The Gartner Market Share Analysis:CRM Software Report Raises Questions On Accuracy of Market Sizing Reports

The recent Gartner report “Market Share Analysis: Customer Relationship Management Software, Worldwide, 2012” has generated some controversy among the enterprise software set.  The report and other reports such as these, are often used for bragging rights by vendors and for buyers to gauge vendor viability.

This specific report attempts to rank CRM software spending by vendor using total software revenue worldwide.  The good news – the numbers are directionally correct with Salesforce.com claiming the top mantle from SAP this year with $2.525 billion in CRM revenue (see Figure 1). The bad news – many question the accuracy of the actual revenues numbers as listed in the press release, especially for the Microsoft Dynamics CRM business.

As Scott Bekker at Redmond Magazine reported, “Gartner put Microsoft’s CRM revenue at $1.1 billion, up from $900 million in calendar-year 2011.  That’s a sizable bump. As of May 2012, Microsoft was only claiming that all of Dynamics, which includes Microsoft’s established ERP products as well as CRM, amounted to $1 billion in annual revenues.”

Mssr. Bekker makes a polite but astute point.  The 26% bump in CRM revenue is significant.  However, the total revenues are questionable.  In any modest observation, that kind of overall growth in the Microsoft Dynamics unit would have Microsoft CEO, Steve Ballmer, shouting from the tops of Mount Ranier and probably have Kirill Tatarinov next in line to be Microsoft’s CEO.

Figure 1. Gartner’s Recent CRM Software Spending by Vendor, Total Software Revenue Worldwide, 2012 (Millions of Dollars)

Not to violate any copyright laws, despite fair use laws, here’s a link to the full table found in their press release. A recreated table below shows the rankings.

Bottom line it shows Microsoft in 4th place for CRM with over 1.1B in revenue.

Organization 2012 revenues 2012 marketshare (%) 2011 revenues 2011-2012% growth
salesforce.com 2,525.6 14.0 2,004.6 26.0
SAP 2,327.1 12.9 2,325.1 0.1
Oracle 2,015.2 11.1 1,870.0 7.8
Microsoft 1,135.3 6.3 900.9 26.0

The Market Sizing Game For Vendors And Legacy Analyst Firms Flawed With Faulty Methodology

In reality, the market sizing game for enterprise software is both an art with some science.  Having played this role as a vendor in an Analyst Relations capacity in a past life, one knows that executives can not disclose such financial information directly to a research or market sizing firm.  The research analysts must play a guessing game with the software executive and ask 100 questions to zero in on a number.  Unlike hardware, where individual counts are more obvious, software revenue sizing requires analysts to dig deep into financial statements and any conversation where growth rates have been discussed.  Revenues are hidden in bundling, suite sales,  discounting schemes, channel revenue deals, OEM arrangements, and inter-company transfers.  To complicate matters, SaaS revenue calculations can differ from how on-premises revenues are calculated.  Analysts must also determine the truthfulness of vendors who are trying to indirectly guide analysts to the “right” numbers.  In short, this is hard work.

As assumptions are built on previous numbers, one false guess in a previous year, cascades and geometrically inflates or deflates a set of future numbers.  In the case of these CRM numbers, one may speculate that past executives may have provided a higher number than actually generated, resulting in the current alleged inaccuracies.  Another speculation may come from previous and current analysts who may only focus on one area of the business and not have the total picture on the Microsoft Dynamics overall business.  There are many points of inaccuracy that can occur with software revenue market sizing and every legacy analyst and market sizing firm works hard to avoid these situations.  For market analysts, dissecting revenue from vendors such as SAP and Oracle is often difficult as these numbers and break outs are masked with multiple acquisitions and product lines.

To be clear, the SAP and Oracle numbers also seem inflated.   These numbers have been inflated over decades.  Given that these vendors also have many other lines of revenue aside from CRM, it’s hard to gauge the accuracy of their numbers without some digging.  Now one would assume a market sizing firm should be doing this right?

The Microsoft Dynamics CRM Revenues Do Not Meet The General Sniff Test

Using publicly available data, one could build out a model based on the original financial model for the Microsoft Dynamics business starting with the two major acquisitions that created the foundation of the Microsoft Business Solutions division.  Here are some assumptions for the sniff test:

  • Great Plains Software drove $225M of revenue in 2002. Microsoft acquired Great Plains Software in April 2001 for under $1B. At the time, Great Plains Software revenues for fiscal year 2000 ending in May was $195M. The  2001 revenues were estimated to be $225M by most reputable analysts.  Microsoft paid five times earnings for the acquisition.
  • Navision brought in $210M of revenue in 2002. Microsoft acquired Navision in 2002 for $1.3B. At the time the 2002 revenues were projected to be $210M.  Microsoft paid a bit over six times earnings for this acquisition for the Axapta and Navision products.
  • Enterprise software vendors have grown in the double digits over the past decade. The enterprise software market has achieved an average growth rate per annum around 10% over the past decade.  Even at 6%  growth over 12 years, the revenues of the acquisitions would double.
  • Conservative estimates assume Microsoft at least doubled its ERP business in a decade. Microsoft’s products at a minimum have doubled their revenue since acquisition.  The combined revenues could conservatively range from $750M to $950M for just ERP software alone.
  • Most of Microsoft’s acquisitions drive ERP revenue not CRM. Over 90% of the Great Plains and Navision revenues were in ERP so little exists in CRM revenue overlap.
  • Constellation keeps close tabs on Microsoft Dynamics revenues. Constellation Research estimates that the Microsoft Dynamics overall revenue sits between $1.47B and 1.56B for 2012. This data comes from following the division as an analyst and market watcher since 2001.

Has the ERP Business Shrunk or Has the CRM Business Grown Gangbusters?

While the above numbers are general assumptions, a few quick questions emerge:

  • Is Microsoft Dynamics overall revenue just under $2B? Even if Microsoft’s Dynamics ERP acquisitions performed in the single digit growth range, $750M in ERP revenue added to $1.135.2B in CRM revenue would have the Microsoft Dynamics business near $2B.  Did Microsoft Dynamics really generate under $2B in overall revenue for 2012?  If this was true, I doubt the Microsoft Business Solutions team would want to hide this major accomplishment.
  • Did Microsoft Dynamics ERP perform so poorly? If Microsoft’s Dynamics CRM business really generated $1.135 B, then did the ERP business significantly fall behind its competitors?  If this is true, then the ERP business has performed more poorly than one had thought.  Based on publicly available information, this does not seem accurate.
  • Did someone inflate numbers in the past or is Gartner not doing its job? Maybe numbers inflated in the past have caught up with current numbers.  The 22% growth rate sounds reasonable, yet the denominator may be inaccurate from previous years forecasts.  Did someone miss this at Gartner in the past?

What’s clear is that Microsoft Dynamics has not achieved $2B in revenue in 2012.  As one can tell, the numbers in general do not meet any reasonable sniff test.  Either the CRM numbers are off or the ERP numbers are off.  Microsoft Dynamics may have achieved $1.5 to $1.6B in 2012.   While the accuracy of these assumptions could be off, one could say these at least meet the sniff test.  A team putting together CRM numbers would most likely compare with the ERP numbers and the total revenues in order to complete a cross check.

The Bottom Line: Transparency In the Industry Would Simplify Everyone’s LIfe

Unfortunately, what we have in the Microsoft Dynamics CRM revenue number is a scenario where the lack of revenue split transparency has create a windfall of revenue for research analyst firms covering market sizing.  Every vendor on the list: Salesforce.com, SAP, Oracle, Microsoft, and IBM must play this Kabuki theater once a year.

In fact, the time and money spent by vendors and analysts to play this game, could be better spent building better software, offering more value to clients, and focusing on more strategic analyst interactions.  Whether the numbers here are accurate or not, this begs the question, why play the game? Why not just disclose the actual numbers and save everyone the trouble?  Remove this non value added part of the research industry, once and for all.

Your POV.

As a buyer, do you trust any of these numbers?  As a competitor, do you know these numbers better than we do?  If so, let us know what assumptions are off, what’s right.  Are you tired of playing the hot or cold game with market sizing firms with numbers you can’t disclose?    Add your comments to the blog or reach me via email: R (at) ConstellationRG (dot) com or R (at) SoftwareInsider (dot) com.

Related resources and links

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Software Insider Index™ (SII): 2008Software Insider IndexTM (SII): SII Top 30 Enterprise Business Apps VendorsTM & SII Top SaaS Business Apps VendorsTM SII Top 30 Enterprise Business Apps Vendors™

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