There are two ways to implement CRM – hosted, with the vendor owning and maintaining the system, and on-premise, with the customer owning and maintaining the system. Of the two, hosted systems are rapidly becoming more popular, according to Forrester Research, a market research firm headquartered in Cambridge, MA.

To determine the size and shape of the market, Forrester evaluated key product features such as setup and configuration, sales management, sales analysis, usability, integration and offline and wireless access, as well as vendor strategy and market presence. The methodology consisted of hands-on evaluations, vendor surveys and customer reference calls.

According to Forrester, hosted sales applications continued on a path of sustained growth in 2004 and the first quarter of 2005. Salesforce.com, the hosted CRM market leader, increased its customer base by more than 140% in 2004 despite mounting competition from emerging vendors such as Entellium and SalesCenter and established players such as Siebel and RightNow.

Hosted CRM is increasingly popular with smaller and midsize businesses seeking flexible systems with the capability of being rolled out more slowly. This is becoming preferable to on-premise systems, which tend to be implemented through a more risky big-bang approach wherein everyone moves to the new system at once.

Overall, Forrester found that salesforce.com and Siebel OnDemand have maintained the leadership position they held in 2004 by making significant enhancements to their systems through multiple product releases in 2004.

In the future, however, functionality alone may not be enough. Forrester has determined that vendors are increasingly competing on price and value as the number of hosted CRM options increases. For example, NetSuite prices its solution competitively by delivering bundled back- and front-office functionality for less than what other vendors charge for standalone CRM. Similarly, Entellium is getting into the game by offering an innovative, modular pricing scheme.

Forrester believes the best way for new vendors to compete in today’s CRM market is to focus on specialization. They cite Salesnet and their partnerships with boutique sales consultants and methodology vendors, such as CustomerCentric and Miller Heiman, as the best example of this. Similarly, NextSale also has found a niche by focusing on quotations, literature requests, and inventory and order management.

Forrester predicts future leadership will depend on how well SFA vendors incorporate key characteristics such as scalability and globalization in addition to proven high-adoption rates and ROI. Competency in these areas will be critical to gaining the confidence of the high-end market because larger firms do not see hosted as a viable alternative to on-site CRM deployment.

Hosted CRM applications, on the other hand, tend to be driven by sales VPs and managers who like the idea of being able to control the system and the purchasing decision without involving IT or getting big upfront budget sign-off.