This week’s podcast is about Salesforce and how generative AI is going to impact its business.

You can listen to this podcast here, which has the slides and graphics mentioned. Also available at iTunes and Google Podcasts.

Here is the link to the TechMoat Consulting.

Here is the link to the Tech Tour.

Here are my 3 working conclusions.

• GenAI is going into their existing services, which are used by teams at their clients. Salesforce is well positioned for this.
• GenAI is going to get incorporated into the workflows of their clients. This requires an AI tech stack, which Salesforce does not have. AI Cloud companies are building this and offering it as a service. This is a problem.
• AI Agents are emerging and this will change the workforce of CRM within companies. This is a big problem for Salesforce. Competitor Microsoft is well positioned here.

——–

Related articles:

• A Digital Strategy Breakdown of Salesforce. Spoiler: It’s Awesome (1 of 3) (Tech Strategy – Daily Article)
• A Strategy Breakdown of Arm Holdings (1 of 3) (Tech Strategy – Daily Article)
• 3 Digital Concepts Powering ARM Holdings (2 of 4) (Tech Strategy – Daily Article)

From the Concept Library, concepts for this article are:

• SaaS
• Switching Costs: Financial, Procedural, Relational and Risk
• Integrated Bundles
• Economies of Scale: Fixed Costs: Specialized, Cumulative and Niche
• Enterprise Software: CRM

From the Company Library, companies for this article are:

• Salesforce Inc

——-–Transcription below

Welcome, welcome everybody. My name is Jeff Towson, and this is the Tech Strategy Podcast from TechMoat Consulting. And the topic for today is generative AI disrupting Salesforce. And this is really about the rise of what we could call intelligent CRM, intelligent customer relationship management, Salesforce.

Total juggernaut, dominant business model, has been really crushing it in what we could call digital CRM for about 25 years. But now we’re seeing generative AI really change a lot of what people do in the area of sales, marketing, customer service you know, everything related to the front end. of Enterprise Software, which is traditionally under the bucket of CRM.

Salesforce is the digital CRM giant, but [00:01:00] are we seeing the rise of intelligent CRM and how much of a problem is that? That’s kind of the question for today. I think it’s a pretty cool question. For those of you who are subscribers, I’m sending you an article on basically Salesforce today, and I will send you another one about HubSpot, which is also in this space.

We’ve been in the news recently. I’ll send you one of those in a couple of days. So kind of looking at quite a few companies in this space. Pretty cool subject, I think. Anyway, so that’s going to be the topic for today and I’ll give you my answer. Thank you let’s see any housekeeping for today. Not really.

Same thing I’ve been mentioning. We have our e commerce tech tour going into China in late October, early November. I’m going to go visit some companies, really do a deep dive in e commerce, retail, CPG, that whole sort of space. And China is really the epicenter for innovation for all of that. Now that’s where the coolest, well, let’s say [00:02:00] most interesting stuff has happened, and what happens in China in retail and e commerce usually ripples out to the rest of the world, hence Xi’an, Timu, and all the rest.

So anyways, if you’re interested in that, go over to TechMoatConsulting. com. You can look at the tours tab and you’ll see the details there, what we’re planning on doing, price, all that stuff. Anyways, or just email me at jefftowson at towsongroup. com. Okay. That’s housekeeping. Standard disclaimer.

Nothing in this podcast or my writing or website is investment advice. The numbers and information for me and NES may be incorrect. The views and opinions expressed may no longer be relevant or accurate. Overall, investing is risky. This is not investment, legal, or tax advice. Do your own research. And with that, let’s get into the topic.

Now, as always, we start with the concepts for today. I’m always sort of a professor at heart. So here’s the, you know, the stuff that I would write down. A couple of concepts for today. None of these are new. It’s just that Salesforce is a really [00:03:00] powerful version of all of these. And when you look at Salesforce, you know, switching costs, enterprise software.

Data technology, you know, switching costs tend to be the big competitive advantage you see frequently. Network effects also very important, but. Only a couple of companies get that, but switching costs, you know, embedding your software into the operations and data and decision making of an organization, almost by definition, you’re talking about significant switching costs.

So we’ll talk about that. And Salesforce is unbelievable at that. Bundles, bundling of software, bundling of digital goods, especially when it’s with a recurring revenue model. which some people call Rundles. So a recurring revenue bundle is a Rundle. That’s a pretty awesome sort of product suite.

Very powerful in a lot of ways. We’ll talk about that. Those are kind of the two big ones. And then obviously [00:04:00] generative AI, which is you know, The mother of all disruptive technology. What’s, what’s the impact of that? So those will be the three concepts for today. All right, let’s just jump into the company here.

Now, those of you who are subscribers, I sent you a couple months ago, I sent you two pretty in depth breakdowns of the business model of Salesforce. You know, it’s pretty dense stuff really. This is going to be sort of the third part in that series and I’ll bubble up the so what’s and the simpler version because a lot of people haven’t read those and then talk about how that intersects with generative AI and some other things.

So, sort of the, if the first two articles were sort of like a deep dive in what the company is, this is more about the key questions going forward which for investors is kind of, you know, the important thing. So anyways full disclosure. I love Salesforce. I think it’s just an awesome business model. I really [00:05:00] like the enterprise side of tech.

I think it is far more predictable. A couple weeks ago, I talked about Constellation Software, which is, you know, they do a lot of acquisitions. They focus almost entirely on the B2B side and the enterprise side. They look for software that’s getting embedded into the key workflows. that creates recurring revenue and that has switching costs.

I mean, their investment strategy is basically less powerful versions of Salesforce. Now, I’m sure they would love to get Salesforce, but there’s only a couple of these. When you look at this business model on the enterprise side, you know, the two gigantic companies, there’s a couple of them. One is obviously Microsoft.

which plays across the entire board of ERP and every aspect of enterprise and business. And then Salesforce, which is much more on the front end piece, which is the customer facing applications and tools and [00:06:00] data. I mean, those are the two big giants, but then there’s a lot of smaller enterprise B2B. Software companies and Constellation really focuses on those.

So there’s a lot of overlap with those smaller businesses that Constellation focuses on. And there’s a lot of overlap with HubSpot, which I’ll talk about probably next week. That’s a smaller Sort of newer version of Salesforce. I mean, if Salesforce is the elephant in the room and Microsoft is the elephant, Constellation and HubSpot, okay, they’re, they’re not the elephants.

You know, they’re whatever animal you want to think about. They’re the hyenas or the coyotes or something. They’re on the Savannah, but they’re smaller animals. So that’s kind of a good thing to look at. Anyways, HubSpot will be an interesting contrast. To Salesforce, the same way a lot of the, the constellation businesses are an interesting contrast to Microsoft.

Okay. So anyways, [00:07:00] I think it’s a spectacular business model. So does pretty much everybody. The question is, all right, if they are in the business of providing this suite of products, which I will summarize based on digital standard technology, software, data, things like that, how does generative AI change that?

And it’s a major disruption. I mean, no doubt it’s a major disruption. Here’s kind of the basics of the business model. I’ll just run through this quickly. Really, let’s say three points. Well, yeah, three points, I think. You know, if you look at my sort of basic frameworks, the key thing is always the product and the customers and the growth, right?

Before you get into all the business model stuff and the competitive advantages and the moats, Look, if you don’t have a really good product, you’re dead in the water. And the analogy I use is You know, question number one of strategy is Steve Jobs. Do you have a great product? [00:08:00] Does it get adoption? Do you get growth?

Then you get to question two, which is more like operating performance. That’s Elon Musk. Then you get to question number three, which is build a moat. That’s Warren Buffett. Okay, let’s start with the Steve Jobs view of Salesforce. Their product suite, their value proposition, it’s a proven winner. I mean, there’s 20 years of what they’re selling doing very, very well.

That’s not going to change. They’ve identified a very good demand. They’ve built great products against it. Basically B2B sales of enterprise software and they’re specialized in the CRM. Now the customer segmentation matters. HubSpot by definition. which was founded 2009, 2008, 2009. They’re focused on mid market and smaller companies.

So anywhere from two to about 2000 employees. So they have much more of a purely digital [00:09:00] model designed to reach lots and lots of little companies. Okay. Salesforce is going for the big boys. They’re going for multinationals, large corporations, and to reach that group, they have a massive Salesforce.

That’s all over the world. They have huge teams of people. That’s very similar to Microsoft’s approach, right? They’re going for the big companies. Okay. So they’re, they’re focused on those sort of large enterprises, multinationals. Now they will step down their products a little bit. to mid market, but they’re not going down to companies with five employees like HubSpot is.

Okay, CRM, you know, what are they doing? They’re basically creating software, data, data repositories, databases that cover everything about how a business connects and interacts with their customers. How you find them, how you get leads, how you make a connection, your customer service people handling complaints.

What are the [00:10:00] touch points? All of that. Now they also apply this same toolkit and software suite against employees. So your connectivity with your customers, but you can also do your connectivity and interactions with your internal staff as well, but that’s secondary. And basically CRM, man, it’s just an attractive business.

I did a couple of podcasts a couple of months ago about ADP which is also similar to Salesforce in that it’s a specialty enterprise software business. Salesforce is a specialty business in CRM. ADP is a specialty. Enterprise software business focused on human resources and workforce. Now, Salesforce is a lot more compelling because businesses, yes, businesses think about their workforce.

It’s important. You got to do all the HR, right? You got to do a hiring and contracting all, all important. You don’t [00:11:00] live and die there. You live and die with connecting with customers, generating leads, making sales, keeping them happy. So CRM is, you know, what every business worries about most in life. So it’s just a much more powerful place to focus your software than let’s say, human resources.

Or if you look at Microsoft or Oracle or SAP, these, these broad based ERP companies. They will cover CRM, but they also cover much less powerful segments like billing, finance, you know, the, the sort of the back office stuff. Now it’s the front office stuff that, you know, those are the calls the CEOs take first thing in the morning, everything related to customers.

Okay. So Salesforce pretty much pioneered SaaS as a business model, dominated the CRM space, doing very, very well. Every business needs it. So They’re mostly in the United States, 70 plus percent of revenue. But in theory, you have [00:12:00] the global market because every business needs it everywhere. And the world is only getting more digital.

Every year, businesses need to keep increasing and upgrading their enterprise software tools, because it’s kind of like an arms race. You don’t have to get better and better every year at your billing software. or your HR software, but in your customer interaction software, that’s an arms race because your competitors are upgrading their tools, so you have to upgrade.

So there’s a nice dynamic there and there’s a great growth trajectory. And you can see that basically in the Salesforce numbers. They make a lot of cash. They’ve got, you know, 10, 12 percent growth in their revenue. So tremendous business, tremendous market, and steady growth with a long runway. So on the, the Steve Jobs question.

It’s about as good as you get as an [00:13:00] answer to that question. I mean, it really is a spectacular product. So that’s point one. Fine. Let’s get to point two, which is more my area, which is, let’s talk about the business model. Okay. Point two. What are they really offering businesses? Now I’ve given you a lot of frameworks, the digital operating basics, the DOB in my framework, you know, I’ve sort of said, look, all businesses have to start building this into their company.

Because these are the, that’s why they’re called the basics. These are the operating basics, the digital operating basics that pretty much every business has or has to build. Okay. Salesforce is pretty much selling DOB 2 and DOB 3. They’re selling businesses the ability to build the operating basics, the digital operating basics.

So. DOB2, Digital Operating Basics 2, is basically one of the basic things every digitally rewired [00:14:00] business has to do is you have to continually improve the user, the customer experience. And that game never ends. You have to remove all the pain points, you have to improve your product suite, you have to improve the products.

That game is a marathon that never ends. Well, that’s kind of what. Salesforce is selling a suite of tools that lets you see everything about your customers and continually improve as they offer better and better products. So they’re basically selling DOB2. And to a lesser degree, they’re selling DOB3.

DOB3 is a digital core for management and operations. And this is basically your database. So really what Salesforce is selling is two products. They have a whole suite of products, but there’s really two that I look at. Number one is they have a bundle of software that is specialized in CRM and, you know, you can buy [00:15:00] one product or two products together.

You can buy the whole suite of products together, but all of these software services are focused on improving your customer knowledge and improving your customer interactions. So they have a software bundle. Second, I would call that kind of DOB2. And then second, they do really have almost a specialized ERP system.

It’s almost a specialized database that you build that all their software draws upon. And what that really creates is, in their words, is a single source of truth about customers and their behavior. So you’re really building an ERP system, a pretty robust database with everything about your customers.

Everything you’d want to know, their behavior, a 360 degree view, and all of their software draws on that. So that’s really DOB3, which is the digital core. So when I look at this, when I [00:16:00] see Salesforce, I see a very powerful software bundle specialized in CRM, and I almost see a specialized ERP system supporting it.

So it looks a little bit like an ERP to me. Mostly it’s a bundle, but it’s also an ERP. Okay, that’s point number two. Last point, and this will just sort of be the basics. Oh, and if you take apart their bundle, it’s pretty basic. There’s a marketing software system you can get. There’s a sales one.

There’s a customer service one. There’s an e commerce one. Basically there’s five or six software products that really are specialized in every sort of interaction you would have with a customer. And the one that they talk a lot about is going to be CRM, Customer Relationship Management. That’s one of them.

That’s really kind of where they sit. A company like [00:17:00] HubSpot is much more focused on digital marketing. That’s the suite they focus on and they’re very, very good at that. And it was these things all sort of bundled together. You can buy one, two, and they all interact with each other. They all make each other smarter and better.

So we would call that an integrated bundle. And it’s pretty powerful. Okay. Point number three, last one. Salesforce with that business model really has three to four major advantages, big advantages and the big one, big surprise, switching costs. You know, anything you, you build on the enterprise side can have these.

The more it’s intertwined with your daily operations, the more it’s entwined with your critical workflows, and you’ll hear that word a lot, critical workflows, like IBM is very focused on critical workflows. Those tend to have much higher switching costs because nobody wants to mess with those. [00:18:00] You can actually switch your HR system and it’s not that big of a deal.

You really don’t want to switch out the system that oversees all your interactions with your customers. And it has a database built from those interactions and all the data is there. And they will tell you, everyone will always tell you, like, the data is portable. Yeah, you can move your data. You know, yeah, it sits on the cloud, but you own it.

The truth is if, if you ever try and migrate large databases, it’s really a pain. Even if you can do it, it’s not easy. So, you know, the switching costs come from definitely the sort of ERP system, the database, but they also come from the fact that your customer interactions are there. It’s deeply embedded in the core operations you care about, which is your relationships with your customers.

So all of that creates switching costs. And if you are offering [00:19:00] good products at a reasonable price, most of the time the customer won’t switch you out and put in a different system just to save 5 or 10 percent. It’s just not worth it. If it’s 50 percent, they might think about it, but it’s usually a cost benefit analysis they make in their minds and the answer is it’s not worth it.

Now the switching costs. Okay, if you look at the switching costs, how do you know they have them? Well, you can look at the gross margins. And they are pretty spectacular, say 2023 for Salesforce. $29 billion in revenue annually. Actually, 31 if you add in their professional services, but it’s mostly from their subscriptions to their, their bundles.

31 billion revenue overall. The gross profits, 75%, 73%. I mean, it is just a cash machine, this business. So you’re going to see it in gross profits. When you see these massive gross profits, that’s [00:20:00] usually a good indication that there’s a demand side competitive advantage. Or there’s some form of customer capture of which switching costs is a big one in this case.

The second thing you can see when you start trying to figure out, Hey, does this company really have a you know, big switching costs? Well, you look at the retention rates. And they’re a little bit dodgy about these, but all indication are is they have spectacular retention rates. People stick. The other thing you can almost so kind of look when you look for this sort of demand side competitive power, if you see prepaid subscriptions, that’s usually pretty good.

You know, if you’re, if you’re a week, if you’re in a weak position and you’re selling, it’s like, okay, we’ll pay you after 30, 60, 90 days and we’ll, we’ll send you purchase order after purchase order. You know, they kind of buy from you when they feel like it, but when you see annual subscriptions prepaid, which is what you see with a lot of Salesforce, that’s usually an indication that you’re in a [00:21:00] pretty strong position.

And if you get annual subscriptions prepaid, which they do, big surprise. You see tremendous negative working capital. Which they absolutely have you can put a number on this. I, I put it up in the 8 to 10 billion dollars per year of negative working capital. So basically your customers are funding your business for you.

Spectacular. Anyways, all of that, big switching costs. That’s something they have. Second advantage, this one’s pretty common. Okay, they’ve got economies of scale. They’re the biggest player in the market. You know, they have 20 plus percent of the market for CRM. The competitors, the big ones are, you know, they have a couple of big rivals, Microsoft, Oracle.

They’re much smaller in terms of market share. They’re significant, but smaller. And then you have a bunch of tiny companies. So it’s a giants and dwarfs situation with the market. Okay. So. If you’re the big player, you can outspend your competitors, your rivals on [00:22:00] things like R& D definitely IT, because if you’re in the software business, the bigger you get, your per unit cost drop, that’s an advantage, but really it’s, it’s R& D and M& A where they’re going to sort of strategically outspend everyone.

To keep upgrading their products. And, you know, at the end of the day, you probably won’t find any company on the planet that is spending more on a yearly basis to create and improve new CRM products. That’s what I kind of really like to see that. I like to see big R& D spending in a specialized area.

That’s usually pretty attractive. Okay, so that’s number two is you get economies of scale and not a big surprise. And then the third one is the software bundle. I talked about this a couple weeks ago with Microsoft’s bundle. Bundling gets you a couple good things. One, it gets you a superior product. A bundle of three to four software services is better than a standalone one service.

Just like [00:23:00] Microsoft Office is better than just Microsoft Excel on its own. The other thing it gets you is it increases the barrier to entry. So, What I just told you, the switching costs and the economies of scale, those are competitive advantages. They work against rivals, particularly smaller ones, but also you’ve got to think about new entrants.

Well, it’s very hard to jump into a business as a new entrant. If from day one, you don’t have to just create one product. You have to create five or six that all work together and are integrated. So, you know, this sort of integrated software bundle creates a very nice barrier to entry. And I’ve talked about that before.

So anyways those are kind of the big three that you would put in my frameworks. The other one to think about, which is not really a competitive advantage, is the big global sales force. Microsoft. This is a big part of Microsoft as well. Yes, they’re [00:24:00] a software company, but Salesforce has 75, 000 employees globally.

When you sell to large enterprises, there is a long sales cycle. When you sell to them, you want to customize. So there’s a lot of professional services work that goes along with it. It’s a lot about the relationship that is, you know, that capability is very hard to build quickly. And when you look at a company like HubSpot.

Which is mostly a digital creature without a big sales force. They have some partners they work with, but you know, that’s very hard for them to replicate and also it’s very expensive. So their big sales force, even though it’s a big expense, is also an operating capability that keeps a lot of companies out of their world.

You know, most companies like to just sort of sell online and do inbound marketing, which is kind of what HubSpot does. Okay. Anyways, those are kind of the three points. That’s a [00:25:00] good, simple explanation for Salesforce. If you want to read more, go to the website, go to company library. I’ve written quite a bit about this.

Now let’s get into the key questions going forward. And we can start with the idea of. Look, Salesforce has a growth strategy. They have a plan going forward. It’s pretty obvious what it is. They talk about it. And this was in place before generative AI sort of burst on the scene. So let’s kind of talk about where they were going with their business as is before this sort of happened.

And then let’s see how this changes that. So now you can go on their 10K and they lay out their growth strategy pretty clearly. It’s pretty standard. In fact, it’s almost exactly the same growth strategy as HubSpot. You know, they are a land and expand growth strategy, which is we get one of our services into a company, you know, into their workflow, into their operations.

And then [00:26:00] we begin to expand and we add more services and we cross sell and we upsell and you know, it’s land and expand pretty standard. So how do you grow that over time? Well, you can add more geographies. which they’re doing fine. You can add more products. So instead of five or six main software tools within their bundle, you can have a seventh or an eighth.

And you know, that’s how they got to five or six. They kept adding. All of that will grow your revenue. So more geographies, more products, fine. The two that are kind of, the two parts of their growth strategy that are more specific to CRM. You know, because what I just said is applying to any enterprise software pretty much.

They’re definitely focusing more on personalization. That’s kind of the biggest upgrade happening in terms of the quality of the products and their value to their enterprise clients. The more they can offer them the ability to personalize [00:27:00] To their customers, the better these tools are. And I’ve talked about this before.

Like when you think about DOB2, continually improving the user, the customer experience, the biggest lever in improving a customer experience is still pretty much personalization. So they’re making their tools more personalized that can be used in certain ways. You know, every message going out to every customer is now personalized.

So they’ve been focusing on that. The other one is increasing industry specialization. You know, they’ve offered a lot of sort of horizontal products that go across lots of industries. The more you focus on industry specialization, that’s another way to improve the quality of the product. So, you know, financial services specialized CRM, manufacturing specialized CRM.

Now, the trick when you do that is as you do more industry specialization, it increases your operating [00:28:00] complexity quite a bit. You need more expertise with all your sales staff. The software is not standardized in one size fits all, so there’s trade offs there. But those were kind of the four things they were focused on in terms of growth.

None of that is terribly interesting. You can see that across lots of enterprise businesses. They’ll, they’ll mention pretty much the same four. The other thing they were doing is they were sort of moving away, not moving away. They were moving from being a pure sort of product based company. with their bundle to also creating an ecosystem.

And so they made some moves. They bought Slack. They were building out data ecosystems. MuleSoft was what they were using. So you could see them starting to look a little bit more like an ecosystem and more like a platform business model, as opposed to, you know, purely a software bundle. So. You know, if historically [00:29:00] they’ve looked a lot like Adobe as a pure software bundle, this was them moving a little bit more towards something like Microsoft, which is a platform and an ecosystem business at its core.

And then it has a lot of, you know, software products as well. So they were making some moves in that regard. The acquisition of Slack was kind of interesting. Okay. That’s where they were going. Let’s talk about how generative AI basically turns all this on its head. Basically, you know, all this enterprise software stuff, the CRM stuff.

You know, what’s the bottom line? You know, when do we know it’s working? And it’s really two metrics, two KPIs. And actually HubSpot talks a lot about this, which is interesting. It’s. When your teams that are working in your organization in various aspects of CRM, sales, marketing, whatever, start to use your tools, that would be the rubber hitting the road.

Okay. Here’s [00:30:00] a team at a midsize company. The marketing team is now using one of our HubSpot tools. Okay. It’s when teams of people, humans, use your software tools. These are tools for teams. The other KPI would be when our software tools and systems become embedded in the workflows of a business. You know, okay, maybe it’s not the team using this tool every day, but this is now how data is processed at the same company.

Those are really the two KPIs that matter. Are the teams of humans in the business in these various functions using the tools and are they embedded in the workflows? Those are kind of the two, that’s, to me, that’s where the rubber hits the road. Okay, now think about what I just kind of said because does generative AI change that?

If we’re providing traditional software tools that are tied to a big database [00:31:00] that’s getting smarter and smarter about the customers okay, we’re giving tools to teams. There’s a team in marketing, there’s a direct sales team, there’s a customer service support team. They’re all using our tools. Does this change that?

Well, yeah, because you know as we’ve been talking about generative AI In terms of improving the productivity and the value of tools, the productivity and operations and the value of tools, I mean, it is just fantastic. So, I mean, basically you have to start putting generative AI into your core services and products because it can make a tremendous difference when, You know, teams of people at various companies are using their tools to do marketing and sales and content generation and commerce and, you know, all of that.

So yeah, on, you know, Generative AI Strategy 1. 0, okay, put it into your products, it’s going to make a big difference in terms of teams of people using your tools. [00:32:00] And embedding that in the architecture of their business, in the, the business workflows? Yeah, the first one is going to happen quickly. Get the tools to them immediately.

The second one is going to take time because to embed this into these companies is going to take time in terms of business processes. Now of those, the first one doesn’t worry me because I think putting these sort of new generative AI tools into your core products and services is doable. And then I think you can hand those to the teams and they’ll start using them.

That seems pretty good. Not a big threat. That just seems like a pretty big upgrade, but a standard upgrade. Okay. What about putting it into the workflows of the company? Well, generative AI has a different tech stack. Salesforce doesn’t have that tech stack to offer, mostly. And the [00:33:00] clients you’re dealing with that are putting your tools into their workflows, they don’t have that tech stack either.

Who has that tech stack? Cloud companies. You know, cloud companies, Huawei, AWS, Google Cloud, they are rapidly building an internal AI tech stack that they are now offering these sorts of tools and services as a service based on their tech stack. I’m not sure how Salesforce can copy that. Can Salesforce go to a medium to large size company and say, start putting the data cleaning, processing, synthesis, and analysis.

of your company into our generative AI tech stack because the data processing layer of generative AI tech stacks is really complicated. No, they don’t have that. The company doesn’t, the client doesn’t have it. Salesforce doesn’t have it. You know who has it? Huawei has it. AWS, Azure, they [00:34:00] have it. So I think that second KPI, that set to metric of, you know, embedding our services into the workflow.

I think they’re in trouble. That’s sort of my first red flag here, that that one worries me. And if more and more of these sort of key business processes are shifted from purely a software process to a software plus generative AI process, They’re behind the curve. So that worries me. That’s number one. So the first one seems fine.

The second one worries me, but then we get to the big one, which is, okay, you’re in the business of providing software tools to people, and you’re going to try and offer generative AI tools to teams of people, which is really what enterprise software is about. What about if it’s not people? What if it’s AI agents?

What if instead of providing tools to humans doing marketing [00:35:00] or tools to teams of humans doing customer service, we are now talking about AI agents? Well, that’s a completely different technology. We’re seeing AI agents doing exactly these functions with little to no human involvement. It turns out AI agents are pretty good at customer service.

It turns out they’re pretty good at content generation. It turns out they’re getting pretty good at doing automated marketing. So that is, that’s the one that like really worries me. I mean, this is the difference between saying, okay, we have taxi cab drivers that provide a service and we are in the business of giving them software tools to make their business better.

Now robo taxis emerge and the cars drive themselves and there’s no humans. It’s [00:36:00] that kind of change. Like, what happens when CRM looks a lot more like robo taxis and a lot less like the taxi companies? That’s not an awesome analogy, but you get my point. What about when AI sales agents are constantly hunting for new customers and sourcing leads and teeing them up?

You know, the sales function, well, maybe not the sales function, depending what you’re doing, the marketing function, the content generation and the content management function, the customer service function, you could see a non human workforce being a big part of that business. Okay. Salesforce doesn’t have any of that.

They are still fundamentally in the business of creating software tools that you give to humans. That’s different. And all of that also creates sort of, you know, go back to where I started with this talk. Salesforce lives in customer knowledge and customer interactions. Well, generative [00:37:00] AI first players, especially AI agents are very good at those two things.

So that worries me. It looks like it’s a major tech change. And here’s the other part that worries me. Okay, the cloud companies worry me for embedding processes. But when we start to look at AI agents, who’s really good at this? Well, Microsoft is going to be very good at this. And by the way, Microsoft is a current rival.

So this is not like a business like Azure that’s not really in your business. This is an existing rival who not only does ERP and enterprise software, but is way ahead of the curve in terms of generative AI. So yeah, Microsoft would be a big, big deal. So the cloud service providers sort of worry me for the second one.

And then Microsoft and a couple others worry me for this sort of shift to AI agents. Mark Zuckerberg had an interesting comment this week. He basically Started talking about AI agents [00:38:00] and that there will probably be more AI agents in the world than humans in the near future. Okay. That’s an issue. So yeah, the AI agent thing with Salesforce, I think it’s a major disruption and that’s pretty much where I am in my thinking.

I’m gonna write a lot of this up and I’ll send it out. But. You know, here’s the, here’s the, the short version. Tremendous business model, tremendous incumbent, has everything we’d ever want to see in an enterprise software business. Their current growth path is good, solid, very predictable. It makes a lot of sense.

Generative AI is, is really a major sea change. Probably the biggest one they faced since they pioneered SAS as a business model. They seem well positioned to enter it, to embed generative AI into their existing products and services. They seem not very well positioned against particularly cloud service [00:39:00] providers, to creating these workflows that get embedded into companies, which is a lot of their switching costs.

And then the major disruption is, you know, these AI agents. And enterprise and ER players like Microsoft that also have tremendous depth in generative AI. That could shift market share very quickly, that combination. So I would expect them to start doing some pretty big moves into this space, probably acquisitions probably a lot of spending, which is good because they have a lot of money a lot of hiring, a lot of building of internal AI capabilities, and probably some acquisitions.

I imagine that they’ve sort of opened the floodgates in terms of money on that already. But we’ll see. That’s just a prediction. That’s kind of where I am with this company. I hope that is helpful. The two concepts today, just bundling, which are awesome, and switching costs. That’s it for me. I hope this is helpful and I will talk to you next week.

Bye bye.

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

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