Hosted versus On-premises Customer Relationship Management

Background: Changes in the Customer Relationship Management Market

The customer relationship management (CRM) market, like most of the tech market, has undergone significant changes since the dot-com boom of the late 1990s. Consolidation and acquisition have been the buzzwords of late, leaving consumers with even more questions as to what product is the best fit for their organizations.

The mid-market is marked by a bitter battle between the hosted giant Salesforce.com, battle-tried veterans like SalesLogix and Onyx Software, and a relative newcomer to the market, Microsoft Dynamics CRM. Salesforce continues to grow in market share, because of ease of use and customization, rapid implementation, and hosted offering, making it simple for organizations to get up and running with minimal IT investment. SalesLogix continues to hold market share, because it is the natural transition from ACT! for network CRM. Onyx continues to grow market share in the upper part of the mid-market with its enterprise suite of Employee CRM, Customer Self-Service Portals, and Partner Relationship Management, which is paired with best-of-breed partnerships. These partnerships include embedded reporting and analytics from Cognos and Knowledgebase.net support solutions. Microsoft is also eager to own a large share of this market. The recent release of Microsoft Dynamics CRM 3.0, with its native Outlook client, extensive integration with Microsoft Office, enhanced customization options, and expanded sales, marketing, and service features, is enticing users to take a second look. These players own the lion's share of the growing mid-market, having eliminated many of the smaller players through market perseverance or acquisition.

To Host or Not To Host?

Having said that, the dot-com revolution has left few lasting impressions as significant as the hosted software phenomenon. The success of hosted solutions—such as Salesforce.com—has given many organizations who previously would not have considered a hosted solution reason to reevaluate their decisions. These businesses are right to do so, as there are several key benefits of hosted solutions:

• Complexity
  Hosted applications can enable smaller organizations to quickly implement complex customer (CRM) and financial (enterprise resource planning [ERP]) management solutions. Hosting eliminates the need for the organization to hire dedicated internal staff to install, configure, customize, and manage the solution.
  
  
• Best practices
  Hosted solutions frequently boast that organizations can be up and running in a fraction of the time of on-premises solutions, and that they can avoid the most common pitfalls associated with implementing complex business systems. The organization benefits from a set of "best practices"—from sales methodologies to service level escalation processes, to financial reporting—that have been proven to be successful by the hosted application provider.
  
  
• Cost
  The most popular reason to opt for a hosted solution is cost. Chief financial officers (CFOs) are attracted to the ability to pay per user, and to add or remove user accounts as needed during the term of the relationship. Cost can be an extremely compelling reason for smaller companies that may need to factor in the cost of software, hardware, consulting services, and internal IT resources to manage the solution.

In our work with customers across the mid-market (from 50 to 600 employees) we are seeing more organizations add hosted solutions to the list of evaluated vendors, especially in the CRM and ERP markets. Lower mid-market customers are selecting hosted solutions predominantly due to cost and complexity. Upper mid-market customers typically opt for a product that has a proven track record and a high degree of user adoption.

So will on-premises solutions—those installed and maintained by the organization internally—go the way of the dinosaur? There are several reasons why the answer may not be all that clear, but there is plenty of evidence to suggest a long life span for the on-premises providers.

One Size Does Not Fit All

Ironically, one of the key benefits of hosted solutions—the incorporation of proven best practices—may make the solution less of a fit for more complex organizations. Typically, as organizations mature, they tend to develop their own proven "best practices" that make them both successful and unique. This is one of the key reasons that a "one size fits all" approach to customer and financial management solutions has rarely worked for the mid- to upper-mid-market customer. These organizations tend to have rapidly changing business processes, along with a host of either legacy applications or third-party solutions, that need to be incorporated—all of which become much more difficult in the majority of hosted solutions that start with a set of best practices. On-premises solutions provide customers with the ability to embed their own proven business processes, procedures, and analytical reports in the applications, thereby ensuring a better fit with their business.

You Get What You Pay For

Many of the hosted software providers guarantee that customers can be up and running in ninety days; this is a compelling claim, given that the industry standards for implementing complex business systems ranges from months to years. The challenge with this streamlined approach is that it does not generally give the organization enough time to prepare for or adjust to the new application. Technology evolves faster than most human beings, and employees need time to work through complex business processes, especially the pitfalls and black holes during customer transitions across departments. The streamlined approach will load some data and configure the application to support some corporate terminology, but will not typically include more complex data conversion, business process implementation, custom analytical reporting, or integration with key legacy or third-party applications that are critical to larger organizations.

Penny Wise, Point Foolish

Cost is the leading reason organizations select a hosted versus an on-premises solution. Paying per user per month can, in the short run, be an economic way of enabling a smaller organization to get access to sophisticated functionality without the complexity required to install and maintain the solution. CRM and ERP solutions are not discarded quickly. The typical break-even threshold for hosted solutions is between the two- and three-year mark; in a recent comparison of several hosted versus on-premises providers, the hosted solution was 1.5 times more expensive over a three-year term than a corresponding on-premises solution. We always encourage customers to evaluate the total cost of ownership (TCO) over a three- to four-year term, including hardware and internal staff support, as well as various financing options that enable customers to finance all project costs—software, services, and hardware—over a fixed term that results in the customer owning the implementation at the end of the term.

Can't We All Just Get Along?

One of the key reasons not to consider a hosted solution is integration. Traditionally, hosted vendors have provided only limited integration options—usually in the form of batch data loads and exports. While this has improved over the last year, with some providers offering more robust integration via Web services, on-premises solutions still hold the upper hand when it comes to integration. Solutions installed on premises offer a multitude of integration options—directly with the database (open database connectivity [ODBC] or object linking and embedding database [OLE DB]), through middleware (BizTalk), or through the application layer (COM, Web services). Some on-premises applications even offer advanced business process workflow tools for managing application processes and integrating data from external applications into the core CRM or ERP solution.

What Do I Do Now?

One of the biggest issues with hosted solutions is what happens at the end of the contract. Most of the hosted application providers offer the ability for customers to receive a backup of their data, which, without some other application—whether hosted or on-premise—does not provide immediate accessibility. This is one of the greatest advantages of on-premises products: even when the organization stops paying for support and maintenance, the software license provides the ability to continue using the application uninterrupted. Many customers with complex integrations and analytical reporting opt for an on-premises solution based solely on this fact.

So what is the right answer for your organization? Ultimately it comes down to a question of business complexity and return on investment (ROI). While products like Salesforce.com make it simple for organizations to get up and running quickly, there is still a thriving market for vendors like Onyx and Siebel which can provide advanced functionality that can be truly adapted to support each client's best practices.

About the Author

Richard R. Smith is the vice-president of CRM strategy for Green Beacon Solutions (http://www.greenbeacon.com), based in Watertown, Massachusetts (US).