Analysis: CRM: To host or not to host

With Microsoft's forthcoming CRM (customer relationship management) software drawing headlines and renewed industry attention to the CRM sector, several growing ASPs (application service providers) are seizing the opportunity to evangelize about the advantages of hosted CRM deployments, a model analysts say remains a small market, but one that is making significant headway in customer acceptance.

UpShot Corp. founder and Chairman Keith Raffel has launched a PR offensive around Microsoft CRM, charging that the product will "give a black eye to the entire CRM industry" by perpetuating an architecture he sees as fraught with problems -- the client/server model of installing code on both a server and on end-user PCs. Inc. Chairman and Chief Executive Officer Marc Benioff is equally outspoken, often voicing dire warnings about the implantation risks and management costs of traditional CRM software.

Both back instead an ASP CRM model, with outside vendors installing and maintaining software on their own servers, which customers access remotely, generally via the Internet through a browser.

On its part, Microsoft says the criticism leveled against its CRM application is misleading, not least because the software giant plans to offer, via resellers, hosted versions of the product.

Nevertheless, at the moment and UpShot lead the emerging market for hosted CRM, according to analyst Denis Pombriant, managing director of Aberdeen Group Inc.'s CRM practice, in Boston. And their efforts to prove the ASP CRM model are paying off, he said: Aberdeen forecasts 96 percent year-over-year growth in the hosted CRM market in 2002, with worldwide sector spending climbing from $60.6 million in 2001 to $724.5 million in 2005.

That's a slim percentage of the $27.8 billion in total CRM spending Aberdeen forecasts for 2005, with $7.7 billion spent on applications and the rest coming from integration services and related hardware. But while absolute revenue for the sector may remain small, the best way to gauge the impact of hosted vendors is by the number of customers they attract and number of CRM seats they deploy, Pombriant said in a report. By the end of 2001, had 56,000 end users; UpShot had 15,200, Aberdeen estimates. It also predicts both will double their 2001 revenue in 2002.

The core of CRM is sales-force automation software, which is used for tracking and forecasting sales. Modern CRM suites tend to also include an array of complementary modules, such as customer service, help desk, partner management and marketing software.

Introduced in the late 1990s, the notion of "CRM as a service" was initially targeted at small companies -- the customers most likely to swallow concerns about data security and uptime in exchange for a low upfront investment and fixed costs. But CRM ASPs are beginning to enter the enterprise through departmental deployments. Hewlett-Packard Co., Xerox Corp., Sanmina-SCI Corp., AOL Time Warner Inc. and Fujitsu Computer Products of America Inc. are among those with units relying on a hosted CRM service.

Analyst Sheryl Kingstone says she's seeing a trend of "ripping and replacing" in the CRM market.

"A lot of these large sales-driven companies already have something in place today that is not working," said Kingstone, CRM program manager at the Yankee Group, in Boston. "They've already felt the pain of an application that has failed from a usability standpoint, and they're ready to rebuild from ground zero."

Initially, CRM ASPs faced doubts about their security and stability: Customers were reluctant to trust crucial corporate data to an outside vendor. But the vendors have done a good job of building robust infrastructures and allaying those worries, the analysts say: "People who still have those concerns haven't done a thorough job of researching the offerings," Pombriant said.

The next hurdle for the ASPs to overcome is customization. Vendors such as and UpShot are able to keep implementation straightforward and their costs low by limiting the complexity of their software. For large companies, or those with complicated business processes, one-size-fits-most software might not be a good fit.

"I think we have found so far, with the different options out there, that the (ASP) model best serves companies that don't have a lot of legacy systems to integrate. Integration with legacy systems is very, very difficult," said Paul Sweeney, president of CRM consultancy Sweeny Group Inc., in Acton, Massachusetts. "If you have sophisticated workflow and business processes, or large volumes of data, a hosted solution is not going to be a cost saver, though it can be a time saver."

Still, the ASP software offerings are starting to mature -- Kingstone notes that in the last year the top vendors have begun adding integration, multicurrency, multilanguage and offline capabilities to their products. That last enhancement, allowing users to synchronize data for remote use, is key, she said.

"That's been the biggest negative of all," she said. "The lack of an offline edition has been a major issue for a lot of companies. What's available is still not as robust a traditional client/server (setup), and it can be a stumbling block, but it's there."

The success of the ASPs has prompted nearly every CRM vendor, including those with products targeted at the market's high end, to make available hosted versions of their software, often through partnerships with channel resellers.

"We see a lot of interest. People always want to know that you've got the ability to host," said Jeff Read, PeopleSoft Inc.'s vice president and general manager of midmarket software.

PeopleSoft offers hosting of its CRM and other applications directly through its "PeopleSoft eCenter" or through channel partners. Oracle Corp. also directly offers hosting services, while CRM market leader Siebel Systems Inc. relies on resellers for its hosted offerings after shuttering its own short-lived attempt at a CRM ASP,

Integration is the biggest factor that keeps customers buying software with more robust functionality, even in the midmarket, Read said.

"It's been changing. A couple of years ago there was a lot of best-of-breed buying. (A company would) go buy a new accounting system and think, 'It'd be nice if that integrated with our order-management system.' There's been a shift. Today, companies in the midmarket are more educated," he said. "They know the dos-and-don'ts, and they know the hidden cost is integration."

It's become such an important issue that integration worries are driving some of the market's rip-and-replace trends, leading users to replace patched-together systems, according to NetLedger Inc. President and Chief Operating Officer Zach Nelson. NetLedger, a new entry in the hosted CRM market, is an ASP closely aligned with Oracle, whose software it sells in a version tailored for small and midmarket businesses.

"Customers are going to choose a product not so much on whether it's hosted or on-site but rather on the functionality of the product, and they look to one thing: integration of the front and back-office," he said. He estimates that 95 percent of NetLedger's sales are to companies using NetLedger's software to replace other products.

"They've tried to run standalone SFA (sales-force automation) and accounting, like and QuickBooks, and have those applications talk together," Nelson said. "It didn't work."

Integration has been a key selling point for Microsoft as it touts its planned CRM software, originally scheduled for release by the end of 2002 but now pushed to early 2003. Not only will the software work seamlessly with Microsoft's ubiquitous Microsoft Office suite, it will also integrate with back-office accounting and business management software from Microsoft's Great Plains unit, the company said. Work on strengthening those connections is partially responsible for the delay, according to officials.

While Microsoft CRM will mainly be sold for on-site deployments, branding it a client/server-model dinosaur -- as UpShot has -- is incorrect, according to one VAR (value-added reseller) that will be reselling the software.

"It's really .Net. It's not client/server. That's a whole other paradigm compared to what this product is," said Tom Brennan, vice president of marketing of ManagedOps Inc., in Bedford, New Hampshire. .Net is Microsoft's technology platform for systems integration and Web services.

Microsoft CRM doesn't require a client-side installation, said Alex Simons, who leads the Microsoft CRM product team. Customers can run a copy of it on a server and configure it to be accessed by end users either through Microsoft Outlook, or through a Web browser -- a set-up that makes it every bit as flexible for end users as an ASP offering, he said.

Microsoft also plans to offer hosted versions of the software through resellers. Right now, is the only partner working on a hosted version, but once the kinks have been worked through, more will follow, Simons said. He estimates that in three years, 20 percent of Microsoft CRM's customer base could be using a hosted version of the product.

"We're big believers in the need to build a CRM system that also works on an ASP basis," he said.

Yankee Group's Kingstone said one concern she has about hosted offerings of CRM software not expressly designed as a pure-play ASP product is cost. Dedicated ASP software, like's and UpShot's, utilizes a "multitenant" architecture, which leverages shared hardware and pooled software resources such as databases to keep operating costs low. Microsoft's software isn't designed for that sort of environment, which will make it more expensive to run in an ASP setting, she predicts.

Indeed,'s price tag for hosting Microsoft CRM is above what competitors charge: plans to charge US$99 per user per month. The price tag starts at $65 per user per month for both UpShot and

For one customer piloting a Microsoft CRM deployment, the price difference is worth it for the functionality of Microsoft's product. He's also happy to pay more in monthly hosting costs for Microsoft CRM than he'd spend buying licenses in order to save on management costs.

"We knew we wanted an ASP solution. I believe that's the way to go these days. I didn't want to have to invest in the IT and resources ourselves," said Tom Racca, vice president of sales and marketing for corporate telephony management software developer iQ NetSolutions Inc., in Westborough, Massachusetts.

Racca said he's focused on keeping iQ NetSolution's internal IT management needs minimal, freeing the company to reserve its capital spending for growing its business.

PeopleSoft's Read says that's one of the main reasons cited by larger companies considering a hosted solution: A desire to stay "laser-focused" on core operations.

And in the end, such factors often tilt the balance as IT buyers decide between on-site and hosted products.

"Often, it's a cultural thing," Kingstone said.

"Sometimes absolute cost isn't the deciding factor," agreed Aberdeen's Pombriant. "People make logical purchases for emotional reasons, especially with technology. Nowhere is that more true than in making the decision about whether to go with a hosted or in-house solution."