CRM Firms Keep Customers -- and Shareholders -- Happy

Customer-relationship management is fast becoming one of the hottest areas of online commerce.
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SAN FRANCISCO -- On the Internet, the notion that the customer is always right is complicated by the reality that the customer is almost always fickle -- just a click away from buying that CD or video on a competitor's site. While a dilemma for online retailers, this fickleness is also proving a boon for companies specializing in customer-relationship management, or CRM, one of the hottest areas of online commerce.

To lure customers, e-commerce companies have worked hard to build brand by forging marketing partnerships and breaking the bank for advertising. But many are finding they also need to focus on the less visible but equally vital task of online customer care, which creates a big opportunity for CRM companies such as

Kana Communications

(KANA)

,

E.piphany

(EPNY)

and

Portal Software

(PRSF)

.

Just how high expectations have grown for this sector can be seen in some of the stock's performances. This year, Kana has risen 1050%, E.piphany 914% and Portal Software 708%. In that period, the S&P 500 has risen 15%.

Information technology budgets "will kick in and a lot of money will be spent in this area," says Edmond Mesrobian, the chief technology officer of e-commerce company

CheckOut.com

, which says it's spending heavily on CRM this year.

The customer-relationship management market will grow from $2.5 billion in 1998 to $9.0 billion in 2002, according to the Boston-based research firm

Aberdeen Group

, which has done consulting for CRM companies. Meanwhile, 92% of respondents to a

Forrester Research

survey said CRM was critical or very important to their company. Small surprise that companies are tripping over themselves to tag the CRM label on their products.

And as companies retool their information technology budgets in the wake of completed Y2K-related spending, analysts expect CRM to benefit. Customer-relationship management "is where the majority of IT dollars will be spent next year," says

Yankee Group

CRM analyst Chris Selland. "There's a ton of investment opportunity." The Yankee Group hasn't performed any consulting for CRM companies.

The growth of the CRM market is also being driven by corporate America's embrace of e-commerce and by the fact that Web-based CRM is a helluva lot cheaper than more traditional methods like call centers and hiring actual humans to make house calls. "Revenues are accelerating because companies need to get online or they'll be at a competitive disadvantage," says Christopher Corbett, domestic analyst with

Driehaus Capital Management

.

Although it's hard to break down the CRM market, analysts and Internet executives say it generally contains two major camps. First there's the old guard, or traditional corporate sales and support software companies like

Siebel Systems

(SEBL)

,

Oracle

(ORCL) - Get Report

and

Clarify

(CLFY)

. These companies have specialized in developing front-office applications such as sales automation, customer service and marketing. But now they're trying to figure out how to integrate the Internet along with the other sales and marketing channels they currently manage.

"Siebel has clearly become the gorilla in the traditional CRM market," says Yankee's Selland. "But it's by no means mature. There's a lot of room for growth here."

The second group is the young turks, or Internet start-ups like Kana, E.piphany and

eGain

(EGAN) - Get Report

. Like most nascent markets, this one is very fragmented with each company specializing in a particular function. Kana, for example, is focused on inbound email customer support. And eGain's software also helps customer service reps route, track and respond to email information requests. E.piphany has developed software that analyzes the effectiveness of e-commerce sales and marketing campaigns.

Although the CRM market is on fire, investors should proceed with caution. The first problem: extreme overvaluation. Some companies like Kana and E.piphany boast market cap to 1999 revenue multiples above 500. To deal with this risk, investors should seek out some of the lesser-known names like

SilkNet

(SILK) - Get Report

,

Primus

(PKSI)

and

Art Technology Group

(ARTG)

.

Another factor to watch out for is consolidation. Typically, companies getting gobbled up will receive a nice premium. But this market is in such favor that acquiring companies are also seeing their stocks rise after announcing CRM acquisitions -- a clear sign of investor approval.

Enterprise resource planning software companies like

PeopleSoft

(PSFT)

are eyeing CRM companies as a way to expand their product lines. Already, PeopleSoft is acquiring

Vantive

(VNTV)

and

Nortel

has announced it is buying

Clarify

(CLFY)

. Other potential CRM takeover candidates, say analysts, include

Pivotal

(PVTL) - Get Report

,

Onyx Software

(ONXS)

and

Quintus

(QNTS)

.

"Only a few key players will remain strong because the market is very saturated," says Aberdeen CRM analyst Karen Smith. "Plus, customers want integration. Combining CRM functionality with other Web-based functionality is going to be more important."

With so many companies chasing after the same market, there are bound to be shakeouts, mergers and failures. So, some buy-siders are spreading bets to reduce their risk.

"I think the whole group is going higher," says Corbett of Driehaus Capital Management, which is long Art Technology Group and recently liquidated its position in Clarify. "I think it's too early to pick a leader. I think you need to play a couple."