Why on-demand is in demand

It may have taken hosted CRM the best part of a decade to become an overnight sensation, but firms are now queuing up to outsource their customer relationship management functions to application service providers. Hosted (or on-demand) CRM’s share of the total CRM market doubled to 10 percent last year according to AMR Research. And with leading hosted CRM vendors presently posting up to 80 percent year-on-year increases in revenues, this share looks set to leap as high as 20 percent this year. Hosted software is, of course, nothing new. Back in the 1990s hundreds of ASPs were offering customers enterprise software hosted over the internet. But CRM is viewed as an altogether different proposition.

Whilst CRM is widely acknowledged as a critical consideration, in recent years it has acquired something of a tainted reputation for being what one expert recently described as “ridiculously expensive and delivering very little in return”. Hosted CRM, however, is being sold as an easy way to get impressive benefit from CRM without having to pay a lot of money and without the risk on the table.

“Five years ago CRM got a bad name,” agrees Wayne Foncette, VP of UK and Ireland, RightNow Technologies. “Businesses were just throwing money at conventional on-premise players that partnered with system integrators who made money out of complex long-winded deployments. On-demand eliminates much of the complexity. We are accountable – we have to provide business benefits to our customers almost immediately and prove to them that we are providing the service that they need. Because our hosted customers do not have to pay a huge upfront investment to us, they can easily take their business elsewhere.”

Companies are lapping this up and the revenue figures suggest it is no flash-in-the-pan trend. In some corners there are even those who have begun to forecast a ‘tipping point’ at which time hosted CRM will become the norm with enterprises turning their backs on conventional licensed CRM packages en masse. But isn’t talk of a tipping point a little premature? And is hosted CRM really all that it’s cracked up to be?

Pay-as-you-go

Hosted CRM sees organisations sign up to use a CRM application on a pay-as-you-go basis or paying a set monthly price to a service provider who hosts the application and delivers it over a network to the user's web browser. Salesforce.com is generally regarded to be the pioneer of this approach, but a raft of other suppliers are thriving in the market including Siebel, SAP, RightNow Technologies, NetSuite, Concerto, Unica and Digital River. Each provides firms with password-protected 24/7 access to the hosted CRM and company's data from anywhere with an Internet connection. There is no software to install, no hardware or software to purchase and no IT maintenance or staffing required.

Unlike on-premise software models, which require a large upfront investment,
on-demand deployments enable user organisations to pay on a monthly basis. In his presentation “CRM OnDemand: The Myth and Promise of No Software,” Gartner’s Rob DeSisto estimated that a 400-salesperson user organisation could pay US$70 per month per salesperson with no maintenance charges (US$336,000 in the first year), whereas the upfront capital costs for just a license from an on-premise model for the same users could be US$1250 per user (US$500,000 in the first year).

The figures speak for themselves. And when you take other on-premise costs such as hardware, upgrades and DBA support into consideration, the on-demand cost becomes even more compelling. “People have always been excited about on-demand because of the ways in which it can reduce the costs of managing these applications,” adds Zach Nelson, CEO of NetSuite. “Traditional CRM or any business application is incredibly complicated to manage and now the fact that the software vendor is actually managing the applications themselves saves the end-user enormous amounts of money.”

Democratising force

Nevertheless, despite cost capturing many of the headlines, much of hosted CRM’s allure lies elsewhere according to John Appleby, Co-Founder and Chairman of independent consulting firm Enterprise CRM, and ex Head of salesforce.com in Europe. “Cost is certainly part of it and it’s one of the reasons why when Salesforce.com launched it became a disruptive force in the market,” he suggests. “But in my experience, it is really ease of implementation that is the big winner for this as a concept. Somebody is able to take this thing and get up and running with it straight out of the box. And that is really where the really disruptive element to traditional software implementation comes into play.”

Payable on a monthly basis, and requiring neither the large upfront investment nor the expertise required to rollout CRM software internally, hosted CRM has understandably found itself warmly embraced by small to medium-sized businesses.

“Hosted on-demand solutions often fit in SME’s budgets, and those of departments within larger companies,” agrees Jens Moeller, Marketing Director at Noetica. “The respective purchase price in many cases is just too high. Purchase often requires setting up extra budgets, which in turn requires involving other departments such as purchasing and legal – often much more than with the on-demand model. Also, small and medium sized enterprises often just need to be faster on the market and on business than larger companies – this is one of their competitive advantages due to pure size. The hosted on-demand model can be deployed extremely rapidly.”

Nevertheless, hosted CRM providers positively bristle at the suggestion that on-demand is solely for SMEs. “There seems to be just as much interest from large companies,” emphasises Appleby. “It is like a democratising force in terms of enterprise software – it is available for everybody. And so people who wants to run it down will say it is an SME solution, but just because something is successful in SME doesn’t make it an SME solution.”

Complex demands

Evidence suggests, however, that small and mid-size firms still remain the core customer base for hosted CRM. Whilst there certainly appears to have been growing interest from the higher end of the corporate ladder, with companies such as Salesforce.com touting success in attracting large companies like SunGard, Gartner studies estimate that around 80 percent of Salesforce.com deployments still have fewer than 20 users. Despite the insistence of some hosted CRM providers, it would appear that not all enterprises are yet prepared to join the on-demand parade – and their case certainly won’t have been helped by the questions being raised over CRM’s ability to cater for the larger enterprises and their more complex demands.

When Jürgen Huf, Project Manager at Assa Abloy in Germany, approached CRM, he at first considered on-demand CRM, but was unimpressed with what he found. “Today, the market is in constant movement and ever changing, so new adjustments with tools must be made again and again,” he explains. “On-demand was not the best way for us to achieve our goal. When you have a tricky IT infrastructure with lots of other software that must communicate and integrate with your CRM system, you must have a detailed look at the required interfaces. Not every solution can bring these interfaces without a large expenditure. For companies that can operate with certain standards, and who want to have clear costs month-on-month, on-demand is a possible solution. But, for those who need to have flexible processes and solutions, a traditional licensed solution is the better option.”

Moeller similarly believes that larger firms tend to profit less from on-demand CRM packages than SMEs. “The higher complexity and scale requires a higher grade of tailoring product and services – whether for set-up, maintenance or upgrade – yet the on-demand model by definition has a quite high grade of standardisation,” he explains. “Because of their specific requirements, large companies often need a higher degree to control their systems by themselves, which is not the case with hosted on-demand solutions. They need to plan early for complex long-term projects and often have even higher demands regarding security issues since they are constantly in the public spotlight. In short: SME’s will profit more from the on-demand model, larger corporations often more from a purchase.”

Customisation and integration

Nelson comes out of the hosted CRM corner fighting, however: “On-demand applications are far more customisable than traditional applications. The biggest challenge for traditional applications is that once you customise them it is very difficult to upgrade to the next version of the software without losing all your customisations and all the work you put in. We don’t have that problem because we know that if every time we upgraded the software customers lost their customisation we would be out of business! So we have an architecture that enables us to carry forward these rich and complex customisations. If you talk to any customer of traditional enterprise apps the number one thing they say is that it is impossible to upgrade an application once you have customised it.”

But Gartner’s DeSisto has also put the boot in to on-demand – this time about the cost model. Despite his TCO estimates favouring hosted CRM in the short-term, DeSisto suggests that within three years of a Salesforce.com deployment, more than 60 percent of large sales organisations will find their costs double due to customisation and integration issues. The Gartner analyst concludes that after three years, complex sales organisations will find the TCO for Salesforce.com will be greater than a packaged solution.

“The Gartner report concludes that if you need to complicate it, don’t do it, because it is going to get very expensive, very quickly,” suggests Guy Tweedale, Managing Director for the UK and Northern Europe at Saratoga Systems. “I believe that if you are confident that your sales process is fairly straightforward and that it is not going to change much over a period of a few years – and you can continue to justify the monthly cost associated with it – then hosted is a good business model. But if you are going to continually change your business process, which most companies today do, then you finish up riding with an extremely high cost and an extremely frustrated user base.”

Tipping point

There is little doubt of the value that hosted CRM offers those firms that have limited or no IT support and desire standard CRM processes, of which many fitting this description will inevitably reside at the smaller end of the corporate spectrum. But for those with more complex demands, it may still be a close call between hosted and in-house software, and one that can only be decided after close consideration of cost, risk and integration issues.

Richard Payne Gill, is New Business Leader UK & Ireland at D&B, a company that uses Salesforce.com in its lead generation activities. Gill speaks highly of his experience with hosted CRM, but concedes that businesses need to take each case on its own merit. “Unlike conventional CRM systems – which carry high upfront costs, take time and effort to implement – hosted CRM systems offer good value, are quick to implement and typically easy-to-use,” he explains, although he adds: “Hosted systems will not be right for every business. They may be flexible and easy to tailor, but this is within limits. For a business that has CRM requirements that cannot be met by off-the-shelf packages, licensed and bespoke packages will continue to offer the best results.”

With providers landing an increasing number of large company contracts (Siebel CRM OnDemand has recently added Caterpillar and Sony, whilst Salesforce.com has secured Automatic Data Processing) the notion that hosted CRM is purely for smaller firms is well on its way to being dismissed. Even Tweedale concedes that on-demand is here to stay. “Hosted is here for the long-term and will mature. These guys will get better at doing integration and a little bit better at configuration, and as a consequence of that, the initial cost will go up for these kinds of solutions where integration/configuration is required – so on the surface it will appear to be more like the cost of buying software in-house.”

However, if the tipping point is to truly be reached, larger customers may have to be offered the full functionality and customisation they desire. Appleby is confident that this time will come. “Reports suggest that by 2010, 30 percent of all software revenue will be derived as software-as-a-service,” he concludes. “In terms of expected worldwide market growth, it is forecast that all software is growing at 6.2 percent and software-as-a-service is growing at 20 percent. So event if the tipping point hasn’t been reached yet, then it is going to be reached pretty soon.”

“Five years ago CRM got a bad name, businesses were just throwing money at conventional on-premise players” – Wayne Foncette, VP of UK and Ireland, RightNow Technologies

“The higher complexity and scale requires a higher grade of tailoring product and services yet the on-demand model by definition has a quite high grade of standardisation” – Jens Moeller, Marketing Director at Noetica.

“People are excited about on-demand because of the ways in which it can reduce the costs of managing these applications” – Zach Nelson, CEO of NetSuite

“If your sales process is fairly straightforward then hosted is a good business model, but if you are going to continually change your business process then you finish up riding with an extremely high cost” – Guy Tweedale, Managing Director for the UK and Northern Europe at Saratoga Systems