Hosted CRM - alternative approach makes waves

Renting CRM software is becoming popular and easy, so much so, says Anthony Plewes, that even established enterprise software vendors are re-examining the way they approach the market.

The application service provider (ASP) model appeared at the peak of the internet boom and promised to transform the way organisations consume software. Many grand plans faltered in the aftermath of the technology market collapse and first-generation ASPs were largely found to contain more hot air than viable software models. But in CRM, software-as-a-service has managed to flourish.

“Traditional software needs to be redesigned,” says Phill Robinson, VP Europe marketing at Salesforce.com. “When building a hotel you do not build a power plant and a sewage works. We are providing enterprise software over the internet as a service.”

Hosted CRM offers companies access to enterprise software functionality through their browser software. The service provider supplies all of the infrastructure and hosts the application in a data centre. Customers simply access the application over the internet. The internet-based model has been characterised as the third wave of software delivery after mainframe and client-server.

This approach is appealing for companies who are tired of the expensive, long-winded approach of typical enterprise software deployment.

“Traditional CRM has been suffering over the last few years,” says Salesforce.com’s Robinson. “A CRM project is too complex, involves sorting out the infrastructure, needs consultants and many projects end up not being deployed properly.”

The traditional method of buying CRM software through licence sales looks to be failing companies. A study published last year from Gartner Group found that a staggering 42 per cent of CRM licences sold in 2002 are sitting on a shelf unused. It's an estimated waste of $1.2bn.

The hosted CRM software vendors claim to offer an alternative to this wastage by selling access to the application through subscription. This ensures companies do not pay for more licences than they need.

The clear message about hosted CRM is proving popular with customers. Salesforce.com, the leading hosted CRM player, announced its 120,000th subscriber in December last year. Its software is now in use in 8,400 companies and its upcoming 2004 IPO is eagerly anticipated.

Hosted CRM is even making an impact in the contact centre market. Rightnow Technologies targets the call centre solutions market aiming at traditional software vendors such as Clarify and Vantive.

“We are the only on-demand CRM company to totally focus on customer service,” says CEO Greg Gianforte. “The elements in our product include agent desktop, analytics, CTI integration, bridges into legacy applications, client-facing components and email routing.”

Gianforte rejects the claim made by some hosted companies that subscriptions are synonymous with hosted delivery. “Hosted salesforce vendors sell on a subscription basis but we don’t,” he says. “That model is not possible for customer service.”

Seventy per cent of Rightnow’s customers have a term licence of two years and only 10 per cent pay monthly.

The success of the hosted CRM software model is not going unnoticed in the enterprise CRM software community. Many of the traditional software vendors have been experimenting with hosted offerings for several years now. BT, for example, launched its Contact Central hosted contact centre based on Siebel and Aspect in 2002. However, many forays by enterprise software vendors into the hosted market have not been entirely successful, largely because their monolithic software was not designed for hosted delivery.

CRM market leader Siebel Systems plans to change this. At the end of last year it launched its CRM OnDemand product in partnership with IBM and BT. The company is determined to make its mark in the hosted market and CEO Tom Siebel has said he believes that as much as 15 per cent of all CRM sales will involve application hosting http://www.silicon.com/software/applications/0,39024653,39117901,00.htm within the next couple of years.

“Our objective was to be the first of the big enterprise software companies to go to this model,” says Neil Morgan, European marketing director for Siebel.

Siebel set out targeting the CRM OnDemand product at the lower end of the market. “This product extends our target markets which have traditionally been the Time Top 1000 companies,” says Morgan. “Our existing customers are also interested and are thinking about using the hosted product to extend CRM to people in their organisations who have not typically been provided with the Siebel enterprise software. These are people who would use the software only around one hour a day. At a per-seat cost the enterprise software was too expensive.”

Although it is inevitable that the hosted product will cannibalise some of the revenue from the enterprise software product, Siebel is confident that this will be made up by opening-up a wider market. CRM OnDemand takes a different approach to traditional Siebel software and is based on IBM Websphere. The product also has a different user interface and is designed to be easier to learn and work with.

Siebel has made a conscious decision not to enter the hosting market, preferring to partner with established players and take a cut of the subscription fee. It is also promoting the idea of a hybrid CRM offering, where a single company could have both the on-demand and premise-based CRM products, with both sets of users accessing the same live data.

While the entry of Siebel and IBM into the hosted market will no doubt accelerate consolidation among competitors in this field, its single most important impact is that it validates the hosted model as a viable alternative to premise-based CRM deployment. Yankee Group analyst Sheryl Kingstone predicts that Siebel will muscle Salesforce.com into second place in the hosted market within two years.

One of the key technology developments that has allowed hosted CRM to become a viable alternative to premise-based CRM is the arrival of web services. This technology allows the hosted players to integrate their offering much more easily with a company’s legacy applications. Salesforce.com has even created an application server called Sforce that acts as a service in the internet, allowing enterprises to customise the product to match their particular needs.

Hosted CRM is clearly not about proving the ASP model can work. It is above all a valuable option when approaching CRM.