CRM: Hosted vs packaged - which to choose?

The mid-market is a hot spot for CRM vendors as many smaller companies are deploying software that used to be the preserve of larger enterprises. It is also a key battleground in the fight between hosted and on-premise software. Anthony Plewes airs the arguments for both approaches.

Hosted customer relationship management (CRM) software has been remarkably resilient. Five years on from the largely ill-fated application service provider (ASP) boom, on-demand CRM software has continued to win plaudits and customers. However, on-premise packaged CRM software still has substantial support right across all company sizes and is the automatic deployment choice for many organisations.

Analyst Forrester says many medium-sized businesses continue to seek an on-premise deployment rather than on-demand applications because many organisations of this size will only have one major office and will also have some IT administration capability. In its assessment of the available software options, Forrester identified Siebel Professional Edition, Sage CRM SalesLogix and Pivotal as the best match for medium-sized companies.

But not even the most dyed in the wool traditionalist can deny that hosted CRM software is catching up. A study from AMR Research in late 2005 found that sales of hosted CRM software grew 105 per cent in 2004 and that the hosted model has now become the prime delivery model for CRM applications.

Hosted companies RightNow technologies and Salesforce.com enjoyed 97 per cent and 83 per cent growth in the same year, respectively, with Salesforce.com moving up to 12th place in AMR Research's CRM revenue rankings. Gartner Group ranked Salesforce.com even higher, in fifth place just behind Oracle (before it acquired Siebel).

The lower total cost of ownership (TCO) has been one of the key drivers for the growth of hosted solutions. Its subscription-based model virtually eliminates the capital expenditure barrier for medium-sized companies. Typically packaged CRM software will only start to pay for itself after three years, so companies choosing that route need to be prepared to make their investment up front.

Chris Boorman, VP of EMEA marketing at Salesforce.com, says: "Companies in the mid-market need to use their IT budgets effectively. A hosted solution offers them clarity in costs through subscription and the ability to scale so that they can grow their business while keeping the same platform."

There is also greater acceptance of applications hosting as companies warm to outsourcing. Boorman says: "Organisations are becoming fed up of managing the complexity of on-premise software. They no longer need to manage the network infrastructure, servers and upgrades."

Many of the barriers to hosted software have come down. For example, in the past companies were not always able to integrate hosted CRM applications with the rest of their infrastructure but the wider use of web standards such as XML makes it much easier.

The ubiquity of cheap broadband connections for business overcomes many of the service quality issues that affected the early ASPs. However, this improvement should not detract from the fact that companies using hosted software are dependent on having a live internet connection to be able to access their key customer data. While hosted CRM service providers offer service levels, they are only able to do so up to the edge of their own environment.

In addition premise-based applications often require the involvement of a systems integrator and rolling out a product such as Siebel can take anything between two and four months. This is in contrast to hosted solutions where companies can be up and running immediately. Wayne Foncette, VP of UK and Ireland at RightNow, says: "Within 30 days our customers already have business benefits."

As a rule of thumb, software architected for on-premise deployment can be customised more than hosted services and offers wider functionality. Smaller companies, however, may find the functionality of fully featured premise solutions may be more than they need. Companies also need to have internal IT resources to be able to support the products on their existing infrastructure.

For example, Siebel's premise software offers functionality for 20 different verticals, compared to only four in its hosted offering. This vertical-specific functionality makes it easier for a company to customise its own software as it comes preloaded with the correct terminology for the industry.

Hosted offerings are starting to become available across the board. After a shaky start Siebel, now part of Oracle, has established its OnDemand product as a leading offering.

However, with such a large installed base, most of Siebel's customers still use the on-premise product. John Simpson, a senior director of sales consulting at Oracle, says: "I would estimate about 10 per cent of medium-sized businesses are choosing our hosted solution today. That is to be expected because medium-sized companies still have a culture of purchasing on-premise software. However, the pendulum is swinging steadily towards hosted solutions."

Like outsourcing, there will always be a core group of companies who will continue to deploy on-premise solutions. They like to maintain complete control over all their applications and have substantial internal IT functions and assets. But for the remainder of medium-sized organizations, a hosted offering will fulfil the majority of their CRM requirements.