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

I came across this interesting white paper on the web site on a controversial topic in the world of CRM:

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.

Time is Money 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 inhouse. 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 ondemand 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.

Customization Considerations 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.

Who, What, When and Where Indeed, such personnel considerations play heavily in the choice of a CRM model. If you’re a large company where IT is a key competitive differentiator, it’s more likely that you’ve got IT workers with sophisticated and multifaceted skill sets who can handle the integration work and custom programming needed to achieve ROI from an in-house CRM implementation. However, if you’re a midmarket or smaller company with little or no IT
staff, you’re probably better served by outsourcing customer-related processes to an ASP. The provider handles upgrades and support, and offers easy-to-use tools for some customization.

Another personnel issue affecting CRM decisions centers on the workforce actually using the applications — salespeople, marketers, customer service agents, administrative people and other knowledge workers. To provide secure access to in-house applications, many companies run virtual private networks, but these sometimes experience performance problems. Field salespeople, for instance, have experienced problems logging into VPNs at customer sites due to firewalls and tunneling issues. However, says Herbert, for companies’ whose field workforce need to have complete application functionality while working offline, in-house licensed options are the better choice.

The ease with which upgrades are rolled out is another benefit of hosted offerings: They’re automatically performed centrally, obviating the need for an IT staff to distribute upgrades to individual desktops or portable devices. Still, while touted as a key feature of hosted offerings, frequent, automatic upgrades bring their own problems. While it’s true that developers may have to redo customizations when upgrading their in-house suites, upgrades aren’t as frequent as they are with outsourced models, and companies have the option of not upgrading when new versions are
released. With hosted offerings, there’s no real control over when an upgrade is rolled out and what new features are included. This frequency, says Herbert, makes it all the more important that businesses stay current with end-user training to ensure against the input of dirty data.

Another personnel consideration is the number of users that need access to CRM applications. At some point, the number of users that should be included in a hosted licensing contract reaches a state of diminishing returns. Because you license hosted software on a per-seat basis, there’s a point where it makes more sense to bring the entire thing in-house and run it yourself, say experts.

Secure in the Knowledge Network security’s long been a hot button in arguments over which CRM model is the better choice. Those who favor an in-house approach over outsourced models often decry what they claim is a lack of control over the security measures ASPs put in place. There’s no question that in verticals working with extremely sensitive data — financial services, for example — keeping applications in-house due to security concerns is a common
strategy, if not a mandate. Kolsky cites compliance issues, government regulations and other reasons that an outsourcing arrangement simply won’t work for some businesses.

However, many experts say that security concerns over hosted solutions are largely overblown today. “In many cases vendors host through [providers like IBM], so security is good if not better than what in-house can do,” “If an organization has a widely distributed workforce, whether it be because of mobility requirements or due to geographically dispersed offices, an outsourced model can make a lot of sense, as users can use a browser
to log-in to applications.” says Herbert. She says customers need to ask providers where their applications will be hosted, what security measures are in place, what back-up procedures they follow and whether they have a back-up location in the case of catastrophic events.

Whatever options customers choose, CRM deployments are moving beyond the less-than-stellar early years to deliver some real, provable ROI. These improvements are due to a number of factors, including the success of on-tap CRM and a more incremental, modular approach to on-premise implementations. Both traditional suite vendors and hosted service providers are adding analytics functionality — through development, acquisition and third-party partnerships — that’s becoming critical to getting more from operational CRM investments. Both camps are also continuing to add vertical-specific functionality to their applications, providing individual industry segments with functions and business process automation specific to them.


Scott Weber

Scott Weber is CRM Practice Manager and Senior Consultant for Customer FX Corporation.

1 Comment

  1. I agree with Hana – have you used it for a long time now? I definitely think that it’s a great idea to go with CRM hosting!


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