Why More Sales Teams Are Turning to Hosted CRM

By Geoffrey James

If your firm has budgeted money to implement or upgrade your CRM system, you’re in good company. According to a recent study by the Boston-based consulting firm AMR Research, half of the 200 companies they surveyed plan to increase their customer management software budgets in 2006 by an average of more than 8 percent over the previous year. Just as significant is the shift in the type of CRM software that many companies are purchasing. The bottom line: hosted CRM is hot, licensed CRM is not.

According to the AMR study, 40 percent of companies are using hosted CRM, which differs from traditional licensed software in that the applications are served over the Web from an off-premises provider, much like a utility. Software companies such as Salesforce.com and more recently Siebel, with its On-Demand product, have popularized this model for customer management. The findings of AMR Research challenge the assumption that SMBs are responsible for the vast majority of hosted application engagements: 28 percent of large companies (5,000+ employees), 39 percent of mediumsize companies (1,000 – 4,999 employees), and 41 percent of small-to-medium size businesses plan hosted CRM deployments over the next 12 months.

Companies looking for ways to quickly increase revenue and customer service quality without a lengthy software deployment are investing in the hosted model, which has caused this new breed of applications to emerge as a growing and viable delivery method, even among larger organizations. Based upon the research, AMR believes that 49 percent of all companies will use hosted sales or e-commerce applications within the next 12 months, including almost half (47 percent) of large companies. In fact, the deployment of hosted sales force automation applications is more prevalent among larger organizations (31 percent) than SMB companies (22 percent).

The anticipated growth of hosted CRM follows a period of rapid growth in the number of implementations of such systems. AMR notes that sales of hosted customer management applications grew 105 percent in 2004. During that period, the two leaders in the hosted CRM market, RightNow Technologies and Salesforce.com enjoyed 97 percent and 83 percent growth rates, respectively, while Salesforce.com rocketed from number 22 to 12 in terms of total CRM revenue.

However, it would be a mistake to think that hosted CRM vendors are raking in vast amounts of money. In fact, when it comes to making money selling CRM systems, the market is still led by traditional installed-base application vendors using the licensed software business model. In fact, as recently as 2004, hosted CRM accounted for only $400 million in CRM spending, as opposed to around $4 billion for traditional licensed CRM software. While the final revenue figures for 2005 are likely to show a sharp uptick in revenue growth, it will still be many years before companies spend as much on hosted CRM as they do on traditional CRM.

AMR, however, clearly identifies hosted CRM as the way of the future. “The hosted model has reinvigorated a market that failed to grow over the past several years,” says Rob Bois, senior research analyst at AMR Research. “The hosted category has changed the whole perception of customer management with faster implementations, quicker time to value and easy customization.”