Hosted Services Make Sense for SMBs

Speakers at Yankee Group forum Monday offer SMBs advice on evaluating hosted CRM offerings.

WALTHAM, Mass.—Small and mid-sized businesses have many good options to get robust customer relationship management (CRM) capabilities from hosted service offerings, but presenters at a Yankee Group forum here on Monday said that differences do exist and are important.

Speakers at the Boston-based Yankee Groups SMB (Small and Medium Business) Forum stressed the traditional benefits of hosted services—that it requires lower up-front costs, lets users take advantage of the systems quicker than licensed software and that it allows companies to focus on their core competencies.

Yankee Group analyst Sheryl Kingston laid out the differences between what she called premise-based CRM software from companies such as Siebel Systems Inc., PeopleSoft Inc. and Oracle Corp. and hosted services from companies like Inc., UpShot Software (which Siebel recently announced it is acquiring) and SalesNet.

While the premise-based, or licensed, software can be highly customized, it requires a large up-front cost, while hosted software, which typically has a starting price at around $70 per user per month, spreads out the cost over a long time, Kingston said.

Costs beyond the initial license, like maintenance, can increase the TCO (total cost of ownership) of premise-based software compared with the cost of a hosted service. As such Kingston presented data showing that hosted offerings can be cheaper over the typical five years over which software is often amortized.

"If the subscription service vendor wants to give [potential customers] a TCO over three years, theyre making it look less expensive than it really is," Kingston said. "You want to look at TCO over five years."

A key when an SMB is evaluating a hosted CRM offering is to look for a system that offers simplicity and flexibility. Creating complex business processes drives longer deployment cycles, she said.

Another item to investigate is a vendors claims about the degree to which its offering is tailored for specific vertical industries.

"SalesNet, are not focused on verticals today," Kingston said. "They might talk verticals, but they dont know them."

IBMs hosting business has seen demand for hosted offerings take off in the past six months, according to Caroline Robertson, marketing manager for IBM e-Business Hosting. An IBM-commissioned survey showed that in January interest in hosted offerings was relatively weak, but a similar poll conducted in June saw interest jump.

The Armonk, N.Y., company found in a separate study earlier this year that small businesses looking to try hosted services are most interested in running CRM and SFA (sales force automation) first.

"The opportunity to get up and running quickly without giving up some of the benefits of on-premise software solutions" is very attractive to SMBs, said Caroline Robertson, marketing manager for IBM e-Business Hosting.

IBM provides hosting services in which it works with ISVs (independent software vendors) in four different business models:

  • through a wholesale hosting relationship in which IBM runs an ISV application but the ISV is the main point of contact with the customer
  • through a traditional hosting relationship in which either the ISV or IBM can work with the customer
  • through a joint sales relationship in which both the ISV and IBM work together to win and service customers
  • through a relatively new Business Transformation Offering in which Big Blue embeds an ISVs software into its own software stack and sells it.

As part of its company-wide On Demand Business push, IBM is trying to boost all four parts of its hosting business through its Application Enablement Program, which helps ISVs convert their software so it will run smoothly as a service hosted by IBM, Robertson said.

Hosted offerings dont make sense for a lot of very small companies, Yankees Kingston said, because they cant justify the cost of the subscription over many years. She suggested that there was an opportunity for ISVs or hosted solutions developers to create a hosted offering that would be priced at $20 to $30 per user per month.

"What they need is account management for [managers] to understand the day-to-day operations of [their] business," she said.