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Newbies crash the hosted CRM bash

With all these providers, the question is: How wary do you need to be when renting software from a new company, especially since it's holding your data?

There's no shortage of hosted CRM providers out there.

The success of companies like NetSuite Inc. and Salesnet Inc. and upcoming public stock offerings from Salesforce.com and RightNow Technologies Inc. have validated the hosted model. Now, new startups are popping up regularly.

However, it's unclear how many vendors the market can support and how much trust organizations will have in a new hosted provider.

When Seattle-based CSG Openline Inc. went shopping for a hosted CRM vendor, it considered the biggest player in the space, Salesforce.com. Instead, the company elected to go with neighbor Entellium Corp., a company that had established itself in Malaysia but recently moved its headquarters to Seattle.

You're buying a service and, if the service is unavailable, you're out of luck.
Scott Nelson, Gartner analyst,

"One of the reasons was proximity; we knew the folks at Entellium," said Bo Wandell, vice president of sales and marketing for CSG Openline, a channel partner management outsourcer. "They're all good products. In our case, we were looking to be able to guide or at least have some influence on the products."

Entellium's recent round of financing from some venture capital firms also instilled some confidence, Wandell said.

Signing on with a new software company early may give an organization extra input into the technology, but not everyone has a neighborhood vendor. Plus, there are risks. What happens if the company that holds all of your customer data goes belly up or switches to a different line of business?

"With on-premise software, you can escrow code so you can protect your investment," said Scott Nelson, vice president and distinguished analyst with Stamford, Conn.-based Gartner Inc. "In a hosted model, that's more difficult. You're buying a service and, if the service is unavailable, you're out of luck."

Do your homework

That makes due diligence particularly important, Nelson said. Many of the new hosted providers are privately held, which makes it difficult to determine if they're showing quarter-to-quarter growth and generating new clients. Speaking with reference customers becomes vital, Nelson said.

However, he said that the hosted CRM space can support additional vendors because it caters to small and midsized businesses, which haven't been penetrated as heavily as the enterprise market. And just because a company hasn't been around as long, doesn't mean it shouldn't be considered.

"You don't have to exclude a small player," Nelson said. "They may have new features or pricing that's advantageous."

New on the scene

In recent weeks, along with Entellium, Technology Integration Group Services Inc., in Bloomfield Hills, Mich., rolled out its NextSale hosted SFA product, and Airframe Business Software Inc., in San Mateo, Calif., introduced a suite of 23 hosted small-business applications, including CRM. Despite the competition, Airframe doesn't think it arrived too late.

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Go beyond the hosted hype

"Maybe if we were in the CRM market only," said Olivier Delerm, Airframe's vice president of product marketing. "The game is not over, but it's a pretty crowded market. We see a lot of demand for things that don't have much to do with CRM." Airframe is also hoping to use an ROI guarantee as a differentiator.

Because the hosted model depends on economies of scale to turn a profit, these startups will likely have their work cut out for them. Market share leader Salesforce.com now tops 100,000 subscribers, has invested heavily in marketing and seems sure to raise the bar higher once it rakes in the funding from its IPO. The other hosts have been developing their software for several years, and hosting newcomer and CRM on-premise software leader Siebel Systems Inc. acquired UpShot Corp. to help it build software and a customer base.

"We have so much functionality, and [these newcomers] are on their 1.0 version, it's hard to imagine they'll last for long," said Zach Nelson, CEO of San Mateo, Calif.'s NetSuite. "In the late '90s, people were excited about [hosted providers] for the cost savings, but [the model] didn't take off because it didn't do something. At the end of the day, the customer won't pay you a dime if it doesn't have the functionality it needs."

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