In House CRM

For the past few years, the big news in the CRM business has been the rise of on-demand systems, where the customer rents the CRM capability from the vendor, rather than purchase the hardware and software outright. The traditional on-premise CRM vendors – such as Oracle, Siebel, and SAP – used to pooh-pooh on-demand, claiming it was too lightweight for companies who needed “real” CRM.

Today, however, Oracle/Siebel is heavily promoting Siebel CRM OnDemand and SAP recently released an on-demand version of its CRM software. Not surprisingly, some pundits believe that the future of CRM lies in on-demand and that traditional on-premise CRM systems are dinosaurs destined for extinction. “[It] will become a standard deployment option,” says William Band, a CRM analyst at Forrester, a Cambridge, Massachusetts-based consulting and market research firm, “With more frequent upgrades, lower risk. and lower upfront costs, customer demand for this deployment option shows no signs of slowing down.”

If on-demand is such a superior option, though, why are so many firms still buying on-premise CRM? In fact, the demise of on-premise has been greatly exaggerated, according to noted CRM guru Barton Goldenberg, president of the CRM research firm ISM. (See sidebar: “A Sampling of On-Premise CRM Users.”) “There are many situations where on-premise is a better choice,” he says. “On-premise may not dominate the market as it did in the past, but there will be on-premise CRM solutions inside sales organizations for many years to come.” It turns out that, for some sales groups, on-premise CRM can be the best way to fuse people, process, and technology together to get the maximum ROI. Here are the six primary reasons you might want to consider on-premise CRM as your best strategic option.

Reason #1
Your company’s balance sheet needslong-term depreciation.

The ROI case for on-demand CRM is usually based upon the fact that the initial expense of renting the software is generally cheaper in the short term than buying the system. That way of describing the difference, however, is overly simplistic. The real reason that on-demand can be more attractive financially is that on-demand usage fees can be written off as a quarterly expense, thereby lessening the current year’s corporate tax burden. On-premise systems, by contrast, constitute capital equipment purchases, which must be depreciated over several years. This is generally less attractive from the viewpoint of effective corporate accounting.

However, there are cases in which a company might want to take the depreciation rather than the quarterly expense, according to Goldenberg. For example, a company expecting a sharp up-tick in future revenue might want to have capital equipment depreciation on future balance sheets in order to smooth out revenue spikes that might make their company’s income appear volatile to investors. In most cases, a firm’s CFO will be able to counsel you on whether on-demand or on-premise makes better financial sense for your organization.

Reason #2
Your business processes are uniquely complex.

While on-demand systems now have customization capabilities, those customizations tend to be limited to variations of a common sales process model. However, many companies inside many industries have sales and business processes that are far more complex and idiosyncratic. A good example is pharmaceuticals, where sales processes must accommodate an incredible variety of ordering methods and insurance reimbursement systems, not to mention the distribution and tracking of samples to hundreds of thousands of doctors’ offices, according Dale Hagemeyer, research vice president at Gartner, a Stamford, Connecticut-based high-tech analyst firm.

Similarly, Hagemeyer points out that business processes which rely on predictive analytics – the deep analysis of customer data – are not likely to be well- served in an on-demand environment. “The on-demand solution is not a suitable platform…because configuration and analytical horsepower are required,” he says. Supporting complex business processes usually entails starting from the bottom up to build a unique CRM application. And that’s an activity that’s easier if you have complete control over the implementation. “On-demand solutions do not favor [these] complex business processes,” says Hagemeyer. “They are based on providing vanilla to the masses.”

Reason #3
You need deep integration with your corporate systems.

Originally, on-demand CRM systems were strictly stand-alone. Companies that wanted to integrate on-demand CRM with other corporate systems (such as manufacturing or order-tracking) were basically out of luck. Today, however, on-demand CRM vendors have used technologies like Web services and XML to make basic integration with other systems not only possible, but relatively easy, according to Denis Pombriant, principal at Beagle Research, a consulting firm that helps companies make intelligent CRM decisions. “Salesforce.com, among others, now offers platforms to integrate multiple solutions from disparate vendors,” he explains.

However, some sales operations demand a deeper level of integration than is practical with an on-demand solution. “Pricing sequencing and conditions, price contract agreements, production planning and scheduling, and detailed quotation information require significant integration into ERP or other back-office systems,” says Hagemeyer. While it may be possible to integrate these functions into an on-demand system, such an implementation can become a nightmare to support because all the applications will be changing and updating, without regard for whatever customizations you may have made. By contrast, deep integration with an on-premise solution is easier because you have more control over when the updating process takes place.

Reason #4
“Plug-and-play” on-premise solutions are available for your industry.

The purpose of a CRM application is to make the sales team more productive as quickly as possible. In some cases, the potential cost advantage of an on-demand system is less important than the ability to get a workable CRM system up and running quickly. Because on-premise solutions have been around longer than on-demand solutions, there exists a wealth of industry-specific customizations that can “plug-and-play” into a particular sales environment. In these cases, customizing an on-demand CRM system would simply be reinventing the wheel.

For example, the aerospace industry suffers from peculiarly long sales cycles as well as Byzantine government regulations. While there’s no statutory reason that an aerospace company couldn’t use an on-demand solution, so many companies in the aerospace business have already implemented CRM using Siebel that it’s only natural for an aerospace company to turn to an on-premise Siebel solution. However, it is important to note that with on-demand versions of the most popular on-premise CRM applications, some on-premise solutions may soon be available as plug-and-play on-demand solutions as well.

Reason #5
Your firm is legally required to control key data.

An argument that’s often surfaced in favor of on-premise applications is that they’re more secure because your own IT staff has complete control over the data. That argument is specious, considering that most security violations result from the actions of internal employees rather than the outside activities of hackers. Sometimes these breaches are accidental, as when hapless New York Times employees used credit card printouts to wrap bundles of newspaper for public distribution. Security breaches can take place when disgruntled employees decide to take revenge. While such employees may exist on the staff of an on-demand vendor, unlike your own malcontents, they’re not likely to target your firm’s data to wreak havoc.

Unless your IT group has a very high level of expertise in security, and an iron-clad set of scrupulously followed security policies, chances are your data will be safer in an on-demand system. That being said, there are some industries, such as consumer goods and pharmaceuticals, which have unique syndicated data sets that are contractually obligated to be located inside of the firewall of the licensee and which third parties are not allowed to store or manipulate, according to Hagemeyer. Similarly, financial institutions often operate under government regulations that prevent them from outsourcing data to an on-demand provider, according to Pombriant. “In that case, the controversy between on-demand and on-premise becomes moot,” he explains. “So you’d be better off focusing on strengthening your own security rather than looking to farm your CRM to an on-demand vendor.”

Reason #6
Your company wants to customize frequently.

While on-demand systems do provide customization, it’s not always easy to do, and not just for technical reasons. “We know of on-demand providers that have to convene a committee to approve the change of a column heading in the solution, let alone a complete change to the look and feel,” says Hagemeyer. Such picayune behavior can be a major problem for a company that believes that major ongoing changes to a CRM system will be necessary to keep the sales team productive.

The problem, according to Goldenberg, is that the on-demand vendors believe that their systems represent the best way to do CRM and are thus reluctant to add features that seem outside the pale. “The more you customize, the more you move away from their optimal model,” he explains. In addition, on-demand vendors often charge hefty fees to make changes to their systems, an extra expense that may not be obvious when you’re contracting for the on-demand service. In other words, just as with a house, if you want to make a lot of home improvements, you probably are better off owning rather than renting.