Customer Investments: Hosted Versus Owned Applications

Hosted systems such as salesforce.com and UpShot have seen staggering growth. Salesforce.com made it into AMR Research’s Customer Management Application Spending Report, debuting at number 29 in the vendors with over $10M in revenue from customer management, expecting to hit a triple-digit growth rate in 2003. But what is fueling this growth--short-term thinking or sound business judgment?

The Bottom Line: Pure-play hosted apps make sense for some organizations: those that are piloting CRM, those that are looking for a business unit system for sales support, and those midsize organizations that are not looking to make large initial infrastructure investments to support their current CRM initiatives. But they do not make sense for everyone; like any other selection, you need to do a needs analysis and think long-term, and not just look at the quick short-term fix.

What It Means: In the enterprise space, much of the growth in hosted applications comes from attaching salesforce.com to an existing CRM application (primarily Siebel) to provide salespeople with a more usable version of the system. Is this because it’s the right thing to do from a business perspective? No. The selection of hosted apps often stems from a business unit’s desire for short-term results and to work around corporate IT. Because hosted apps do not require hardware expenditures or IT support staff, they are perceived as a cheaper and quicker option.

But are they cheaper?

Hosted apps are going up in price. Salesforce.com is now $1,500 per user per year--that’s higher than many midmarket-owned applications. The total lower cost argument stems from two areas: no hardware required and reduced support costs.

Here’s the problem with that argument: there are going to be network and hardware costs associated with a hosted system. Connectivity and bandwidth become important with more users accessing a hosted product and usually that will require additional infrastructure and hardware costs.

That leaves the ongoing support costs issue. With Microsoft priced at $1,295 for the full range of sales and service functionality, the cheaper argument begins to pale. When purchasing only the sales product in a standard version, it only costs $400 per user, making it very difficult for companies to justify the extra $1,100 per user per year for salesforce.com. An implementation of 60 to 75 users pays for the support person in the first year alone ($1,100 x 75). Plus, that $1,500 for salesforce.com is per year/per user, unlike owned apps, which have the initial software cost and then a yearly maintenance fee of approximately 17%. Now the justification for owned applications starts to look a lot less expensive in the long run. The Takeaway: Hosted applications are cheaper in the short term, but not always in the long run.

But are they quicker?

Yes, the time from decision to having the software in users’ hands can be shorter, but that does not mean that the time to value is faster. The same business case, business process realignment, and hard decisions about organizational change still have to be made to make the hosted product successful. The Takeaway: Do not confuse quick availability with faster time to value.

Conclusion: Hosted app vendors are capitalizing on the poor relationship between business (sales) and IT as well as an organization’s desire for fast results with low initial expenditure. Companies should instead maximize the value of existing customer management investments. Follow the advice below for your business, if you are doing any of the following:

• Using hosted applications on top of a CRM implementation--Look closely at how to get the value out of the existing systems (improved training, vanilla applications versus customizations, and reassessing the business case) rather than making additional investments in hosted application services.
• Just beginning to pursue CRM--Use these hosted applications in a piloted environment to see if the technology is of value to the organization. If the answer is yes, then pursue the selection of an appropriate system. (That said, to implement any technology effectively, a business case and ROI metrics must be established beforehand. These steps cannot be avoided simply because the solution appears to be less complex.)
• Line of business that is waiting for larger corporate initiatives to be ready for prime time--Hosted applications can provide a stopgap approach to plugging the temporary hole.
• Midsize organizations not wanting to make a large upfront infrastructure investment--Consider hosted apps as an alternative to the costs of a large CRM initiative.