Analysis: Hosted CRM looks to step things up

November has been a busy month for The hosted CRM pioneer held its second annual user and developer conference, where it introduced a software upgrade that became available Nov. 15. San Francisco-based, which went public in June, also reported third-quarter revenue of US$46.4 million and raised the sales forecast for its full fiscal year.

And, perhaps most significant, the company announced a 1,500-user subscription deal with office supplies retailer Staples and a 2,000-user commitment from pharmaceutical services firm Quintiles Transnational. Those are the seventh and eighth contracts that has signed that involve more than 1,000 end users. CEO Marc Benioff said this week that he thinks hosted CRM is "now at the tipping point," with mainstream adoption of the technology starting to approach a critical mass of users. Rival vendors, such as Siebel Systems, also are rushing to position themselves to take advantage of an expected upsurge in demand for CRM.

Chris Monica, senior vice president of sales and marketing at Houston-based EGL, which operates under the name EGL Eagle Global Logistics, has already embraced hosted CRM. Monica said that three years ago, when EGL was looking for software to help standardize its global sales processes and make them more nimble, the $2 billion company decided to let someone else handle the IT headaches.

Until that point, EGL's 800-person sales force had relied on e-mail and other manual processes to track customer interactions and sales opportunities. Now sales personnel at the provider of transportation and supply chain information services use's hosted applications. That has made it easier to share data, keep track of what's in the sales pipeline and coordinate marketing campaigns, according to Monica. " has been a vehicle for the company to connect around the world in real-time fashion," he said.

The traditional knock on hosted CRM applications has been that they primarily appeal to smaller companies that would find installing and maintaining complex software from vendors such as Siebel or SAP a budget buster -- as well as a potential technical nightmare.

A case in point is Document Sciences Corp., a vendor of document management software with annual sales of about $25 million. David Barker, the company's IT director, said Document Sciences began using NetSuite's hosted CRM applications 18 months ago and currently has about 70 workers accessing the software.

Prior to signing up with NetSuite, Document Sciences relied on a hodgepodge of third-party and homegrown sales and marketing applications, including Amdocs' Clarify product suite. The mix of software required IT staffers to store duplicate sets of customer information in multiple databases, Barker said.

He added that the first year's cost for using NetSuite's software was under $40,000 -- less than it would have cost to renew the company's Clarify license -- and that covered twice the number of end users. In addition, Barker no longer needs to worry about hardware support, database tuning and software upgrades. "I'm asleep when the upgrades get applied," he said.

InFact Group, an e-business consulting and systems integration firm, uses Siebel's CRM OnDemand sales and service tools. InFact, a Siebel business partner that works on projects involving the vendor's software, has 25 hosted users and pays a monthly fee of about $92 for each one, said Richard Napier, the company's business development manager.

"About a year and a half ago, InFact was a disparate set of companies around the globe, and our goal was process alignment to get us all singing off the same hymn sheet," Napier said. "But we're not a huge company and didn't have the time or infrastructure to deploy (CRM software). We have to be smart and fast off the mark."

Even some of the big companies among the 10 hosted CRM users interviewed for this story think that way.

"We didn't want to get bogged down," said William Patten, director of sales and policy administration at Sovereign Bancorp in Philadelphia. The $60 billion bank began using sales force automation software hosted by Boston-based Salesnet two years ago. About 420 end users have access to the tools, according to Patten.

Salesnet CRM offers a simple seven-step sales methodology that "doesn't get in the way" of Sovereign's operations, Patten said. He added that the software is easy to use and flexible enough to handle business needs that are specific to the financial services industry. For example, Sovereign bolted on a customized incentive-payments utility to support its employee compensation processes.

Executives at Staples weren't available this week to comment on their hosted CRM plans. However, said Staples plans to roll out the applications in stages to workers in its contract sales division nationwide.

Quintiles, which reported $1.3 billion in net revenue for this year's first three quarters, has been using's software in one business unit since August 2002. A Quintiles spokesman said the company now plans to deploy the software to its sales and marketing teams worldwide, replacing a set of homegrown applications. The on-demand nature of the hosted tools will let Quintiles scale up its use of them as needed, he added.

With those kinds of contracts in hand, raised its revenue forecast for the fiscal year that ends Jan. 31 to as much as $174 million -- up from the previous range of $165 million to $170 million. It also provided initial guidance for fiscal 2006, saying it expects revenue to reach as much as $285 million. That would represent a year-to-year growth rate of nearly 70 percent.

Not to be outdone, CRM market leader Siebel said this month that Deutsche Telekom's T-Systems International GmbH subsidiary plans to deploy Siebel's hosted software to about 1,000 sales workers worldwide. CRM OnDemand will be integrated with an existing 2,800-user installation of Siebel's packaged applications at T-Systems, an IT services firm that also plans to market the hosted software to companies in Germany and eight other European nations.

Technical Shortcomings

The fact that more and larger companies are adopting hosted CRM software hasn't gone unnoticed by analysts. As a rule, though, big users are still keeping their distance from the technology because of well-placed skepticism about the ability to link hosted CRM applications to their in-house software and to support customizations through successive product releases, said Ian Jacobs, an analyst at Current Analysis.

"From the perspective of a smaller company, what's not to love?" Jacobs said. But if hosted CRM vendors want to continue going upscale, they will have to tackle some tough challenges, he added.

For example, Jacobs said that vendors need to offer expanded functionality, such as data quality services, without making the hosted technology too complex and thereby losing one of the features that differentiates their product from packaged applications.

Total cost of ownership is another issue that users need to consider, according to Jacobs. Hosted CRM vendors tout their offerings as being less expensive than packaged software, but Jacobs said that may not be the case when costs other than the purchase price are included in the equation. Gartner analysts made similar points in a report issued last May.

Hosted CRM sales total about $200 million now, compared with roughly $2.8 billion for licensed CRM software, said Erin Kinikin, an analyst at Forrester Research. That makes the hosted approach "small potatoes in terms of revenue," Kinikin said. But she added that hosted CRM sales are growing at an annual rate of 20 percent to 30 percent, while sales of traditional products are flat or declining.

One user who passed on hosted CRM is George Chappelle, CIO at H.J. Heinz. The food products maker runs Siebel 7.5 internally to help manage its promotional campaigns, and Heinz has also looked at hosted technology.

"But it's not very interesting," Chappelle said. "We already had the knowledge in-house."

Benioff Sees Hosted Apps as 'the Future of Software'

It could be easily argued that Marc Benioff,'s chairman and CEO, has done more to promote the idea of hosted CRM and make it seem credible than anyone else in the software industry has. Benioff, a former Oracle executive, founded in 1999. Now the company claims that its hosted applications are used by about 12,500 customers with a total of 195,000 end-user subscribers. Benioff recently spoke with Computerworld about the hosted CRM market.

How have things gone since you went public in June?

I think our business is very strong. We're starting to see large companies come to us for mega-implementations, such as SunGard Data Systems, SunTrust Bank, ADP and Cisco Systems. We're seeing a model where we're doing something unusual and not done in other enterprise software companies -- it's a true democracy. Very small companies, medium companies and even large mega-implementations are all done on the same piece of code.

Did Siebel's entry into the hosted CRM market validate offerings?

If you go back and look at the history of all the things Tom Siebel said about us, it was that we won't be around in a year, this will never work, and big companies will not be interested in this. It's all on the record. Now it is the future of software (for Siebel as well as for us), and that's interesting.

Do you think the number of vendors in the hosted CRM market will eventually shrink?

Like in all markets in software, there's going to be a leader. Typically, the industry tends to aggregate around a leader -- (Microsoft) in office productivity and operating systems, and it's true in databases with Oracle. The (hosted CRM) market is still young, and is a young company, only in business five years. I'm still seeing the market take shape and form, and how it will turn out is up to the customers.

What about integration of your applications with back-office systems? Is that getting any easier?

It's an irony of the market that people think it's hard to integrate with our service. We have a lot of customers with SAP or PeopleSoft or Oracle. They run Oracle applications like the (E-Business Suite) 11i payables and receivables, and it's integrated with Salesforce.

In a sense, doesn't hosted CRM put internal IT staffers at your customers out of a job?

I've never found that to be true. I've never had anyone contact me and say, "You cost me my job." It's more likely a true statement when someone says they bought XYZ (software) and never got it up and running, and it's more likely that cost them their job.

Siebel's Strategy Gives Users Freedom of Choice, Exec Says

Bruce Cleveland is senior vice president and general manager of Siebel's CRM OnDemand hosted software service and its development and marketing unit for small and midsize businesses (SMB). Siebel launched CRM OnDemand last fall in an effort to catch up to smaller and nimbler online software vendors such as Cleveland spoke recently with Computerworld about Siebel's two-pronged software strategy.

Didn't Siebel oppose launching a hosted offering for quite some time?

I don't think we were opposed to hosting. I think in reality, our customers in the enterprise weren't really asking for it. There's a pretty strong appetite out there for it (now), and certainly that wasn't the case several years ago.

How do you think you stack up against and your other competition?

We'll offer hosted as well as nonhosted, or a hybrid of the two, and make it the customer's decision. That's where we're headed. It's not a conflict because the entire sales organization sells the entire product line.

But does CRM OnDemand cut into your license revenue stream for installed software?

That's not the case. There isn't good revenue vs. bad revenue. There's a kind of revenue that comes from licenses, a kind from maintenance, a kind of revenue in the form of services and a fourth coming from subscriptions. More and more, we're going to build this kind of model where we don't have to do large quarterly transactions where 80 percent of the money is made going into the quarter and then 20 percent is made relying on Hail Mary kinds of things (to boost sales). We're blending revenue streams to build consistent quarter-to-quarter growth and a profit engine that Wall Street can count on.

What's unique to your offering?

The beauty of the single code path is you get to decide what particular (software) objects you want to express. We benefit from having 1,000 developers working at Siebel, and we only need a few to turn on (features) or turn them off to create the OnDemand product. One competitive advantage against someone like is that our research and development dwarfs theirs. may get closer to making a more complicated product by adding all these additional features to make it more competitive -- we can pick and choose what we want.

Are you selling the hosted applications to the SMB market only?

The truth is that while initially we had thought the product might prove to be primarily for the SMB market, the uptake has been quite strong in the enterprise space. We've got a number of companies you could classify as enterprise: Sprint, Marriott, Motorola.

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