Hosted or Housed?

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The good news is, the choice to implement a CRM solution improves a business: It ups sales by targeting customers more specifically; it reduces process errors and so cuts costs; and it increases both customer loyalty and satisfaction, which also makes more money for the company. The bad news? Well, there really isn't any, even though an implementation can be daunting. Eventually, the CRM delivery-model decision an enterprise makes--to go with a hosted or with an on-premise model--boils down to choosing which elements of a suite or which specific applications meet the enterprise's needs list. A thorough in-house assessment of all business sectors is the first step to take. Figuring out which model to go with may in fact become more difficult as CRM continues to evolve, as Sajid Usman, a partner with Accenture, avows. Usman underscores that a firm must look at how much the CRM integration will affect other systems, and what unique needs the business has. He describes working with clients to find the right balance: "I've gone through a similar exercise with a few clients to figure out when it becomes cheaper to bring it in house. Where on the scale does it become more important from a pure infra cost? We've seen the number come in at the low thousands. We've seen it come up from $1,500 to $5,000 or $6,000. There really isn't one set answer." What's in the Mix There are some costs that are a given, whether a company uses a hosted solution or implements in-house. The first one is obvious: Companies pay for applications in one way or another, although licensing fees are always going to be significantly more initially than a subscription cost, which is generally $50 to $125 per user per month (according to a recent Yankee Group study). A hosted subscription cost includes standard maintenance, support, upgrades, and free Web-based training, while licensing fees are for seats only. An onboarding program to help get users up to speed may also be an option for an additional cost. It's for this reason that businesses that have simple, basic CRM needs for fewer than 100 users fare better using a hosted model, even at the one-year mark, says Tien Tzuo, senior vice president of product management at Salesforce.com. "You might think, 'Isn't it like buying versus leasing a car?' If you're going to keep it a few years it's cheaper to lease, but if you're going to keep it longer, it makes more sense to buy. But not really." Hardware on the SaaS side is minimal--Web servers and desktops or notebooks, which the firm may or may not already have. The hosted model also involves a few more costs. Bandwidth for in-house and remote users comes with a fairly fixed cost structure, especially because of the commodity nature of ISP services.

Manpower costs--the price for people installing and configuring the laptops and desktops, and integrating existing ERP data with the program--will vary depending on if there is an in-house IT staff or if a company sends people out to multiple remote sites. Integration may be the biggest cost, says Tony Martinez, vice president of SAP's CRM On-Demand Business Development. "You should expect to spend 60 percent plus [of the subscription costs] actually integrating the system. Still, if you look at an on-demand solution and a traditional software solution, around the three-year mark on-demand will probably cost more." Last, plan on spending a smaller percentage on in-house change management--training above and beyond the online modules, user administration, and business process implementation. Owning It All On-premise software comes with plenty of additional startup costs at the first year, with other incremental fees added in subsequent years. Even before a firm pays for the initial site license (the cost of which varies greatly, depending on the number of seats installed, because the more licenses purchased, the more opportunity for deep discounts), there's site testing and assessment to go through. Middleware, database, and application servers should also be considered. Companies need to allocate manpower to examine and compare their IT structure with what's required at a one-time cost of about $42,000 for a 200-seat configuration. Going forward, on-premise installations require 1.5 to four people on staff for maintenance and support, at a yearly cost of $50,628 for the same 200 seats. Hardware for an on-premise install can be a significant, ongoing cost. Think data center costs, as well as user and network hardware. Yankee Group estimates a $120,280 cost for a 200-seat configuration in the first year, with upgrades required in the fifth year. (On-premise integration costs are double those of a hosted solution.) Companies also need to test infrastructure, as well as applications. Overall, maintenance and tech support costs, which are nonexistent for a hosted model, can be about 25 percent of the firm's license fees. Software upgrades can be expected at the three-year mark, although that too is a wildcard, says Bob Bois, an analyst with Boston-based AMR Research. "The cost for a software upgrade can be exorbitant, but you may not need to upgrade at three years. There are dozens and dozens of variables that are going to go into that and other decisions," Bois says. Last fall technology staffing firm Yoh installed SAP's mySAP CRM, an on-premise software program. It might have been cheaper in the short term to go with an SaaS CRM program, but the company was an SAP shop already--one of the key reasons it went with the software, says Jim Lanzalotto, vice president of strategy and marketing. "As much as we could do with SAP as our background, the better it would be for us." In the past Lanzalotto might have made a decision between SaaS and an on-premise installation by looking at what each would cost, but today other factors come into play. Even more important than cost, he says, is what each iteration of software would allow his company to do. According to Lanzalotto, Yoh's experience is similar to analyst estimates for an on-premise solution. To date the company's first-year costs break out to 30 percent software licensing, 8 percent spent on hardware, a whopping 48 percent spent on consulting services, and 14 percent on other miscellaneous expenditures. Consulting was a major component because of the level of customized development required. "The biggest thing is having the right talent here," he says. "The biggest indication of being successful is having everyone in-house when you need them." Consulting services are the biggest challenge when doing cost analysis, says Jasmine Noel, principal of research firm Ptak, Noel & Associates. "The more difficult thing in terms of understanding costs is figuring in managing and maintaining the CRM application. That breaks down into how great the management processes are, and how much expert knowledge you have on staff." Accenture's Usman concurs: "You can easily spend $10 million implementing an enterprise package for 1,000 users to get tremendous value out of it. You could also spend $1 million, but you're getting two completely different things from a business-case perspective, so you really can't compare apples to apples."
Noel says both on-premise and hosted models should include cost estimates of lost time and revenue from integration and, in the case of on-premise, of upgrades. "If you want your CRM to be part of your online ordering and marketing system, then the issue becomes what it will cost in downtime if you have a problem while you're trying to integrate these systems. You need to calculate how much one hour of lost service will cost your company." Big, Bigger, Best? So if it's too difficult to do the ROI calculations without having some of the intangibles that make themselves known in subsequent years, can a company use the size of the business to determine which model to purchase? Not exactly, experts say. In the past it was easy to figure out which type of CRM implementation was best, and how soon a business would recoup an installation based on its size. According to conventional wisdom, the smaller the company the more likely it was to use an SaaS model, while larger enterprises needed an installed option. That's just not true anymore, Bois says. "There's a mistaken theory that companies that have smaller revenues are less complex, but I've talked to a lot of smaller businesses that have some CRM processes that are more complex than larger businesses. Yes, smaller businesses don't always have the personnel, but that doesn't mean their sales, marketing, and service are simpler." And, large firms aren't always going to go for enterprise software, especially as the need to remotely connect to CRM apps at any time from anywhere becomes more important. The bottom line is, a firm can fill in the blanks to help it determine which is better, but it's hard to plug in numbers for a company with a specific demographic. A lot of it comes down to assessing the software's impact on the company's business, and what trade-offs the company will make. "CRM software comes down to what the company is going to do with it," Noel says. "If you're going to use standard features, then it doesn't matter how big or small you are--hosting makes sense." Karen Bannan is a New York--based freelance journalist.
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