When is the tipping point for hosted CRM?

Is there a 'tipping point' when enterprises stop buying conventional licensed CRM in favor of hosted? I asked Siebel's Keith Raffel.

As I mentioned last week, AMR Research reports that hosted CRM's share of the total CRM market doubled to 10% last year. With leading hosted CRM vendors currently posting from 40% and 80% year-on-year increases in revenues as we move through 2006, that share looks certain to rise to 15-20% this year. You can't dismiss that as a flash-in-the-pan or a niche interest. On the contrary, it raises the question whether there's a 'tipping point' at which hosted CRM becomes the mainstream choice and most enterprises stop buying conventional licensed CRM packages.

Last week, I put that question to Keith Raffel, Siebel group vice president and founder of UpShot, the hosted CRM vendor Siebel acquired in 2003. To be frank, what I really wanted Keith to say was that, yes, Siebel had thrown in the towel and now freely admits that the on-demand model is the future. But Siebel's corporate position is stedfastly even-handed: "The market will decide," he said. "We are ready, willing and able to give customers what they want," whether that be on-demand, on-premises or as service-oriented modules.

"Clearly, on demand is becoming a more and more popular option," he told me. Last quarter, Siebel booked $20 million in contracts for its hosted CRM products, compared to $75 million in on-premises licenses. But the user numbers are still heavily weighted in favor of the traditional licensed package. Of 530,000 new Siebel users that went live in Q1, only 30,000 were on-demand users; the other half million were using the on-premises product.

On the other hand, Siebel CRM OnDemand is winning contracts at a lot of blue-chip enterprises — Sony, 3M, Caterpillar and many more. The notion that on-demand is for smaller businesses only is one that went out the window at Siebel some time ago. But on-demand needs to mature some more before it can really win over the enterprise mainstream, he told me. "What needs to happen for that tipping point to be reached for large customers is that they see they can get the full functionality they require, and they can do the integration to other packages they need to do." It may take a year or two more before that point is reached.