For any new consumer-oriented technology to be successful, companies must provide good customer service. As a result, it’s no surprise that at the height of the dotcom boom in early 2000, online customer relationship management services looked like a major growth area.

Back then, Datamonitor predicted the eServices software market would grow at an average 74% per year from 1999 to 2004. eServices is defined as the delivery of customer care over the Internet, whether through email, web-page collaboration, text chat, or click-to-talk technologies.

In 2000, it seemed obvious that the increased uptake of Internet technologies and software applications would drive growth in the market, especially as companies increased their online presences, and online consumers became increasingly intolerant of poor service.

Dotcom bubble, toil and trouble

None of these drivers has changed in the past two years. However, the downturn in the economy, combined with the end of the dotcom bubble, has taken its toll on the market’s growth rate. Datamonitor’s latest figures predict that the eServices market will grow at just over 20% from 2001 to 2006.

This does not mean that the eServices market is no longer important – just that it must be considered in the proper context of the broader service automation software market. This market includes more traditional applications that automate service over well-established channels such as the telephone.

Service automation software is set to show relatively strong growth in both the US and Europe over the next five years: it will grow from $2.3 billion in 2001 to $4.4 billion by the end of 2006. Most of the revenue comes – and will continue to come -from traditional applications, rather than eServices: $1.8 billion in 2001 and $3.1 billion in 2006, compared with $500 million in 2001 and $1.3 billion in 2006.

Still growing…

But these figures still hide the potential of the eServices market. While eServices accounted for 22% of the market in 2001, the sector will account for 30% in 2006. So despite the slowdown in what was once an explosive market, eServices is still the largest growth opportunity for service automation vendors over the next five years.

The end of the boom times has also brought dramatic changes to the eServices market’s competitive landscape. In short, most of the companies who once provided eServices no longer do.

Kana and eGain are almost the only first generation providers left. The others have been bought, become insolvent, or both. Examples of market consolidation include Brightware’s acquisition by Firepond, eShare’s by Divine, and Quintus’ by Avaya. And even Kana is a result of a spate of acquisitions (Rubric, Broadbase, ServiceSoft, Silknet).

This trend is unsurprising: 20% annual market growth cannot support anywhere near the number of start-ups and small vendors who could survive in a market growing at 74% a year.

The big boys come out to play

At the same time, traditional service automation and CRM vendors, such as PeopleSoft, Oracle, Siebel and Clarify/Amdocs, have bolstered their eChannel functionality. They are now able to offer their target customers much, if not all, of the eServices functionality of a Kana or eGain. Leveraging their huge installed base in enterprise applications, there is a strong probability that they will make the most of the growth in eServices.

SAP, a late but so-far successful entrant into the CRM arena, has a solid chance of establishing itself as a major force in the front office. Even Baan, long consigned to the ‘backwaters’ of ERP, has been revitalized by Invensys’ takeover. It is clear that eServices is in the process of being subsumed into the greater enterprise applications market.

In sum, developments in the service automation market, and eServices in particular, point to modest growth in the next five years. At the same time, the market will consolidate, as traditional vendors crowd out the first-generation eServices providers. The market slowdown has made the financial position of many first-generation eService vendors untenable.

Combined with the fact that the false distinction between online and offline service is blurry and fading fast, it is likely that in the next 3-5 years eService functionality (as one could perhaps already say about the whole of the CRM sphere) will be a conquered domain ruled by three and five large enterprise application vendors.

Related research: Datamonitor, 2002: The Future of Customer Service Software