crmindustry.com White Paper - Hosted CRM vs. In-House: Which Direction Should Your Company Take?

Hosted CRM vs. In-House: Which Direction Should Your Company Take?

Any technology closely tied to the financial health of a business generates heated debate, and customer relationship management (CRM) is no exception. CRM, as a concept and a technology set, has both bolstered and burned, been praised and maligned. One of the most animated arguments over the last couple of years has centered on the “where” of CRM: whether to deploy the technologies in-house or “rent” them, outsourcing their implementation to an application service provider. It’s a case, the arguments go, of cost vs. customization, time to productivity vs. control, accessibility vs. security, on-tap vs. on-premise, and so on.

Yet, as customer management technologies mature and deployment models prove themselves under real-world conditions, the two factions are becoming a little less polarized. One reason: people finally understand that in the tricky world of CRM — and despite early hyperbole to the contrary — no one size fits all. Today, in fact, the two models coexist in many large companies, answering differing enterprise and divisional needs. Further, some traditional suite providers, witnessing the popularity of hosted offerings and recognizing the benefits for customers, are now providing their own software through outsourced models. Meanwhile, the highly publicized failures of large-scale CRM deployments are giving way to better stories, with customers finding success in carefully planned, incremental implementations. Businesses, it seems, have more choices than ever before and — thanks to better planning, more options, reasonable expectations, and experience — better odds of succeeding.

Increasingly, the choice businesses are making include an outsourced model. Apparently, the siren call of hosted CRM offerings — lower total cost of ownership, quicker ROI, etc. — is a seductive one. Gartner Inc. estimates that by 2009, businesses will be spending nearly $1 billion in CRM as a service, and that 33 percent of all small to medium businesses (SMBs) will have chosen a hosted model. Meanwhile, Forrester Research predicts that the percentage of overall CRM revenues coming from hosted applications will stand at 13 percent by 2005, up from 7 percent in 2002.

“There’s a huge interest in hosting,” says Esteban Kolsky, an analyst at Gartner. Beyond the usual drivers, he says, on-demand models are attracting adherents who got burned by costly in-house CRM projects that didn’t deliver the expected results. Hosting is particularly attractive, he says, if companies are looking for more tactical, point applications, such as campaign management, pipeline management, and email management.

What CRM model businesses choose, of course, depends largely on their individual needs and circumstances. Do they have an IT department? Do they need highly customized applications, and if so, do they have skilled developers? Is their workforce distributed or mobile? Do they have key back-office systems that need to be integrated with new front-office functionality? What are their security restrictions? The answers to these and other pertinent questions should dictate approach, say experts.

Of a number of considerations that come into play when choosing a CRM deployment model, time-to-implementation and cost, not surprisingly, lead the list. If a business needs to have customer-related software running fairly quickly, with a more immediate ROI, a hosted solution can be very attractive. Though they’ll have to sacrifice some of the things that ownership can bring — absolute control, sophisticated customization — they don’t have to dedicate IT resources or purchase expensive hardware to get things underway. This has been particularly attractive to mid-market and smaller firms, who might not have the IT expertise to bring CRM in-house.

With a hosted model, “you can start with five or 10 users as a pilot and if you’re successful, you can expand it further into the enterprise,” says Liz Herbert, an analyst with Forrester Research. “The advantage with hosted in this case is that it doesn’t cost you a lot if you have to throw it away — you didn’t sink a million dollars into a large-scale Siebel implementation.”

Many enterprises, of course, don’t want to cede the control that comes with running their software themselves, and some feel that deploying integrated, highly customizable applications allows them to better differentiate themselves from their competitors. Experts say that if a company has complex integration and customization needs, and has sufficient time to deploy an in-house suite — or even incrementally deploy the modules that will eventually constitute an integrated suite — they may be better served by an in-house deployment. Security and regulatory restrictions in some vertical industries are other factors that drive the deployment of on-premise applications.

The cost-of-ownership question is a little trickier. Not surprisingly, the nod in terms of costs typically goes to on-demand solutions: Not only do potential customers usually get a free trial, but they don’t have to invest in hardware or factor IT personnel into their cost models, and they receive frequent upgrades as part of their subscription fee. According to Herbert, most businesses who choose a hosting option are able to manage necessary changes with one full-time or even a part-time business administrator. However, while the cost of an in-house, licensed model drops over time and eventually comes down primarily to maintenance fees, customers continue to pay the same monthly fee for hosted offerings. Gartner’s Kolsky says that, all things being equal, the cost differential between the two models begins to equalize somewhere in the third year. Nonetheless, hosted vendors maintain that
such cost comparisons can be misleading because they're based on the
assumption that businesses won't need to make changes to their on-premise
implementations beyond the standard upgrades they receive.

When hosted offerings first came on the market, prevailing attitudes held that they made sense for businesses that could live with plain vanilla implementations. Hosted applications, after all, need to target a diverse range of customers and are designed to eliminate the need for extensive programming. Nonetheless, vendors of hosted offerings are increasingly able to offer more areas of customization, and changes can typically be implemented by a business administrator taking advantage of various offerings’ built-in wizards, tools and configuration options.

Says Herbert, “If a sales process workflow needs to be changed [within a hosted solution], a business person can usually do it. They need some training but not heavy IT background or development skills.”

However, if an organization has complex business processes to automate, it may make more sense to run CRM products in-house, she continues. “The customization you can do [with hosted offerings] is limited to some extent,” she says. In any case, if more difficult coding is needed, the company would require the services of a skilled programmer.