CRM swallows CPQ as Salesforce buys Steelbrick

Completed in the last hours before offices closed down for the long Christmas weekend, Salesforce's acquisition of quote-to-cash vendor Steelbrick is of interest from several angles. It has repercussions not only for how we think about the CRM application category, but also for Salesforce's relationships with its partners. It may signal a renewed vigor in its approach to the SMB market, and there are implications too for the future development of its industry cloud strategy.

So while the teams of lawyers and executives must have heaved a big sigh of relief when they finished the paperwork in time to head off for some family time over the holiday weekend, it provides the rest of us with plenty to mull over as we ease ourselves back to work.

CRM swallows CPQ

Customer relationship management (CRM) is a category of software that grew out of bringing automation to the outbound prospecting of sales teams and the inbound case handling of customer service teams. This history has left many related processes to be automated piecemeal over the years. These ancillary processes often started out being simple enough to handle manually or with the aid of spreadsheets, but where the needs were more complex, it created an opportunity for new applications dedicated to automating these tasks.

In the sales field, one of the main ones has been configure-price-quote (CPQ), which helps a salesperson select and price all of the features, components and add-ons that go into a proposal to the buyer. The category has its origins in high-value B2B equipment sales, where there were many possible variations when configuring the proposal. It has also become important in fields such as telecoms, where many different service options can be picked to satisfy the customer's needs.

This all feeds into other closely related processes such as order management and billing, all encompassed in the term quote-to-cash. With the trend towards bundling services with products, there's recently been a big rise in demand for subscription billing capabilities. Other related activities include contract management, ecommerce, collections and other revenue management processes.

In the beginning, it was only in highly specialized contexts that all these various activities were complex enough to justify investment in software. But as automation spread and became more cost-effective thanks to cloud delivery, they have become more prevalent. That in turn has led to more demand, because if your competitors are using tools like these to provide a better, faster service to your customers, then it's only a matter of time before you end up taking them on too.

Which is how we have ended up with CRM swallowing CPQ. More and more of Salesforce's customers are using third-party software to add configure-price-quote and subscription billing capabilities alongside their core CRM and then integrating the two together. The capabilities have moved from being occasional additions to become a commonplace requirement, to the extent where it no longer makes sense to consider them as separate from the core CRM offering.

So Salesforce has decided to accept what the market was telling it, and has redefined CRM to include CPQ — along with other quote-to-cash functions such as subscription billing and collections, which Steelbrick added in September when it acquired UK-based billing specialist Invoice IT.

What will the partners think?

While this is not the first time that Salesforce has acquired an ISV whose software runs natively on its own platform, the $300 million price tag — not the full valuation as that's net of $60 million cash acquired along with the undisclosed value of Salesforce's own existing investment in Steelbrick — puts it in quite a different league from earlier buys.

This is a substantial acquisition, and Salesforce has paid a generous price for a company with just 350 customers ranging in size from a few dozen up to 3,500 employees — a price that was bolstered by growth in 2015 subscriptions said to be in the region of 300 percent. Named customers include Cloudera, Jive, Marketo and Nutanix, although Marketo is unlikely to stay on given its frosty relations with Salesforce.

What really puts the cat among the pigeons though is that buying Steelbrick makes Salesforce a direct competitor of important partners who offer similar functionality. Among those who will be scrutinizing this acquisition very closely to see how it could impact them, the following names stand out. As an aside, it's worth pointing out that Salesforce is also an investor in each of these players, which adds further intrigue to the mix.

• Apttus. This is the other big quote-to-cash player in the Salesforce ecosystem, one of a number of richly funded B2B unicorns that has built its software on Salesforce (and whose fortunes are thus closely tied to the platform). Apttus targets much larger enterprises than Steelbrick and so will be able to argue that the acquisition makes little difference to its prospects (its customers include Salesforce itself, according to Patrick Walravens of JMP Securities). But it will be wondering what the impact will be on its own application if Salesforce decides to incorporate more of Steelbrick's functionality into the underlying platform.
• Kenandy. Having launched, just last week, its own quote-to-cash functionality to broaden out its cloud ERP offering, Kenandy is another Salesforce-native ISV that has every right to feel irked by the Steelbrick acquisition. It will argue that the way its software integrates the functionality is engineered to benefit its core market of manufacturers and packaged goods suppliers. But it will be secretly wondering how much of its effort will prove to have been wasted on building functionality that Salesforce may soon make available natively.
• Zuora. While not a Salesforce-native ISV — Zuora has its own servers and integrates to Salesforce — the standard-bearer for the subscription economy will find it harder to sell its wares to the Salesforce customer base now that Salesforce has its own offering. Like Apttus, Zuora will rightly argue that it offers much richer, more sophisticated functionality. It will also be able to welcome one more sign that the subscription economy is becoming mainstream. But it would have preferred not to have Salesforce as a direct competitor.
• CloudSense, Vlocity and any other industry cloud player that has built a vertical solution on top of Salesforce with significant quote-to-cash functionality. CloudSense, which targets telecoms and media, and Vlocity, which builds for four different verticals, will each argue that the vertically tailored capabilities they offer go far beyond the generic functionality of Steelbrick. But, as with all the rest, they'll be wondering how much reengineering they'll need to do to their own products if quote-to-cash functions are coming inside the core Salesforce platform.

A fresh offering for SMBs

I've been among those arguing (or sometimes merely hinting) that Salesforce's focus on winning large enterprise deals over the past few years has meant it may have taken its eye off the needs of smaller businesses. Meanwhile, simpler, easier-to-use alternatives have started to gain traction in the small business end of the market.

The acquisition of Steelbrick at last gives Salesforce something fresh and meaningful that will appeal to the SMB segment. If configure-price-quote and other ingredients of quote-to-cash are becoming part of the CRM spectrum, as I've argued above, then having a ready packaged offering that does it all as a single solution will have true mass market appeal to SMBs.

That's enough of a prize to justify ruffling feathers by acquiring a Salesforce-native ISV partner whose product runs entirely in Salesforce's own infrastructure. Salesforce has evidently learned the error of its ways after its acquisition of SMB helpdesk Assistly, since rebranded Desk.com, which still runs in its own datacenter and thus provides a less than ideal integration and upgrade pathway to Salesforce's other products.

A more rounded offering also provides new implementation, integration and consulting opportunities for partners, whose support is essential to take products to market in the SMB segment. Salesforce needs a story that is distinctive against Microsoft Dynamics and other players in this market.

A new ingredient for industry cloud

I've written in the past about the strategy behind Salesforce's own industry cloud offerings and how it favors volume market opportunities that leverage its reach and scale. Taking into account how often quote-to-cash seems to be an important ingredient in industry solutions, I suspect the Steelbrick acquisition is in part motivated by a desire to be able to go after new SMB opportunities in vertical markets.

I don't see Salesforce aiming to directly compete with its more specialized partners, who it will continue to work with to win large enterprise accounts. But I do see it turning the Steelbrick functionality into a mass market offering that will either be an optional (and chargeable) bolt-on to its core offering or could even later on become an integrated, free-of-charge value-add.

This is all speculation on my part of course. But with so much to speculate upon, it will be fascinating to see what comes of this acquisition.

Image credit: Businessman spraying dollar sign cloud blue sky © TSUNG-LIN WU - Fotolia.com.

Disclosure: Nutanix and Salesforce are diginomica premier partners, Marketo is a diginomica partner. Vlocity is a consulting client of the author.