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Hosted or in-house CRM? It depends

In-house CRM provides more flexibility, but hosting is cheaper. Before you choose an approach, you should figure out which factors are most important to your project.

In-house CRM provides more flexibility, but hosted CRM is cheaper. Before you choose an approach, you should figure out which factors are most important and develop an honest appraisal of where you are in the CRM adoption process.

You'd expect any decision regarding something as complex as customer relationship management to have few absolutes and many gray areas. And you'd be right, especially in the matter of deciding whether to buy your own CRM software or pay someone else to host it for you.

That said, there are a few general rules of thumb. First, hosted CRM is usually much less expensive and much faster to implement than buying and installing the software yourself. You can save up to 80% by hosting, according to the Aberdeen Group, a Boston-based consulting firm. These savings accrue in several areas -- such as labor and hardware -- in which the application service provider (ASP) provides resources for you. Going with a hosted provider also saves time, since it takes a lot longer to build the entire CRM infrastructure yourself than it does to plug into a vendor that's already up and running.

Another reason for the lower prices, though, has to do with economies of scale. The profitable hosting service makes money, in large part, by providing the same features and functions to as many customers as possible. There's not a lot of profit in reinventing the wheel for every customer, so ASPs don't generally provide much by way of customization. Sure, there are some options in the CRM setup menus – akin to choosing English or French as your native language in Microsoft Word, for instance. But you can't change the source code to do anything really complicated, as you can with software that you buy outright.

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So what this comes down to, says Denis Pombriant, vice president of CRM research at Aberdeen, is a decision about whether a hosted vendor "has built an application that is sufficiently configurable for your business needs." If not, he adds, "you have to change your business processes or find a solution that enables you to get the behavior you need for your business to be successful."

Another factor has to do with how long a customer has been engaged with CRM as a formal process, says Laura Preslan, research director at AMR Research in Boston. Generally, she says, customers that are just beginning to implement CRM are smart to try the hosted route first. With this approach, customers can "figure out if CRM is something that works for them," she says. If it is, some will go on to buy their own software that they can use in-house and customize. But if CRM doesn't work for their business, "they'll save a lot of money" by trying a hosted service first.

A third major factor is, of course, the size of the customer. Small and medium-sized businesses generally do better with hosted CRM vendors than do giant corporations, because their CRM processes are often simpler from the get-go, says Paul Greenberg, president of the 56 Group, a CRM consulting firm in Manassas, Va.

In general, privacy and security are no longer problems among hosted CRM providers, all three analysts agree.

"The only issue is if you want all your customer data held by someone else," Greenberg suggests. Things can get murky if you decide to stop doing business with the vendor, or if the vendor is acquired by someone else. One way to deal with this is to have a "very, very strong service-level agreement," he says, "one that specifies the disposal or return of the customer data" and in what format. A good SLA will also address privacy concerns and the amount of allowed downtime.

Keep in mind, too, that there are different flavors of hosting vendors. One is what Greenberg calls the "Net natives" -- companies like Salesforce.com, UpShot Corp. and NetLedger Inc., which have their own proprietary CRM software and host it for you. Customers generally plug in via Web browsers or some other type of front end. It's this category of ASP that's the least expensive.

The other major category is a hosting-only company that will run software that you buy from PeopleSoft Inc. or some other CRM vendor. While this type of arrangement saves on hardware and labor costs, it still requires the customer to buy the software license -- so it's not as inexpensive as the first type of outsourcing arrangement.

On the in-house side, Greenberg says, the "big four" vendors are Oracle Corp., PeopleSoft, SAP AG and Siebel Systems Inc. But there are many other suppliers that cater to midtier customers, including Microsoft Corp., which recently entered the CRM market with its own package.

Analysts expect customers to go for hosting in a big way over the next couple of years. An AMR survey asked 111 existing CRM customers about their buying plans, and 37% said they would be using hosted software sometime this year, Preslan says.

Aberdeen's Pombriant agrees, citing a soon-to-be-released study from his firm. Hosted CRM revenue will hit $2.8 billion by 2006, he says, with $1.2 billion of that representing brand-new contracts (as opposed to continuing revenue from earlier relationships).

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