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On-demand cuts costs, increases success rate of CRM

Hosted customer relationship management (CRM) vendors are winning over customers with offerings that are cheaper and easier to implement than on-premise products.

On-premise customer relationship management (CRM) implementations have a median cost of about $1.2 million over...

five years, and they fail at alarming rates, almost 80%. So, it's no wonder that outsourced on-demand CRM, which offers low-cost entry and high success rates, is catching on.

Studies by Framingham, Mass-based IDC, which revealed the $1.2 million costs, show that successful CRM implementations delivered strong ROI. However, failure rates as high as 75% dog on-premise CRM implementations, and vendor switching is common, says Rob Bois, senior research analyst at AMR Research Inc. in Boston.

On-demand model

Don't confuse today's on-demand CRM providers with yesterday's application service providers (ASPs), Bois says. ASPs simply provided housing, security and maintenance for a company's software and systems. The customer still had to buy the products. ASPs died out because that model's startup costs were too high.

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On-demand vendors, also called Software as a Service (SaaS) providers, learned from that mistake. In their model, the hosting company provides the hardware and software, customization where needed and data transfer and integration services. As a result, this approach offers low startup costs, often in the low thousands of dollars range. On-demand CRM's per-user subscription costs run from about $60 to $200 monthly, depending on the customer's length of contract -- which typically runs about one or two years -- and the amount of customization required.

Of course, some on-premise software licenses may have similar per-user prices, but the customer usually has to pay 15-25% of the software cost for a service contract and hardware and maintenance. "In service costs alone, you're paying for the software twice over a five-year span," says Jim Berkowitz, CEO of CRM Mastery Inc., a consulting firm in Denver. On-demand CRM requires purchasing only what your company needs today, Berkowitz says. You don't have to buy a larger system to allow space to grow.

Choosing your on-demand vendors

Companies already using those vendors' CRM products may benefit from switching to their vendors' on-demand offering. For others, tread carefully, our sources say, because these vendors' offerings are not mature.

"On-demand is a living and breathing example of a disruptive innovation in the software industry," says Denis Pombriant, managing principal at Beagle Research Group LLC in Stoughton, Mass. "The older, more established vendors are having a very hard time with it, primarily because they cannot adapt their business models to the new realities. They will continue to struggle."

On-demand CRM is also attracting more vendors. SAP AG, Oracle Corp. (via its acquisition of Siebel) and Microsoft have recently entered the on-demand CRM market.

Pombriant, Bois and Berkowitz agree that there are three leading companies today with mature product and services offerings and large customer bases: Inc. in San Francisco; NetSuite Inc. in San Mateo, Calif.; and RightNow Technologies Inc. in Bozeman, Mont. While each company initially took different application approaches to providing SaaS, they now have relatively similar offerings.

"Choosing between them is a matter of business fit and how much users like the interface," Bois says. "Since there are only three major vendors, evaluating all three isn't daunting."

In fact, Bois says, test driving on-demand CRM is easy. "The vendor can just turn it on for your users. You can see their reactions to the interface without spending much money. This is so important, because CRM user adoption is its biggest barrier to success."

Is it the right fit?

User adoption barriers may be lower for on-demand CRM, which offers simpler, Web-based user interfaces than on-premise systems. Many on-premise CRM products are complex, and interfaces reflect that.

"Software as a service has to be delivered over the Web, so the interfaces have to be simpler," Bois says. "It turned out that that was what users wanted."

In evaluations, check the processes involved in using the software against your company's existing processes. They'll never match perfectly, but go for the one that requires the least change for your organization. In particular, make sure that the provider's CRM software fits well with your financial software. "Make sure that all CRM and accounting info will be in one place," Berkowitz advises.

With on-demand CRM, the employees of Friend Communications -- an online travel reservations firm in Orange, Calif. -- have to go to only one place for sales, accounting, marketing and operations information. "Best of all, our remote employees can update and access the information just as if they were in the office," says Deb Kohls, vice president of sales/support at Friend, a customer of RightNow.

On-demand CRM isn't a good fit for every company. It may not be right for companies with thousands of users, many back-end systems integrated with CRM applications and proprietary, in-house CRM code and/or products.

"The break point is when the level of integration to back-end systems becomes too intensive for on-demand," Bois says.


On-demand CRM can benefit many types of companies, but it is a great option for emerging companies without lots of capital to invest in traditional systems, Pombriant says. Friend Communications fit that description, Kohl says. Thanks to on-demand CRM, Friend has the sophisticated business systems it needs to compete with large competitors.

The best news about on-demand CRM is that customer satisfaction is high. It's simple to switch on-demand CRM suppliers, as it's mostly just a matter of data transfer. Since it's so simple to switch, on-demand CRM providers work harder to keep customers happy.

"It's a more democratic environment," Berkowitz says. "On-premise vendors win the minute you sign the contract. Your win is less important to them. On-demand vendors have to deliver to keep you on board."

Maxine Kincora is a technology writer in Berkeley, Calif. She can be reached at

This was last published in May 2006

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