If you listen to the hype from hosted providers, enterprise CRM customers aren't just for enterprise CRM vendors anymore. But some analysts say those marketing messages aren't entirely grounded in reality.
While inroads have been made, application service providers (ASPs) aren't penetrating the enterprise CRM space to the extent that they're claiming, according to Steve Bonadio, senior program director of technology research services for Stamford, Conn.-based Meta Group.
"These guys want you to believe they've hit the big time," Bonadio said. Instead, large companies with a number of CRM initiatives rolling out in a phased manner often use hosted software on an interim basis until their internal project is ready to go live, he said.
"[ASPs] are getting some short-term play because of that," Bonadio said.
While the hosted vendors are touting their ability to move up and serve the enterprise market, they suddenly find the enterprise software leader moving down to their space. With the launch two weeks ago of its own hosted offering and the announcement Wednesday of its plans to acquire UpShot Corp., Siebel Systems Inc. is taking on the hosteds on their own turf.
With both a hosted and an on-premise offering, Siebel claims to offer the best of both worlds: affordable hosted software you can get started with quickly, coupled with the ability to migrate and scale up to their larger enterprise applications.
In the long term, that may be the key for the enterprise market, Bonadio said.
"The companies that have both models are the ones that are really going to benefit from the ASP model," Bonadio said. "They can say, 'We can do either. It's your choice.'"
Hosting is hot
Regardless of where the customers are coming from, this model of delivery is catching on. The entry of Siebel, which had previously sworn off the hosted model, goes to show just how hot the ASP model is. Analyst estimates put the market at $2.7 billion by 2006. Most of that revenue is expected to come from the midmarket, however.
Still, hosted providers like Boston-based Salesnet Inc. say a down economy and a recent emphasis on outsourcing have led to some gains with large customers. Salesnet counts Staples Inc. among its larger clients, with more than 1,000 seats currently live in its Quill division, based in Lincolnshire, Ill. Salesnet also has another multi-thousand seat deal currently in the works, said Dan Starr, the company's chief marketing officer.
San Francisco-based Salesforce.com, which has 100,000 overall subscribers and frequently has bragged about picking off customers from on-premise market leader Siebel Systems Inc., announced this summer that it had signed up SunGard Data Systems Inc., Wayne, Pa., for 1,000 users worldwide. The deployment is its largest to date.
Yet sources say most deployments are likely to follow the model of Wyse Technology Inc., a thin-client desktop company in San Jose, Calif. Wyse went live with 165 seats from Salesforce.com after deciding it didn't need all the bells and whistles from the enterprise vendors, according to Stephen Yeo, director of marketing in Europe. The quick startup, ease of use and low cost all factored into the initial decision to start with Salesforce.com in the company's European offices and then roll out the hosted software around Wyse's global operations.
"Basically, it spread like a fire through our company," Yeo said. "The level of functionality is spot on. It does what you need well, but not too much."
When Polaroid Corp., in Waltham, Mass., was shopping for CRM, its IT department was under pressure to cut back on resources, according to Yale Cohen, group manager for worldwide service communications. In 1999, the company selected RightNow Technologies Inc.'s hosted customer service offering, and three years later re-upped for around 100 users.
Do the math
That sort of scenario, where a company looking to save money selects hosted CRM, has served the ASP vendors well in the short term -- but as more IT money is freed up, the trend won't last, Bonadio said.
In the fourth quarter, there will be a dramatic shift in CRM spending, according to Bonadio. No matter how cheap a hosted offering is in the short term, those monthly fees will add up.
"At some point you have to do the math and say, 'Where have we met the point where we could have paid for the software in the first place?'" Bonadio said.
With bigger IT budgets, larger companies will be even more likely to make the up-front investment than they already are.
Similar to the decision to buy or lease a car, there are tradeoffs in the decision to host or purchase a CRM application, said Chris Selland, managing director for Cambridge, Mass.-based Reservoir Partners in a recent report. For smaller companies with less of a requirement to customize and integrate an uncomplicated IT infrastructure, hosted offers a compelling value. But for larger enterprise companies, the financial and IT economies of enterprise software -- plus the integration and customization capabilities -- make it a wiser choice.
"Hosted CRM will not eliminate enterprise software -- nor will it return CRM to the glory days of triple-digit growth," Selland wrote. "In the enterprise market in particular, we believe that its potential is modest at best."
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