“YOU CAN’T GET AWAY WITH ADDING WATER TO homogenized milk and then selling the resulting 1% milk product cheaper to consumers. That’s obviously not the way to do good business,” says Sai Gundavelli, founder of Digiprise Inc, a Sunnyvale, CA-based hosted customer relationship management (CRM) and enterprise resource management (ERM) solutions company.

We are talking about Gundavelli’s vision for Digiprise, the 2001 founded startup that he hopes will give established enterprise application players a run for their money. Gundavelli feels that the recent forays by behemoths like IBM into the small niche that Digiprise straddles further validates his business model. He believes that Digiprise’ approach to market will succeed while that of larger competitors may not. “The dynamics of this industry is that you don’t skim down on the functionalities in order to make a product suited for small and medium enterprises that have lower budgets. The trick is to provide exactly what they need, which requires a high level of customization, not to mention an understanding of the small industries.”

Gundavelli has a grandiose dream: to do to application software what Hotmail did to e-mail. With Digiprise, Gundavelli insists, he can commoditize application software. To that end, he brought in Venky Rangachari, a founding member and VP (Business Development) of the internet hosting and managed services company Exodus Communications. Rangachari, like Gundavelli, is bullish about the compelling business opportunity in ASP model. And both had, in their previous jobs, felt the pinch of spending millions of dollars on integration and CRM suites, some 80% of which most small and medium enterprises would never use. Digiprise was set up to address this. By using the application service provider (ASP) model, Gundavelli proposed to combine the long accepted fiscal benefits of the ASP model and the newer enterprise applications, providing their target group—Small and Medium Enterprises (SMEs)—with a cost-value proposition they would find hard to resist.

Simultaneously, the duo also started a development center in Hyderabad, India, that would accelerate Digiprise products’ time to market.

Recent research reports appear to have validated their train of thought. One such report by market research and consulting firm Aberdeen Group states that up front purchases of perpetual CRM software licenses will decline from $3.01 billion in 2002 to a mere $2.48 billion in 2006. Over the same period, revenues from hosted, subscription-priced software offered by ASPs and systems integrators will soar from the current $246 million to $2.8 billion.

“Demand for perpetual CRM licenses are already topping out,” Rangachari says. “Most people I have met prefer hosted independent software vendors rather than software packages,” Rangachari claims.

Outgunning the leaders
The duo’s bravado will be tested soon. Digiprise has just launched its flagship solution in April 2003. The company has a roster of just 45 clients compared with competitor Salesforce.Com’s 8400. But it considers itself a strong, direct competition to the hosted CRM behemoth. In fact, Rangachari calls Salesforce.Com good competition because they sell ‘point solutions’ as opposed to ‘complete solutions’. “With reduced IT budgets, our solutions sell themselves. We have no up front fees, and we charge on usage alone, which suits our customers’ diminishing budgets. Companies are strapped for budgets, but they still need enterprise software,” he says.

But how does Rangachari intend to compete with—let alone outperform—a company that has had a two-year start over Digiprise? “By a simple mantra: Consolidate and Conquer,” says the CEO.

Gundavelli coined the war cry when he realized that companies were developing HR solutions, sales force automation suites and CRM solutions independently. Consolidation was the need of the hour. Few companies offered solutions that were a comprehensive package of the widely disparate software packages needed to run an organization efficiently. Fewer still provided the software at a cost that would make it affordable for the SMEs. This did not seem so much of a problem during the heights of the boom, but when the tech bubble burst, IT spending came under scrutiny and suddenly, nobody—least of all SMEs—wanted multi million-dollar application software anymore. And SMEs represent the single largest spenders on CRM software. Says Hugh Bishop, senior vice president of Aberdeen’s emerging technology intelligence (ETI) group, “We anticipate that small-to-medium sized businesses will increase spending at a higher rate than the Fortune 1000. Part of that will be an increase in outsourcing to a subscription-based model. Switching to an ASP is likely to happen since they want to automate a specific business process.”

It was this market opportunity that Digiprise set out to address. By consolidating a number of functions, right from pre-sales through implementation to post sales customer support, Digiprise made their customizable solution irresistible for small services industries. Rather than spending millions of dollars on developing a sales module, Digiprise built sales, marketing, customer support, project management, asset management and recruitment management solutions in one suite.

The pricing of their solution was just the icing on the cake. Says Rangachari, “Many of our competitors’ claims to returns on investment are that while it costs $2 million for an Oracle application, and a million to support it, they can do it for $4 million. But our proposition is, ‘it doesn’t even cost you $2 million to get the application from us.’ Our solution costs a fraction of what the big names sell for, and what’s more you don’t even have the headache of implementing and integrating the technology.”

Challenges Abound
IBM’s recent entry into the hosted application services domain has validated Gundavelli’s bright idea from three years ago. “Everybody now wants to have a hosted offering,” he complains. The entry of behemoths like IBM can be a double-edged sword too. While Digiprise has a distinct first mover advantage over the newcomers, they could always hit back by packing the hosted services along with their existing products. To counter that, Gundavelli and Rangachari have their teams working overtime to constantly better the functionalities without losing the cost advantage.

Says Rangachari, “One thing we have going for us is that most big companies will have to cannibalize their traditional businesses to enter the hosted business.”

Securing a $5 million round of funding in 2002, Rangachari is ramping up on the company’s sales force and expanding its small research and development team. The company is focusing its R&D efforts on a services company’s traditional pain point between implementation and the sales module. “Most SMEs keep track of their sales force automation but after the actual implementation, the ball drops dead,” says Rangachari. “We are building solutions that will both manage resources better as well as keep track of customer feedback.”

Having signed up 500 users in just over 6 months, Rangachari feels he is well on track to challenge Salesforce.Com’s supremacy. “We have a better solution and a better costing model. It will not be long before Digiprise becomes the Number One provider of hosted solutions,” Rangachari declares.

For the immediate future though, Rangachari has to figure out how to keep that 500 list happy and growing.