A recent Gartner research note states that companies that engage an ASP are perhaps overawed by the low initial price tag and don't consider the necessary ongoing costs they may incur as the relationship period extends.
Posted Jun 24, 2004
A recent research note takes special aim at what might be considered the hidden costs of hosted CRM. The note, by Gartner analyst Alexa Bona and entitled, "CRM on Demand Is More Expensive Than You Think," addresses the very nature of the hosted deal. It suggests that companies that engage an ASP are perhaps overawed by the low initial price tag without considering the necessary ongoing costs they may incur as the relationship period extends.
Bona points to a series of negotiation items that hosted users typically overlook, any one of which has the potential to undermine (or even erase) any expected savings. These concerns include setup costs; license conversions; fees for customers or business partners; costs of reducing users; selecting the appropriate pricing metrics; arranging residual rights; training fees; data-ownership issues; integration and customization; and termination fees.
Some vendors don't agree that any of these expenses is a surprise. "All the costs are visible," says Dan Starr, CMO of Salesnet, which provides on-demand CRM. "You know what they are when you get into the game."
But Bona also mentions several opportunities for hosted users to lower the already reduced initial costs, suggesting that users consider requesting free pilot periods, discounts, the addition of new functional modules, and minimum requirements for downtime and related service-level agreements.
According to Adam Klaber, partner and global and Americas CRM leader at IBM Business Consulting Services, with the hosted model "you have to commit less dollars initially than if you're going to go out traditionally to buy some hardware and buy some software and get some integration assistance. [But] if I'm committed to transform some of my marketing and sales and service for the long term, and my company has the skills to acquire and manage and run business applications and technology, then I may not need someone else to do it. The more sophisticated the needs or companies, the less appealing the hosted components become."
Mike West, senior program director for Saugatuck Technology, says, "Buyers negotiate pay-as-you-go or subscription pricing in the same manner as traditional licensing. These...deals often include many complex provisions and service-level agreements." Regardless of the nature of the hosted contract, he says, "due diligence is the norm."
Klaber says that hosting "is a new area," and most reports incorrectly approach the disadvantages and advantages, avoiding questions such as risk or long-term cost. A one-to-one comparison of the setup costs and licensing fees of hosted versus on-premise solutions misses the point entirely. Michael Isaac, senior program director for Saugatuck, agrees: "It is naive to view pay-as-you-go as the end of pricing and licensing issues facing buyers."
Organizations must answer one question, Klaber says: "Are you buying on-demand applications, or are you becoming an on-demand organization?" The difference is in how an organization wants business processes to function.
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