Hosted Apps: Answer for CRM Cost Bloat?

While pure-play CRM ASPs (application service providers) such as Inc. and traditional CRM software vendors such as Oracle Corp. and PeopleSoft Inc. have been retooling their hosted offerings to attract enterprise users, IT managers and expe

The pitch seems almost too good to be true. Are you frozen with fear by tales of runaway CRM software deployment costs? Not to worry. Your organization can enjoy the same benefits offered by big, complex, expensive customer relationship management packages without the hassle of deploying the software. Just sign on with a CRM ASP. No new hardware to install. No hands-on software customization. You can pay on a per-user, per-month basis, without paying for a software license. And heres the kicker: Hosted CRM is improved and ready for enterprise users.

If only it were that easy.

While pure-play CRM ASPs (application service providers) such as Inc. and traditional CRM software vendors such as Oracle Corp. and PeopleSoft Inc. have been retooling their hosted offerings to attract enterprise users, IT managers and experts say the hosted CRM story still has holes. Despite the efforts of pure-play, subscription-based, hosted CRM vendors to become enterprise-friendly, they still cant offer the functionality, customization and track record that traditional, in-house-deployed CRM software can. At the same time, hosted offerings from traditional CRM ISVs may not deliver all the cost savings that they first appear to. As a result, experts predict, hosted CRM will continue to be a hard sell in the enterprise.

"Frankly, Im less optimistic about the hosted model today than I was a year ago," said Barton Goldenberg, a CRM consultant and president of ISM Inc., in Bethesda, Md., and an eWeek contributing columnist. "Larger enterprises, in particular, are still reluctant to let the family jewels—critical customer information—out of their sight. Theyre also concerned about the long-term stability of CRM ASPs. And, finally, theyre critical of the lack of customization available from some offerings."

Take the case of a large financial services company that, while sharing its decision process on hosted CRM, asked not to be named. Sales officials there recently elected to deploy CRM software from Pivotal Corp., of Vancouver, British Columbia, after also evaluating an ASP offering from, of San Francisco. The sales officials said they avoided, in part, because of a lack of CRM functionality and concerns that Salesforce.coms support organization was too small to effectively service the companys 400-plus CRM users.

To be sure, a growing number of organizations are plugging into hosted CRM applications, particularly the subscription-based variety that claim to be able to get businesses up and running in as little as 15 days and charge a flat per-user, per-month fee of between $50 and $125. Indeed, privately held now says 3,000 companies are using its online CRM service. A direct competitor, 5-year-old Salesnet Inc., of Boston, said its sales have increased by almost 8,000 percent over the last year.

But while these pure-play, hosted CRM service providers each claim a handful of large-enterprise reference customers—with contracts in the 500- to 1,000-seat range—to date, theyve mostly attracted small and medium-size businesses in search of a quick, simple sales automation solution but often without the budget, expertise, servers and other IT infrastructure needed to deploy full-featured CRM software on-site.

One such medium-size company is Pan American Life Insurance Co., of New Orleans, a private provider of 401(k) pension services that six months ago signed on with Salesnet after backing away from a plan to deploy Goldmine sales force automation/contact management software from FrontRange Solutions Inc., of Colorado Springs, Colo. According to Charles Jorge, Pan American Life second vice president for CRM systems, the company switched to the ASP approach after realizing that the Goldmine application offered more functionality than its users wanted —or could use—and that implementing Goldmine internally would mean training and paying a four- or five-person team to keep it running at all times. "Those were resources IT didnt have," Jorge said.

Salesnet, in contrast, charges $49 to $95 per user, per month—support included.

Pan American Life uses Salesnets Sales Process Management online service mainly as a contact manager and to coordinate among sales representatives via a shared calendar feature. Pan American Life has created customer prospecting features using an online workflow-builder tool that is part of Salesnets offering.

But the key for Pan American Life was that Salenets offering was relatively inexpensive and that it was easier to use. "We wanted something that, in 45 minutes, a salesperson could understand," Jorge said. "Something like Goldmine has a lot of features, but its a logistical nightmare training someone to use it."

What looks like low cost and simplicity to small companies, however, is often seen by larger enterprises as a lack of CRM robustness. IMS Goldenberg, who recently analyzed offerings from subscription-based providers, Salesnet and UpShot Corp., of Mountain View, Calif., said most offerings still address a relatively narrow range of functions and are mainly focused on sales contact management, expense reporting, proposal generation and pipeline forecasting. Most of these services still dont address such customer touch points as incident management for call centers or Web-based customer self-service. Thats a problem, experts say, particularly for larger enterprises looking to integrate customer information from multiple channels.

Now, pure-play, hosted CRM providers are pushing to enrich the functionality of their offerings, with an eye toward attracting large enterprises. Earlier this month, and UpShot introduced what they called enterprise versions of their services. Salesforce.coms Enterprise Edition includes new back-office applications such as order management, invoice management and contract management, as well as an enterprise administration console, product and annuity revenue forecasting features, and XML- and API-based integration with ERP (enterprise resource planning) and other back-end applications.

UpShots Extended Edition for enterprises includes a new workflow engine that can create processes that link marketing and sales functions, as well as a variety of options for integrating UpShot with back-end systems.

Its unclear whether these products will live up to their marketing and bring larger enterprises into the hosted CRM fold. But at least one midsize company, Sigma Tau Pharmaceuticals Inc., based in Gaithersburg, Md., signed with after deciding that deploying Siebel Systems Inc.s eBusiness Applications or another CRM package internally would take too long and eat up too many scarce IT resources, said IT Manager Yamil Hernandez.

Hernandez said that while Enterprise Edition has helped close the functionality gap between and more traditional CRM software, "something like Siebel still has more features. But, for us, we had to balance that between the pain of adding new servers and the upfront cost of buying licenses." In the end, Hernandez said, Sigma Tau was able to get 21 sales users up and running on in 60 days.

While pure-play CRM ASPs such as and UpShot are progressing in broadening the features and functionality of their offerings, experts predict that two issues will continue to pose barriers for many large enterprises: integration and customization. Its true, said Kevin Scott, an analyst at Boston-based AMR Research Inc., that CRM ASPs have begun announcing APIs, gateways and XML tools to allow users to integrate hosted CRM with ERP and other back-office enterprise applications, "but I have yet to find large customers who have used those APIs to do much integration. Over time, the Web-services-style integration should work, but its going to take a couple of years."

A more fundamental problem for enterprise customers of subscription-based CRM providers may be customization. While hosted service providers such as, UpShot and Salesnet provide online tools for configuring the way individuals or groups see data or create workflows, they are, for the most part, not set up to support the kind of core functionality customization that is possible with more traditional, licensed enterprise software, experts say.

IMS Goldenberg said that, in his experience, between 30 percent and 50 percent of enterprises deploying CRM require a moderate or extensive amount of customization of the application.

Much of the problem subscription-based CRM providers have with customization is tied to the way they deliver service. Rather than hosting an instance of the application for each enterprise customer, these providers tend to run a single application and database. Users accessing the service are plugged into any of several servers running a single copy of the application. That lets providers offer the service economically and gets users up and running quickly. But it makes customization of the application difficult.

Of course, enterprises wanting to offload CRM deployment while retaining a more full-function CRM package and the option to customize can select a hosted CRM offering from Siebel, Oracle, PeopleSoft or another more traditional enterprise software provider. Directly or through hosting partners, these companies can configure, deploy and support CRM as a service. Rather than pay on a flat per-user, per-month basis, customers of this service typically must license the software as they would for an internal deployment and pay a combination of per-user and support costs. Users would also pay extra—usually to the vendors consulting organization—for software customization.

While the traditional CRM hosting approach can help cut certain costs—such as application management and support—the cost advantages compared with internally deployed CRM are much less clear-cut. A report last year by Aberdeen Group Inc., of Boston, estimated that buying CRM as a hosted service from an ISV would save customers 44 percent overall in the first year, falling to 15 percent in the second year as some initial deployment costs shrank. Those estimates, however, were based on an average per-user cost of more than $12,000 in the first year and more than $5,000 in the second year for internally deployed CRM. According to IMS Goldenberg, with enterprise customers in a stronger bargaining position with ISVs today because of the recession and competition in the CRM market, its possible for companies to deploy CRM internally for less than $5,000 per user, per year, averaged over three years.

Perhaps because of those less attractive financials, ISVs generally have seen relatively slow demand for their hosted CRM services, experts say. That hasnt stopped Oracle CEO Larry Ellison from predicting that, within the next three years, 50 percent of his companys business will be generated by hosted CRM and other online services.

That may be, but at least for now, large enterprises arent buying the hosted CRM pitch.