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CRM gold rush! Vendors dash in hosted direction

The on-premise software providers are muscling into hosted CRM, leaving buyers with new software options and some hard choices to make.

Not too long ago, Tom Siebel, then the CEO of CRM market leader Siebel Systems Inc., pronounced the hosted delivery model "doomed."

Last year, his San Mateo, Calif., company did an about face. It not only acquired a hosted CRM vendor, but built its own hosted application. Since then, several other providers of on-premise applications have announced plans to grab a piece of the hosted CRM pie.

Yet, unlike Siebel, these companies have not rebuilt their software for a new delivery model, but simply made their existing apps available via a Web browser.

"Most are offering a hosted option as a concession, but the real desire is to get you to go with the on-premise version," said Scott Nelson, vice president and distinguished analyst with Stamford, Conn.-based Gartner Inc.

That's not necessarily a bad thing. In fact, starting with a hosted version and easing into an on-premise system, which is often called the "hybrid" model, holds some advantages for businesses, Nelson said. Among those benefits is a lower starting price and simpler data migration.

I think we're going to see many of these hosted applications fail because they're not being thought through as a strategic offering.
Scott Nelson, Gartner analyst,

The potential to eventually migrate to an on-premise application was among the reasons Digitell Inc. selected, a hosted offering from ACCPAC International Inc. The Pleasanton, Calif.-based subsidiary of the Sage Group released the hosted version of its application nearly one year ago.

Steven Parker, vice president of sales and marketing for Jamestown, N.Y.-based Digitell, joined his brother's company to help out as sales were booming. He thought that a hosted application would help grow the business, which produces multimedia CD-ROMs for conferences and educational proceedings.

"People are in Boston, some in NewYork, some on the road," Parker said. "I knew a network system wouldn't work. We needed something Web based."

Digitell also wanted inexpensive software that the company could get up and running quickly.

Parker said that he had some concerns about the security and performance of an application not written for the hosted model, but a trial run and the assurances of a consultant convinced him to go with The system has performed well in the three months since the company implemented it, Parker said.

Security and performance should be concerns for anyone considering hosted CRM, particularly if they plan on staying hosted, Nelson said.

Hosting is a "different delivery vehicle," he said. "[The software] tends to be written differently in terms of protecting and writing data."

Hosting isn't for everyone and undoubtedly some companies that are not a good fit for the model will buy into it when they shouldn't, Nelson said. But on-premise vendors need to consider offering it and doing it properly.

"I think we're going to see many of these hosted applications fail because they're not being thought through as a strategic offering," Nelson said. "To me, it's more of an add-on."

The hosted bandwagon

Several pure-play hosted providers have enjoyed significant success, as evidenced by the planned public stock offerings of vendors like and RightNow Technologies Inc.

That's led to on-premise CRM vendors to answer the apparent demand for hosting. Last month, Kana Software Inc., of Menlo Park, Calif., announced it was providing its customer service applications as a hosted offering. In November, executives with FrontRange Solutions Inc., in Colorado Springs, Colo., told that the company would have a hosted version of its Goldmine application by the middle of this year. Meantime, Saleslogix's parent company acquired ACCPAC in part to gain hosted capabilities.

It's not hard to see why vendors want to join the hosted providers, a new delivery model represents new revenue potential. Talisma Corp., of Bellevue, Wash., expects 35% of the company's revenue this year to come from hosted applications, up from 25% last year, according to president and CEO Dan Vetras.

"I don't see [hosting] slowing down anytime soon," Vetras said. "I have predicted that within five years you won't be able to buy software, you'll only be able to rent it [for non-mission critical functions]."

For more information

Read about some of the newcomers to the hosted CRM arena

See why SAP isn't as bullish about on-demand CRM

Not surprisingly, the established hosted vendors don't think too highly of the on-premise vendors muscling in on their turf.

"The challenge for those guys is it's not a multi-tenant architecture," said Zach Nelson, CEO of San Mateo, Calif.- based NetSuite Inc., a provider of hosted CRM and accounting applications. "They can't share the cost savings that I can. Even if they're hosting, it's still a one-to-one relationship to the architecture. I can divide that cost by 100."

To users, however, hosting is about simplicity and savings. If its success continues, Digitell may not even bother moving the application on premise.

"If we continue to experience no problems, we may stay with the hosted version," Parker said.

News editor Jon Panker contributed to this report.

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