The Hidden Costs of In-House CRM

By Geoffrey James

Needless to say, Return On Investment (ROI) should be the primary driver for CRM technology investments. However, the entire idea of ROI is meaningless if you don’t know how much each option will cost. In this regard, on-demand CRM can be at a disadvantage because pricing typically reflects the total cost of usage, while the true costs for in-house CRM can be buried inside a company’s IT budget. It is possible to extract some of these hidden costs in order to get closer to an "applets-to-applets" comparison (as it were).

Let’s suppose that you have CRM implementation proposals from two vendors: one on-demand, the other in-house. On the surface, the in-house proposal appears to be competitive with the on-demand proposal in terms of monthly outlay, because the in-house software will be supplied under a subscription license. The in-house CRM vendor has also promised that, after three years of rental, the subscription licenses will convert to perpetual licenses at no extra cost, at which point (theoretically) the software won’t cost any more money.

On the surface, the in-house proposal looks like the better deal because the monthly costs are similar and the on-demand system will continue to cost money beyond year three. However, there are hidden costs with the in-house proposal that need to be considered.

For example, even if you already have a data center and an IT staff, getting that CRM application up and running, and maintaining it 24/7, will require the time and effort of at least one (and probably two) system administrators. Nationwide, systems administrators receive an average salary of about $85,000 a year, with many receiving 7 to 15 percent of their base pay in bonuses or stock options. In addition, having technical personnel in-house involves office space, personal computers, HR overhead, benefits and so forth, which account for an additional 80 to 100 percent of an administrator’s base pay. Therefore, the cost of the system administration is about $170,000, just in year one!

Another major hidden expense is the data center. The in-house CRM vendor is arguing that since you already have a data center, it isn’t going to cost you any more to add this application. Maybe so, but that’s only if your data center is running so inefficiently that it has a lot of extra capacity. If your data center is like most, the square footage is already being used effectively, which means that adding a new application will require new floor space in the data center.

According to the market research firm Gartner, data center construction costs in most areas of the United States are about $400 per square foot. Assuming that the CRM system (hardware, cabling, etc.) will consume a conservative 50 square feet, it’s going to cost approximately $20,000. The CRM system will also need to pay the rental for that floor space once it’s been converted. Data center floor space rental (not including air conditioning and power) costs an average of $50 a square foot a year nationwide, so that’s another $2,500.

And then there’s the hardware itself. A CRM server, along with networking hardware and monitoring software will run around $10,000, not including another $1,000 for a years worth of "Gold" hardware support. You’ll also need backup and disaster capability, which will cost an additional $1,000 a year. Remember: even if your data center has these things, a percentage of the total cost for the entire data center is going to be transferred to the cost of running your department.

When all these expenses are added up, the total is more than $200,000 in extra expenses for the in-house system in just the first year. More importantly, all of these costs (other than the hardware purchase price) will be ongoing, which means that after the third year, your TCO for the in-house system will be $600,000 higher than for the on-demand system.

This is not to say that the extra expense of an in-house system might not be a good investment, but it’s impossible to tell which approach makes sense unless you’re willing to look at the real TCO of each approach.

The above is based upon information provided by Gartner, the world’s largest high-tech market research firm.