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Hosted CRM: A crazy idea that's now realizing its promise

Summary: Hosted CRM, once considered far-fetched, is now a viable and hot technology. And according to a recent Gartner report, by 2009 hosted CRM is poised to grow 33%.

When the concept of hosted CRM first materialized about four years ago, there were a lot of skeptics.

At that time, plenty of companies had already been burned by CRM -- its costly and complex technology, long and painful implementation cycles and, ultimately, inability to demonstrate ROI. The market on the whole had a black eye -- vendors were chastised, practitioners were discouraged and analysts were tired of reporting about failed projects. And through it all, the focus was always on the technology -- the errant belief that software could cure all. Back then, the notion that any provider might audaciously suggest that CRM could be provided as a service without software seemed ... well, a bit lunatic.

But perhaps the line between crazy and genius is blurrier than we thought. Today, hosted CRM is not only viable, it's hot, hot, hot.

According to analysts at market researcher IDC, 76% of growth in the CRM market between now and 2008 will come from the "on-demand market," also known as hosted CRM. IDC predicts vendor revenues in this sector will grow from $700 million to $3.6 billion in the same time period. And Gartner sees some promise in the hosted market, too. It estimates that by 2009, businesses will be spending nearly $1 billion on CRM as a service, and that 33% of all small to medium-sized businesses (SMBs) will have opted for a hosted model.

Certainly, SMBs, which don't often have deep pockets or plentiful IT resources, stand to gain a lot from hosted CRM. It's cheap (companies usually pay a monthly fee for each user), it's fast (deployed via the Web) and it's easy (the provider handles the maintenance and upgrades). But the indisputable success of the hosted model has intrigued larger enterprises as well.

In the past year, hosted CRM pioneer Salesforce.com has signed eight deals, including those with Staples, SunTrust Bank and Cisco, that involve more than 1,000 end users. Why? Maybe it's because hosted CRM, which once only offered limited functionality, has greatly improved.

The changing face of hosted CRM
The early concerns about hosted CRM -- it was tough to customize and integrate and data sat outside the corporate firewall -- have been driving vendor innovation. Salesforce.com rolled out its own integration platform, called sforce, which integrates with Microsoft Office and also enables businesses to tie in other internal applications. Seattle-based Entellium announced an open source strategy to release its source code to developers looking to build specialized applications or features based on its technology. Some vendors offer audits of their systems to assuage customer concerns over security. Truth is, a lot of hosted vendors have better security measures in place than do many enterprise data centers. After all, a single breach could bring down a hosted vendor's whole business.

And the evolution doesn't stop there. Some vendors -- like Siebel Systems and Salesnet -- have released industry-specific versions of their on-demand offerings. Other vendors have ventured outside their traditional niche -- like RightNow Technologies, which has its roots as a customer service specialist but recently unveiled new marketing and sales functionality -- to provide a more holistic approach.

Of course, the hosted model is not perfect. Slow Internet connections can impede access to critical data that's stored on the hosted provider's databases. And companies need to do some math to make sure that "renting" CRM won't cost more than "buying" it in the long run. But do these drawbacks pale in comparison to those afforded by on-premise CRM implementations (i.e. higher initial purchasing costs, expensive application maintenance and upgrading, slow implementation cycles, the strain on IT resources, etc.)? Maybe. Maybe not.

What matters most is that when it comes to selecting a CRM provider businesses have a broader selection than ever before. It's no longer a one-size-must-fit-all market. Some companies are hosted CRM evangelists, others are staunch believers in the licensed application model. Still others have decided to use hosted apps as "training wheels" until they need a full-fledged on-premise app or have rolled out hosted CRM to smaller divisions outside corporate headquarters. All of these approaches make sense for different reasons – because every company has a different set of business needs.

Call me crazy, but I think hosted CRM has changed the customer-focused enterprise for the better -- forever.

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