Salesforce.com Buys InStranet Customer Service Knowledge Base

Salesforce.com, a 9-year-old company that has grown mostly from internal expansion, disclosed on Aug. 20 that it has acquired AppExchange partner InStranet, the producer of customer service knowledge base technology, for $31.5 million.

InStranet’s knowledge base technology is used by business-to-consumer or business-to-business customer service call centers to give service agents online reference and policy databases to answer customers’ questions. It can also be deployed as a searchable Web-based self-service portal to help customers answer their own questions.

InStranet was founded in 1999, the same year as Salesforce.com, by CEO Alex Dayon and Executive Vice President Jean-Noel Grandval, who were both former executives at Business Objects.

Salesforce.com acquired InStranet, which has been an AppExchange partner since 2005, “because we believe that they have the best knowledge base technology for customer service and support in the market,” said Brett Queener, Salesforce.com’s senior vice president of applications.

While it is a relatively small company, InStranet has a number of high-profile customers, mainly in Europe but also in North America, including 3M, Comcast, Manpower, Business Objects, Credit Lyonnais and Credit Agricole. InStranet is based in Chicago but has most of its operations in Paris.

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Currently, companies use a wide variety of software applications, databases, content management systems and documents to create customer service knowledge bases. This includes anything from Microsoft Word documents to Adobe PDF files, Queener said. Many of these systems are so bulky and cumbersome that they frequently fail to give customers the information and answers they are looking for, he added.

While businesses have spent billions of dollars to set up customer service call centers and self-service Web portals, customer service knowledge bases have been relatively neglected and represent a potential new growth market. Gartner estimates that the customer service and support market is worth about $3.4 billion. Salesforce.com estimates the overall CRM market in 2008 is worth $9 billion.

The customer service knowledge base sector is an area in which the IT industry “has let down its customers,” said Queener. “When you go to a customer portal and try to get an answer or when you talk to an agent and you want an answer, it is just too damn hard sometimes,” he said.

Salesforce.com had brought in InStranet on a number of its deals where customers wanted to integrate their CRM system with a knowledge base, he said. The partnership worked so well the company decided to acquire InStranet.

So for a relatively small amount of cash, Salesforce.com will add a new product to its on-demand CRM service. It will give Salesforce another selling point when it competes with the other big names in CRM software, including Oracle, Microsoft, SAP and a host of smaller players.

But the price is so low you have to wonder why a 9-year-old company such as InStranet didn’t grow faster on its own. With only $4 million on its balance sheets, it doesn’t look like InStranet’s technology, now so highly valued by Salesforce.com, was raking in a lot of cash despite a fairly impressive customer list.

While currently the InStranet knowledge base is no more than an olive in Salesforce.com’s CRM martini (shaken, not stirred), if it will help Salesforce.com close more deals, the company will hardly have reason to complain about the price it paid.

Salesforce.com actually closed its acquisition of InStranet on Aug. 4, but it didn’t disclose the deal publicly until Aug. 20, when it was scheduled to announce its second-quarter financial results, because it was in a quiet period mandated by Security and Exchange Commission regulations, company officials said. While the deal included the assumption of $4.2 million in cash on InStranet’s balance sheets, the acquisition won’t have any impact on Salesforce.com's second-quarter results, Queener said.