In-Depth

Social Networking: The CRM Trend to Follow

There’s little risk for CRM vendors who wish to get into the social networking game—and the potential upside is enormous

• By Stephen Swoyer
• 01/19/2005

When Microsoft Corp. makes a move—in any market—people tend to take note. That’s because, with few exceptions, interest from the folks in Redmond is a sure sign that a technology or market opportunity has arrived.

Similarly, when CRM giant Siebel Systems Inc. takes notice of a CRM technology trend, it’s a safe bet that the rest of the market will follow.

That looks to be case with the burgeoning demand for CRM social networking functionality, which Siebel vested with the imprimatur of legitimacy last month, when it forged an alliance with little-known Spoke Software, a provider of enterprise relationship networking services for sales professionals (see ( http://www.esj.com/business_intelligence/article.aspx?EditorialsID=7402). Enterprise relationship networking is just a marketing-approved way of describing the same social networking concept that powers the online Friendster service and others like it.

The success of Friendster all but assured a stampede of for-profit imitators, says Ian Jacobs, a principal analyst for CRM with consultancy Current Analysis.“[Friendster] obviously tapped into some Zeitgeist. Success on that scale seemingly cannot exist without imitators and entrepreneurs hungry for the next big thing looking for ways to exploit and monetize the social networking phenomenon,” he writes, noting that such entrepreneurs were logically targeting corporate customers. “Start-ups popped up like prairie-dog colonies with names such as LinkedIn, Ryze, Visible Path, Spoke, and ZeroDegrees. These companies got caught in something of a hype loop because prevalent among their early users were venture capitalists.”

According to Jacobs, the social-networking model had an inside track with venture capitalists in particular because it parallels the way they themselves typically interact. “The VC community’s modus operandi closely matched the social networking model, and so VC users raved about the services,” he says. “Attracting VC interest gave the market some sense of legitimacy, yet many questions remained unanswered. These ranged from numerous model questions to actual utility to a wider spectrum of corporate users.”

The trick with social networking, as with any new technology, is to figure out a successful profit-generating model. Currently, Jacobs says, there seem to be at least two established methods of doing so. “One model preferred to focus on the user, charging a per-user, per-month fee. These companies banked on salespeople finding the service so valuable that they would find a way to pay that monthly fee,” he writes, explaining that some entrepreneurs even imagined that salespeople would pay for the service out of their own pockets, just as they did with personal copies of ACT! or GoldMine personal information manager software programs.

“Other social networking companies looked to the enterprise application vendors for their inspiration. Convincing companies to peel off a large wad of bills for a new technology provides a great challenge, but the rewards are obviously fairly large, including maintenance revenue that gives some predictability to earnings.”

The topography of social networking also splits between at least two camps, says Jacobs. Some tools help users create insular networks that aggregate contacts from applications that are inside the enterprise firewall—e.g., CRM systems, ERP systems, and e-mail applications. Others have designed (or claim to have designed) tools that enable extra-firewall networks, either by connecting the networks of many different customers or by using publicly available information to populate networks, according to Jacobs.

This latter approach may seem like a grand slam on paper, but in practice its benefits are decidedly more dubious. “That second model is great for returning hits if a salesperson wants to reach Michael Eisner, but the strength of the links to reach the head Mouseketeer might be questionable,” he observes.

But why do Jacobs and other industry watchers feel that social networking is a good fit for CRM? Easy, they say: The technology makes little sense as a standalone application. “[A]ll social networking vendors suffer from the exact same malady—they all offer what is essentially a feature of CRM and not a standalone application,” Jacobs argues. “This makes proving long-lasting value a prickly proposition and will likely spell the end of the field as its own market.

This is already happening, of course, with Exhibit A being the relationship between Siebel and Spoke Software. Jacobs expects other CRM players to follow suit.

“CRM vendors have tentatively begun to partner with social networking vendors, making it easier for companies to pull contact information out of CRM systems and use that information to build the social network,” he notes. “But CRM vendors should look at this class of underachievers as a potential source for acquisitions. Because none of these vendors has broken away from the pack yet, all of them would have a relatively low price tag.”

In fact, Jacobs believes that Siebel and other early adopters could make a killing in the near term. “[A]t least for CRM vendors that get in early, the potential upside could be high. CRM vendors are unlikely to win over net new enterprise customers solely on the strength of social networking, but improving customer satisfaction by opening up new revenue generation possibilities is not too far fetched—nor is opening up an ancillary revenue stream if CRM vendors decided to add social networking as an optional service,” he argues.

More to the point, SAP AG, Oracle Corp., and Salesforce.com (among others) could inexpensively augment their CRM solutions with social networking capabilities by acquiring any of several financially troubled vendors, Jacobs says. “CRM vendors, in fact, have little to lose by buying their way into social networking. The cash outlay would be low,” he comments.

In the end, social networking capabilities should be a standard feature in all enterprise CRM suites, Jacobs says. This means that CRM vendors should resist the urge to sell it as an optional—and potentially expensive—service. Instead, early adopters could exploit social networking as a potential differentiator. “Enterprise vendors might well benefit from including social networking in their business- and pipeline-development programs, but customers should not be forced to shell out for licenses for two separate applications,” he concludes. “This technology should be a part of CRM suites and customers of those suites should press their vendors to make it so.”