Hosted CRM Cost Analysis

Responding to Siebel's entrance into the hosted CRM market, META Group released a META Practice report earlier this month called "Hosted CRM: A Great Debate or Much Ado About Nothing?" The report, written by Steve Bonadio, an analyst at META Group, focuses on whether a hosted-CRM solution is tenable for companies. The bottom line, according to the report, is that "enterprises must not be swayed into choosing a hosted-CRM solution based on market hype or perceptions of it being less expensive. Several factors--including application best fit, growth, and migration; IT maturity and constraints; and cost of ownership must be explored prior to making a deployment decision," Bonadio stated in the report. The report shows a chart comparing the cost of a hosted solution versus the cost of a licensed solution over a five-year period. A hosted solution, the chart shows, will cost roughly $650,000 per year for 300 users; an on-premise solution will run close to $1 million for the same amount of users for the first year. However, over five years the chart shows the hosting solution totaling roughly $2.4 million, creeping past the on-premise solution at around $2.2 million over the same time frame. This includes an upgrade of the on-premise solution after the fourth year. Zach Nelson, president and CEO of NetSuite, one of the companies mentioned in the report, says the numbers don't add up. META Group's calculations, Nelson says, are too vague, citing the research underestimates the customization, maintenance, and salary costs associated with on-premise solutions. "The cost analysis takes into account customization, maintenance, and salary costs associated with on-premise solutions," Bonadio says. "In fact, the assumptions listed under the cost analysis chart clearly reveal maintenance and salary costs details (18 percent annually and three FTEs, respectively, for on-premises implementation). The model also takes into account customization/configuration costs for both hosted and on-premises." Traditionally, companies like NetSuite don't compete for 300 seats. The report acknowledges that while Salesforce.com has already landed some 1,000-plus-seat implementations, hosted solutions were initially designed for small and medium businesses. If, after five years, a 300-seat implementation is comparable in price to an on-premise solution, then it stands to reason that a hosted solution would be less expensive for companies implementing fewer than 300 seats. Bonadio disagrees. "Even if we halve the number of seats to 150, the model still holds water," he says. "Additionally, I ran several scenarios, even going down to 30 seats, with very similar results throughout." Another point of contention, Nelson states, is the definition of hosted. He maintains that companies like PeopleSoft and Siebel have single-tenant architectures, meaning one server is used per customer company. In a true hosted environment, he says, there exists a multitenant architecture where many companies share one server, effectively lowering the TCO by sharing the costs of hardware, backup, maintenance, application upgrade costs with other companies.