An Eagle Eye On Customers

A vast array of Net software lets companies read the minds of their clientele--and win them over

When Mary Aehlich gave up her career as a weapons controller in an Air Force AWACS spy plane to become casino administrator at The Venetian resort in Las Vegas, she joked that she went from "combat boots and flight suits to sequins and high heels." But now the stay-at-home mom of two babies is again on the front lines, of sorts. As an occasional at-home Web site tester, she's part of an early warning system for e-tailers--helping them figure out what works and what doesn't in the uncharted world of Web commerce.

Take Aehlich's December sortie onto the jewelry site Miadora.com. Following a script prepared by the market research software company Vividence Corp., she shopped for a xen bracelet, a Jordan Schlanger necklace, and a round diamond. Although she enjoyed the site, it was difficult to locate some items. She said as much in an online critique she typed as she worked her way through the exercise. Feedback like hers from 200 testers was priceless for David A. Lamond, Miadora.com's vice-president for business development. Within two days of getting Vividence's report, he ordered changes to make the site easier to navigate. "This is as close as you can get to reading the mind of your customer," he says.

Vividence's product is just one example of a vast array of new software products that are designed to help companies read customers' minds and win them over--whether in cyberspace or on Main Street. The latest advances in software technology make it possible for companies to amass detailed profiles of customers, offer them just the things they're likely to buy, reward them for loyalty, and quell their frustrations. And, thanks to the Web, companies can keep all of their information about customers in a single electronic storehouse, easily accessible through Web browsers for executives at headquarters, salespeople on the road, and service reps in remote call centers. It's all about delivering TLC--Internet style. "Every- body is scrambling to grab the customer and not let them go," says David Caruso, a vice-president at market researcher AMR Research.

It's a mad dash that's creating a vast new software category: call it customer management software. Included is the Old World of so-called customer relationship management software--giant packages such as Siebel Systems Inc.'s program that lets corporate sales forces track their customers and analyze markets. That's now merging with new programs for the Web that manage everything from online sales to customer service. The whole shebang is expected to grow from $4.45 billion last year to $21.8 billion in 2003, according to AMR--a growth rate nearly five times that of the overall software market.

WANTED WIDGETS. Why are companies opening their wallets so fast? The technology promises to transform the way they do business. Gone are the days when they could afford to build products without knowing for sure if customers would snap them up. Now they can learn precisely what their customers want before they design a single widget. Manufacturers can even let buyers specify the key features they would like before a product is assembled. And by using technology to track their every encounter with a customer, companies can easily separate out the best from the bad--and focus their marketing muscle on customers who are likely to buy often and pay their bills on time.

The new software already is delivering cash rewards to its early adopters. For starters, it cuts costs: A self-service package tracking system for customers that IBM built for United Parcel Service Inc. saves the shipping company $450,000 a day in customer service expenses. And this stuff boosts revenues, too: Thanks to call-center software from Clarify Inc., Automatic Data Processing Inc. handed 8,000 customer service reps detailed information about its 80,000 payroll clients--improving the customer retention rate by 5% and upping revenues by $100 million last year. Based on its surveys of six industries, Andersen Consulting estimates that with just a modest 10% improvement in customer management operations, a $1 billion business can reap $40 million to $50 million a year in pretax profits.

With customers lining up to do business, hundreds of software companies are busy staking claims. Some are well-established players in the customer software arena, such as Siebel, with revenues of $790 million and a 19% market share of the $3.7 billion market for corporate sales and marketing software. But as big as it is in its own market, Siebel has to watch out for even brawnier competitors in this new land grab: software giants SAP and Oracle Corp. Even Nortel Networks Corp., the maker of telecom gear, wants in on the action. It's about to close a $2.1 billion acquisition of Clarify, the call-center software maker.

While the giants duke it out, hundreds of small fry are cooking up new products for everything from personalizing online sales pitches to customer service software for the Web. Some have solid traction, such as Vignette Corp. and BroadVision Inc., which are each logging more than $40 million in revenues per quarter for Web site sales software. Many are minuscule--such as Salesforce.com in San Francisco, which just launched its Web-only sales-management site. But even some of the little guys already loom large on Wall Street. Kana Communications Inc., a seller of e-mail systems for customer support, has watched its stock soar from $45 a share at its initial public offering last September to about $240 today--giving it a market cap of $6.9 billion.

Ultimately, expect only a handful of players to claim the lion's share of this market. Siebel and Oracle look like big winners. They already have relationships with thousands of large customers and offer a broad array of software packages. Up-and-comers such as Vignette, BroadVision, and Kana stand a good chance of succeeding, too. They lead in their segments and are rapidly broadening their product portfolios.

With hundreds of others vying for this new software prize, consolidation is a sure bet. Those that survive are apt to be the players that put together the most compelling soup-to-nuts packages. They'll either develop products themselves or buy up smaller competitors--often with stock. It's already happening. On Feb. 7, Kana announced a $4.2 billion purchase of Silknet Software Inc., a maker of self-help software for Web sites. "The companies with the biggest market caps will be the winners," predicts Kevin Harvey, a partner at Silicon Valley venture-capital firm Benchmark Capital.

Some large corporations are already demanding one-stop shopping for customer management software. Honeywell International, for instance, aims to revamp totally the way it does business. Rather than making products and then finding out later if customers will buy them, it's using a software package from Siebel Systems to anticipate more accurately what its customers will want. Honeywell's $5.2 billion air-transport business, which makes jet engines and avionics gear, uses Siebel to track all of its interactions with customers and publishes monthly analyses so executives can quickly spot problems and opportunities. One early result: It noticed that airlines were frustrated with managing parts inventories, so it's rolling out new services that will spare them that headache. "Our focus used to be from the inside out. Now it's the reverse," says division General Manager Lynn Brubaker.

The software giants have taken the lead in assembling packages capable of handling huge jobs such as Honeywell's. Siebel has spent the past two years adding call-center and Web commerce components to its sales-force management software. The newest pieces delivered last year include a package for setting up Web shops and an e-mail marketing product. The empire-building effort is paying off big time: Siebel just landed a deal worth tens of millions of dollars to supply IBM with practically its entire suite of products for 55,000 IBM sales and marketing employees to use internally.

Oracle and SAP are going further. They're packaging customer software with their suites for managing finances, employees, logistics, and manufacturing. Their pitch: While companies must attach Siebel's suite to the rest of their computing systems manually, Oracle's and SAP's pieces come ready-mixed.

It's not just established companies that want the kind of end-to-end package that Oracle and SAP offer. Many Web upstarts have similar needs. Consider Streamline.com in Westwood, Mass., which sells groceries and household items online and delivers them in Boston and Chicago. "We're really a logistics organization. We've got warehouses and trucks. We're focused on operations," says John Cagno, vice-president for information technology. That's why he bought a suite of software from SAP that includes customer, finance, and logistics software all linked together. When the new system rolls out in March, Streamline.com's customers will be able to chose from its actual inventory, so there's no risk of their picking out-of-stock items and being disappointed with substitutions. The goal: improve customer loyalty and cut down on service calls.

Now, companies want a way to view all customer information in one place. Often companies keep multiple databases for each business and each way of reaching customers--and those repositories aren't easily synced up. This new generation of software offers a way to gather information collected by companies' Web sites, direct-mail operations, customer service, retail stores, and field sales. H&R Block Inc., for instance, is using software from Clarify to combine and coordinate the customer records at its tax offices, discount brokerage, Web site, and customer-service center. Armed with that central storehouse of information, sales people in the stock-trading business, for instance, can look at detailed descriptions of tax customers and size up which of them would be good prospects.

Not every company wants software that will handle the whole enchilada of customer needs. Many--especially dot-coms--shop for single pieces of software that solve problems or boost revenues in a matter of weeks. They shun complex packages that can take months or even years to install. Vignette, for instance, has grown fast because its software allows Web sites to generate pages on the fly that are custom-made for individuals. Web site operators can analyze customers' online behavior and pitch them products that are likely to pique their interest. And the software is relatively easy to get going. Thanks in part to Vignette, Iwon.com, the four-month-old Web sweepstakes portal, was able to launch in just 4 1/2 months.

The more narrowly focused the software, the easier it is for companies to see results. Using Silknet's new virtual sales assistant, for instance, online computer retailer cozone.com created "Jill--the Notebook Advisor." It's a piece of software that walks customers through a series of questions about their lifestyles and what they're looking for in a computer--then makes recommendations. Cozone.com gathers a vast amount of data from cybershoppers and can use it later to target them with e-mail promotions. But mostly, "Jill" is about making customers feel good about their experience so they come back for more.

Often, customers want software to bridge the Web and other businesses. Williams-Sonoma Inc. for instance, uses e-mail software from Kana to cross-promote its Web site, mail-order businesses, and Williams-Sonoma and Pottery Barn retail stores. Patrick Connolly, general manager of the company's direct-marketing businesses, says he wants to avoid simply transferring sales from stores to the Web site. He can use e-mail addresses collected at stores and on Web sites to send targeted promotions. He recently sent e-mail to shoppers at the company's outlet stores inviting them to come back for 15% discounts. The response rate was 12%--far above the typical 1% response to e-mail solicitations.

BIGGER FASTER. In spite of victories like these, the upstarts can see the writing on the wall. They've got to broaden their portfolios of products if they hope to cement relationships with customers--and compete with the bigs. Even before the Silknet deal, Kana began taking advantage of its outsized market cap by buying NetDialog, for Web self-service software; Business Evolution Inc., for real-time e-mail and chat; and Connectify Inc., for e-mail marketing. "We have to get big fast so when Siebel does come, we're ready for them," says Kana CEO Michael McCloskey.

What could derail the industry giants? The Net is a wild card. All of the major players have converted their applications so they can be accessed via Web browsers. But the newer software companies that built their products from the ground up with Web delivery in mind can offer faster service over the Internet. That could become crucial if corporations and dot-coms opt for the convenience of having applications delivered over the Net by hosting companies. Siebel Systems Chairman Thomas Siebel is convinced that will be only a small part of the market. "None of my customers are asking for it," because they want to control their own technology, he says dismissively.

He better not get too smug. The competitive landscape could change radically in the next couple of years. Siebel charges premium prices for its software--often hundreds of thousands of dollars per sale. Already, competitors such as SalesLogix Corp., a five-year-old company in Phoenix, offer many of the same capabilities for much less. Del Webb Corp., the Phoenix housing developer, bought SalesLogix software to coordinate the activities of 700 salespeople and paid just $600 for each user, vs. the $2,000 that Siebel would have charged. "The big companies haven't rebelled yet, but I believe they will," says SalesLogix CEO Patrick Sullivan.

Siebel and the other high-priced big shots won't have a lock on the ability to give corporations a comprehensive view of their customers, either. The California State Auto Assn. is doing that with a comparatively cheap $1 million purchase from E.piphany Inc., a maker of market-analysis software in San Mateo, Calif. CSAA uses the upstart's software to extract customer information from separate databases controlled by its travel agency, emergency roadside service, insurance business, and Web site. That gives it the capacity to size up customers and give each one a "lifetime value score"--singling out the best customers for special treatment. "It's been a revelation," says Alexandra Morehouse, the association's corporate marketing officer.

Make that an epiphany. If more people have stirring experiences like Morehouse, there could be a revolution in the works for the customer-management software business.