On-Demand CRM Primed to Shock and Awe the On-Premise World

The on-demand CRM market has quickly found a new friend in the small-to-midsize business (SMB) space, which now realizes it needs to have formal CRM software in order to stay afloat in an increasingly competitive business landscape. According to new research from Tier1 Research (T1R), an independent research division of the 451 Group, the on-demand CRM market will explode through 2010, with a forecasted compound annual growth rate (CAGR) of 41 percent. This statistic leaves the on-premise CRM market in the dust, as T1R forecasts a 6.2 percent CAGR through 2010.

Wesley Kennedy, senior analyst at T1R and the author of "On-Demand CRM Marketplace," explains the expansive on-demand growth is due to Software-as-a-Service's (SaaS) cost-effective delivery method for software functionality. He goes on to explain that traditionally, SMBs didn't think they needed CRM applications, and used spreadsheets or organically based templates--but when business became increasingly competitive SMBs turned to formal CRM applications to stay one step ahead. For the purposes of the T1R study, Kennedy identifies the SMB market as companies with between 100 and 400 employees. "For SMBs, with the advent of SaaS and on-demand, now it becomes cost-effective for them to move toward a more traditional type of platform," Kennedy says.

Large enterprises largely have a CRM platform already, many of which are on-premise according to Kennedy. Consequently, the on-premise enterprise CRM market will realize much slower growth through 2010. "Consider what's happening for traditional on-premise," Kennedy posits. "All the growth is coming from basically existing customers doing some slight renewals or the extent that they need to upgrade applications. [That market] is pretty saturated already."

Kennedy identifies on-demand software vendors he believes are best primed to rise to the forefront of this burgeoning SMB market:

• Microsoft;

• NetSuite; and

• Salesforce.com.

Salesforce.com, Kennedy says, is a no-brainer. "Salesforce is still well-positioned to grow," he states. "[Salesforce.com] still has a platform that's going to resonate with those customers." However, Salesforce.com may see some heavy competition from NetSuite, particularly with its newly released offering, OneWorld. "I think [OneWorld] puts [NetSuite] heads and tails above even Salesforce.com for dealing with SMB corporations, particularly multinational ones," he says.

According to Kennedy's study, RightNow Technologies may have trouble keeping up with other on-demand vendors because the company does not usually deal with SMBs. "The real growth is seen in enterprises with 100 to 400 employees, and RightNow Technologies doesn't deal with that [size] customer base," he says. "[RightNow] deals with very, very large enterprises with large call centers, so it is not leveraged in the real growth area." However, when large enterprises start knocking on on-demand vendors' doors, Kennedy says to look for Oracle to gain a large piece of that market share. "As the larger enterprises start to migrate on-demand, Oracle's Fusion platform will be SaaS ready and enable them to garner a majority of the growth from larger enterprises," he says. "We don't anticipate migration for larger enterprises for some time, but when it does, Oracle will be well-positioned."

The one vendor Kennedy mentions that straddles the fence between its on-demand and on-premise offerings is SAP. "SAP has a product targeted for the highest growth demographic, but there is a conflict because they have a highly lucrative existing on-premise business model," Kennedy notes. He explains this has the potential to create great organizational conflict, and time will tell if this could initially hurt SAP's prospects for new on-demand CRM business.

Beyond these vendors, and some others (Kennedy notes ZoHo and SugarCRM as "smaller competitors"), new entrants trying to tap into on-demand CRM's growth in the U.S. and Europe in the next couple of years need not apply. Kennedy points to cost, time, and a glut of existing competition as being the three largest obstacles impeding new companies from entering this market. "It'd be so unbelievably costly for an organization to start from this point to get up and running in terms of research and development, building out a sales force and presence, and competing," he explains. "There's a very real difference between great market opportunity and great opportunity to enter a market. Competition has reached a point where a smaller competitor couldn't survive."

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