Handling hosted CRM growing pains

As smaller companies mature and their functional needs grow, are they likely to say so long to hosted CRM?

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In 2001, then-software startup MercuryMD Inc. chose hosted CRM because it didn't have the budget for an on-premise rollout.

About a year later, a single reason compelled the Durham, N.C.-based health care applications firm to bring CRM in-house: At the time, its provider didn't enable offline access.

"It became clear as our folks were traveling that the online software had some limitations," said David Levin, MercuryMD's director of marketing.

So, MercuryMD turned off its hosted service from Salesforce.com and installed SalesLogix software. It now has 35 users running SalesLogix 6.1 to track leads, gauge marketing activity and keep tabs on trouble-tickets and customer deployments.

Levin said MercuryMD is happy with its decision to bring CRM in-house but would have stuck with Salesforce.com had it had an offline edition. The San Francisco-based vendor has since released that edition.

Many of the benefits of hosting -- such as low upfront costs and the ability to free up internal IT staffs -- appeal largely to smaller businesses with less complex CRM needs. As these companies mature and their functional needs grow, are they likely to follow MercuryMD's lead and give hosting the heave ho?

Thus far, analysts said a relatively small number of hosted CRM users have abandoned the model.

Chris Selland, vice president of sell-side research at Boston-based Aberdeen Group Inc., doesn't expect a hosting mass exodus. He said hosted CRM might not meet a company's need because it is tougher to integrate and customize and its monthly rental fees may result in a higher total cost of ownership.

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However, providers are already addressing two of those three limitations. The hosted players are releasing application programming interfaces and development platforms like Salesforce.com's sforce that make it easier for businesses to customize and integrate the hosted services. Third-party developers are also signing on to produce add-ons to hosted software.

That means economics may be the biggest threat for hosting. Selland said hosted CRM makes sense for customers with fewer than 50 seats. As the size of a deployment grows, however, he said the on-premise option is often cheaper.

"It's like a car. If I'm going to use a car one a day a month, I should rent it. If I'm going to use it every single day and drive it into the ground, I should buy it," Selland said.

Other analysts have said that hosting ends up costing more in the long haul regardless of deployment size.

Hosted CRM and accounting provider NetSuite Inc. in San Mateo, Calif., said it has lost just a handful of its 7,000 customers because the company's needs outpaced its software's functionality.

"From our perspective, everything's going the opposite way," said NetSuite CEO Zach Nelson. "People are running to this model."

Making the switch

When companies lease their CRM software, the data sits outside the corporate firewall, usually in a data center many miles away from its headquarters. Standard hosting contracts spell out the type of access that businesses have to their data. Contracts often also include migration plans, in the event of a vendor switch.

Nelson said that his customers are welcome to their data "anytime they want it" -- even if that means a nightly data export for complex internal reporting.

Still, Selland said transferring data after a vendor swap isn't always foolproof. While companies can easily get their core information, they often lose valuable data structure. For instance, when transferring sales force automation data, businesses may be able to capture all their account information but might not be able to recreate linkages between accounts, opportunities and appointments, according to Selland.

"It's disruptive to rip out one of these systems and go with another," Selland said. That's why his primary advice is to negotiate with an existing vendor before abandoning it; a firm may find that provider is better able to meet its needs than it initially thought.

MercuryMD's Levin described his 30-day data migration project as "smooth" and commends Salesforce.com for sending the data. The lone hiccup in MercuryMD's SalesLogix installation came in synchronization.

Hosting is here to stay

Even if they lose some hosting customers over time, vendors now realize that this is a viable way to sell software. In the last few years, CRM providers have looked to steal a slice of the growing hosted pie from industry pioneers like Salesforce.com, which now boasts more than 11,000 customers.

Siebel Systems Inc., the longtime on-premise CRM software leader, scrapped its initial foray into hosting. Yet, last year it did an about face, reentering the market by partnering with IBM and acquiring hosted provider UpShot Corp.

Siebel touts a hybrid CRM model that boasts simple integration between its on-premise applications and Siebel CRM OnDemand hosted software. That strategy enables companies to get their feet wet with hosted software and then upgrade to on-premise as the business grows or to link CRM applications in the corporate headquarters with hosted software at far-flung divisions.

Just about every CRM vendor now has a hosting strategy, especially those targeting small and midsized companies. Pleasanton, Calif.-based FrontRange Solutions has been busy re-architecting its software and will roll out its first hosted application later this year. Best Software, the Scottsdale, Ariz.-based company that makes SalesLogix, last year acquired ACCPAC International Inc. in an effort to give its customers a hosted alternative.

Jon Van Duyne, Best's senior vice president and general manager of SalesLogix, said he's considering a migration path from ACCPAC to SalesLogix for customers looking for a deeper technology offering once they experience some CRM success.

Hosted CRM's future

Most expect that hosted CRM will continue to gain traction, especially since its providers haven't tapped the lion's share of the market. The vast majority of smaller businesses still haven't invested in packaged CRM software.

Still, few dispute that hosting will evolve.

Ben Kiker, senior vice president and chief marketing officer at Bellevue, Wash.-based Onyx Software Corp., predicts companies will still host their CRM software, but some will do it themselves instead of contracting with a provider. Onyx, which has historically offered its midmarket CRM applications through traditional license agreements, has hosted CRM partnerships with vendors like IBM.

Within 18 months, Kiker said many larger organizations will realize that it doesn't make sense to pay monthly fees to an outside provider to rent a smattering of CRM seats across multiple divisions.

"One day, someone is going to start doing the math on what they're spending on a monthly basis and say, 'why are we doing that?'" Kiker said.

The smarter budgetary bet, he said, would be for these bigger businesses to host the software in their own data center and extend it out to divisions or subsidiaries in a utility computing model.

Selland expects the most significant change to be a narrowing of the gap between hosted and on-premise offerings. Soon, he said, the user interfaces and functionality will be similar.

"The only real difference will be what your invoice looks like," Selland said. "How do you pay for the software and where does the server sit?"

Despite its CRM experience, MercuryMD wants to make it clear that it's still bullish on the hosted model. In fact, it's building a hosted version of one of its health-care applications, largely to target customers looking for upfront cost savings.

"I don't know too many startups or small teams in large corporations that can shell out $50,000 to $100,000," Levin said.

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