Hosted CRM vs. In-House: Which Direction Should Your Company Take?

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Hosted CRM vs. In-House: Which Direction Should Your Company Take?
Any technology closely tied to the financial health of a business generates heated debate, and customer relationship management (CRM) is no exception. CRM, as a concept and a technology set, has both bolstered and burned, been praised and maligned. One of the most animated arguments over the last couple of years has centered on the where of CRM: whether to deploy the technologies in-house or rent them, outsourcing their implementation to an application service provider. Its a case, the arguments go, of cost vs. customization, time to productivity vs. control, accessibility vs. security, on-tap vs. on-premise, and so on. Yet, as customer management technologies mature and deployment models prove themselves under realworld conditions, the two factions are becoming a little less polarized. One reason: people finally understand that in the tricky world of CRM and despite early hyperbole to the contrary no one size fits all. Today, in fact, the two models coexist in many large companies, answering differing enterprise and divisional needs. Further, some traditional suite providers, witnessing the popularity of hosted offerings and recognizing the benefits for customers, are now providing their own software through outsourced models. Meanwhile, the highly publicized failures of large-scale CRM deployments are giving way to better stories, with customers finding success in carefully planned, incremental implementations. Businesses, it seems, have more choices than ever before and thanks to better planning, more options, reasonable expectations, and experience better odds of succeeding. Increasingly, the choice businesses are making include an outsourced model. Apparently, the siren call of hosted CRM offerings lower total cost of ownership, quicker ROI, etc. is a seductive one. Gartner Inc. estimates that by 2009, businesses will be spending nearly $1 billion in CRM as a service, and that 33 percent of all small to medium businesses (SMBs) will have chosen a hosted model. Meanwhile, Forrester Research predicts that the percentage of overall CRM revenues coming from hosted applications will stand at 13 percent by 2005, up from 7 percent in 2002. Theres a huge interest in hosting, says Esteban Kolsky, an analyst at Gartner. Beyond the usual drivers, he says, on-demand models are attracting adherents who got burned by costly in-house CRM projects that didnt deliver the expected results. Hosting is particularly attractive, he says, if companies are looking for more tactical, point applications, such as campaign management, pipeline management, and email management. What CRM model businesses choose, of course, depends largely on their individual needs and circumstances. Do they have an IT department? Do they need highly customized applications, and if so, do they have skilled developers? Is their workforce distributed or mobile? Do they have key back-office systems that need to be integrated with new front-office functionality? What are their security restrictions? The answers to these and other pertinent questions should dictate approach, say experts.

Time is Money
Of a number of considerations that come into play when choosing a CRM deployment model, time-to-implementation and cost, not surprisingly, lead the list. If a business needs to have customer-related software running fairly quickly, with a more immediate ROI, a hosted solution can be very attractive. Though theyll have to sacrifice some of the things that ownership can bring absolute control, sophisticated customization they dont have to dedicate IT resources or purchase expensive hardware to get things underway. This has been particularly attractive to mid-market and smaller firms, who might not have the IT expertise to bring CRM inhouse. With a hosted model, you can start with five or 10 users as a pilot and if youre successful, you can expand it further into the enterprise, says Liz Herbert, an analyst with Forrester Research. The advantage with hosted in this case is that it doesnt cost you a lot if you have to throw it away you didnt sink a million dollars into a large-scale Siebel implementation. Many enterprises, of course, dont want to cede the control that comes with running their software themselves, and some feel that deploying integrated, highly customizable applications allows them to better differentiate themselves from their competitors. Experts say that if a company has complex integration and customization needs, and has sufficient time to deploy an in-house suite or even incrementally deploy the modules that will eventually constitute an integrated suite they may be better served by an in-house deployment. Security and regulatory restrictions in some vertical industries are other factors that drive the deployment of on-premise applications.

Tradeoffs Between Hosted Vs. Licensed CRM

ASP Cost Flexibility Support Staff
Cheaper Upfront

Software
Cheaper after year three

Easier to customize, More flexibility, but easier to but has limited options overcustomize Usually requires only one business administrator Easier to manage Requires business and IT staff, but larger implementations benefit from economies of scale More control over the app
source: Forrester Research

Overall

The cost-of-ownership question is a little trickier. Not surprisingly, the nod in terms of costs typically goes to ondemand solutions: Not only do potential customers usually get a free trial, but they dont have to invest in hardware or factor IT personnel into their cost models, and they receive frequent upgrades as part of their subscription fee. According to Herbert, most businesses who choose a hosting option are able to manage necessary changes with one full-time or even a part-time business administrator. However, while the cost of an in-house, licensed model drops over time and eventually comes down primarily to maintenance fees, customers continue to pay the same monthly fee for hosted offerings. Gartners Kolsky says that, all things being equal, the cost differential between the two models begins to equalize somewhere in the third year. Nonetheless, hosted vendors maintain that such cost comparisons can be misleading because they're based on the assumption that businesses won't need to make changes to their on-premise implementations beyond the standard upgrades they receive.

Customization Considerations
When hosted offerings first came on the market, prevailing attitudes held that they made sense for businesses that could live with plain vanilla implementations. Hosted applications, after all, need to target a diverse range of customers and are designed to eliminate the need for extensive programming. Nonetheless, vendors of hosted offerings are increasingly able to offer more areas of customization, and changes can typically be implemented

by a business administrator taking advantage of various offerings built-in wizards, tools and configuration options. Says Herbert, If a sales process workflow needs to be changed [within a hosted solution], a business person can usually do it. They need some training but not heavy IT background or development skills. However, if an organization has complex business processes to automate, it may make more sense to run CRM products in-house, she continues. The customization you can do [with hosted offerings] is limited to some extent, she says. In any case, if more difficult coding is needed, the company would require the services of a skilled programmer.

Who, What, When and Where

Indeed, such personnel considerations play heavily in the choice of a CRM model. If youre a large company where IT is a key competitive differentiator, its more likely that youve got IT workers with sophisticated and multifaceted skillsets who can handle the integration work and custom programming needed to achieve ROI from an in-house CRM implementation. However, if youre a midmarket or smaller company with little or no IT staff, youre probably better served by outsourcing customer-related processes to an ASP. The provider handles upgrades and support, and offers easy-to-use tools for some customization. Another personnel issue affecting CRM decisions centers on the workforce actually using the applications salespeople, marketers, customer service agents, administrative people and other knowledge workers. If an organization has a widely distributed workforce, whether it be because of mobility requirements or due to geographically dispersed offices, an outsourced model can make a lot of sense, as users can use a browser to log-in to applications. To provide secure access to in-house applications, many companies run virtual private networks, but If an organization has a widely these sometimes experience performance problems. Field distributed workforce, whether it salespeople, for instance, have experienced problems logging be because of mobility requireinto VPNs at customer sites due to firewalls and tunneling ments or due to geographically issues. However, says Herbert, for companies whose field workforce need to have complete application functionality while dispersed offices, an outsourced working offline, in-house licensed options are the better choice. model can make a lot of sense, as The ease with which upgrades are rolled out is another benefit to applications. of hosted offerings: Theyre automatically performed centrally, obviating the need for an IT staff to distribute upgrades to individual desktops or portable devices. Still, while touted as a key feature of hosted offerings, frequent, automatic upgrades bring their own problems. While its true that developers may have to redo customizations when upgrading their in-house suites, upgrades arent as frequent as they are with outsourced models, and companies have the option of not upgrading when new versions are released. With hosted offerings, theres no real control over when an upgrade is rolled out and what new features are included. This frequency, says Herbert, makes it all the more important that businesses stay current with end-user training to ensure against the input of dirty data. Another personnel consideration is the number of users that need access to CRM applications. At some point, the number of users that should be included in a hosted licensing contract reaches a state of diminishing returns. Because you license hosted software on a per-seat basis, theres a point where it makes more sense to bring the entire thing in-house and run it yourself, say experts.

users can use a browser to log-in

Secure in the Knowledge

Network securitys long been a hot button in arguments over which CRM model is the better choice. Those who favor an in-house approach over outsourced models often decry what they claim is a lack of control over the security measures ASPs put in place. Theres no question that in verticals working with extremely sensitive data financial services, for example keeping applications in-house due to security concerns is a common strategy, if not a mandate. Kolsky cites compliance issues, government regulations and other reasons that an outsourcing arrangement simply wont work for some businesses. However, many experts say that security concerns over hosted solutions are largely overblown today. In many cases vendors host through [providers like IBM], so security is good if not better than what in-house can do,

says Herbert. She says customers need to ask providers where their applications will be hosted, what security measures are in place, what back-up procedures they follow and whether they have a back-up location in the case of catastrophic events. Whatever options customers choose, CRM deployments are moving beyond the less-than-stellar early years to deliver some real, provable ROI. These improvements are due to a number of factors, including the success of on-tap CRM and a more incremental, modular approach to on-premise implementations. Both traditional suite vendors and hosted service providers are adding analytics functionality through development, acquisition and third-party partnerships thats becoming critical to getting more from operational CRM investments. Both camps are also continuing to add vertical-specific functionality to their applications, providing individual industry segments with functions and business process automation specific to them.

Outsourcing Customer Service Processes? Avoid These Mistakes

While the promise of reduced costs and other benefits continue to drive CRM outsourcing agreements, companies need to consider a few things before going with a hosted model. Through 2006, according to Gartner Inc., 60% of companies that outsource customer-facing processes will experience customer defections and unexpected support costs that outweigh any savings theyve gained from the arrangement. Gartner cites the following challenges as contributors to customer service outsourcing problems: Failure to Manage Customer-Facing Intersection Points According to Gartner, companies often neglect to map customer processes from a customer perspective, particularly the intersection points between outsourced and in-house processes. This fragmentation can cause frustration for customers who need to interact with the business, and in the worse case, encourage them to defect. Gartner recommends that companies sit down with outsourcers to map the process to be outsourced, defining individual entry and exit points and integration models. Proof of Concept Testing Pressures to leverage newly signed BPO (business process outsourcing) deals can cause companies to cut corners. Pilot tests, or proof of concept exercises, are common victims. Reference checks simply arent adequate for determining whether an outsourcer can do the job, says Gartner, as BPO arrangements vary between industries and even individual customers. The research firm recommends that companies conduct pilot tests of the business processes to be outsourced for three to six months prior to signing an agreement. Inadequate Knowledge Management Processes Customer service knowledge specific to a business doesnt just sit in knowledgebases; its lodged in agents heads as well. And if agents think their jobs are getting outsourced, its not necessarily an easy process to get them to share their insights so the knowledgebase can be optimized. The best situation, says Gartner, is to have in place a reliable knowledgebase including the knowledge gained from individual agents prior to any mention of an outsourcing arrangement. Lack of a Well-Defined Exit Strategy Despite the benefits, any outsourcing strategy that includes the outsourcing of personnel can result in loss of control over critical knowledge. This, according to Gartner, reduces a companys leverage during contract renegotiations. To avoid the loss of key process knowledge, some companies retain inhouse staff to work with outsourcers, or negotiate to keep some of the outsourcing staff if the contract goes awry. Gartner recommends that companies entering into customer service outsourcing agreements establish procedures for retaining process knowledge.

Entellium: Your Place or Theirs

Let others debate whether CRM applications deliver better results as in-house deployments or as a hosted service; Entellium can rise above the fray. Offering its product set on both a hosted and on-premise basis, Entellium gives its customers what they want so they can concentrate on a more important issue their own customers. Were very customer-focused, so we offer both types of solutions depending on customer size and needs, says Natalee Roan, vice president of sales and marketing for Entellium, a Malaysia-based company with North American headquarters in Seattle. As the product is the same in both incarnations, the choice, says Roan, comes down to what the customer feels comfortable with. When an account reaches 100 seats or more, some IT departments prefer to bring an implementation in-house if, for example, they have very sensitive data. On the other hand, weve been approached by global corporations that just want us to manage the entire solution for them so their IT staff doesnt have to take on the additional workload. Its our job to be flexible enough as a company to provide customers with either option. Founded in 2000 with the charter of delivering a hosted CRM suite that was both feature-rich and flexible, Entellium offers Entellium eSalesForce and Entellium eCustomerCenter, its sales and customer service products, respectively, as well as MyEntellium, a business intelligence and team collaboration portal. The products are available as individual modules or integrated suite. Both in-house and hosted models are priced on a monthly, per-user subscription basis, and both deliver regular quarterly upgrades and occasional smaller releases as part of their subscription fee. Key to Entelliums ability to differentiate itself from its competitors and offer rich functionality across both models is its sophisticated workflow engine a typical component of costly in-house systems that Entellium has engineered for a hosted model. This and other capabilities are instrumental in driving what Roan calls secondgeneration hosting, wherein the capabilities of on-demand CRM solutions more closely rival those of onpremise offerings. Roan cites a number of areas where Entellium is driving second-generation hosted CRM: Integration: In the area of integration, Entelliums relative youth in the market has been a great boon its been able to leverage the agnosticism of XML and Web services to allow cross-communication between its products and key back-office data sources. The company makes its integration platform available free of charge as an SDK, and regularly publishes new Web services as customers request them. Weve built our product on Web services on Microsofts .NET platform, so we have two-way communication with anything for which a Web service is developed, says Roan. When we wanted to integrate with QuickBooks, [an Intuit developer] was able to develop an integration platform in 24 hours. Entellium also integrates its products to key third-party analytics tools through Web services, though it will bundle sophisticated analytics of its own in its next major release. Usability: Led by a CEO Paul Johnson who previously served at Apple, it should come as no surprise that Entellium touts usability as one of the most important overall features of its product set. Difficult-to-use products, after all, have been cited as a major contributor to failed CRM implementations. Entellium has enhanced the usability of its suite by breaking the products into modularized components so that customers can purchase just the functionality pertinent to them. For businesses using the entire integrated suite, individual users are able to leverage the functionality of the module they need, without the clutter of superfluous tabs, and can take advantage of read-only views into the other modules when necessary. Weve simplified the interface, so that every [tab] is absolutely essential to helping users do their jobs, says Roan.

Customization: Proponents of installing CRM products in-house have long pointed to the inflexibility of ondemand CRM offerings; companies choosing hosted solutions, they complain, have to be satisfied with plainvanilla implementations. Recognizing that clients will be more effective if they can customize components of their hosted CRM suites, Entellium provides customization capabilities in four areas.

Entellium allows customers to set business rules in their workflow to reflect their own sales, marketing and customer service processes.
- Natalee Roan, VP, Entellium

First, individual users can customize the look and feel of the interface, choosing, for example, their color palette, tags or icons. The second area provides for corporate control of interface customization, so that management can enforce policies or ensure, say, that the interface mimic the look and feel of the corporate intranet.

Third, businesses can customize their workflows, enabling the product to better fit their processes and adapt as they grow. Weve talked to a number of customers whod jumped on other hosted products only to grow out of them relatively quickly because they were forced into certain processes, says Roan. Entellium allows customers to set business rules in their workflow to reflect their own sales, marketing and customer service processes. The fourth area where Entellium enables customization is at the data field level, so that companies can add and track fields as their business needs dictate. Furthermore, customers can populate fields from third-party data sources such as Excel, as well as perform searches and create reports based on customized fields. These kinds of capabilities, Roan says, are typically only available through costly in-house installations, but Entellium offers them as part of the subscription fee. We dont treat our product like a software-based offering where, once youve bought the product, there are huge fees for customization and integration, says Roan. Data Access: Entellium recognized early on that one of the main reasons many IT managers prefer in-house solutions is that they feel they'll lose control over their data with a hosted solution. Entellium raises their comfort level with its hosted solution by providing customers access to their data whenever they want, including providing a full download in the most popular formats upon request.

Pan Pacific Rewards Loyalty, Reaps Revenues

One customer that took full advantage of Entelliums integration capabilities was Pan Pacific Hotel and Resorts, the international hotel operations division of Tokyo-headquartered Tokyu Group. Using the Entellium eCustomerCenter product under a hosted model, Pan Pacific has been able to overhaul and centralize its VIP loyalty programs, greatly increasing revenues through cross-selling and up-selling opportunities and improving customer service. Though some custom work was needed, the integration effort to provide consolidated views into key databases cost far less than was projected due to Entelliums Web services architecture. The eCustomerCenter implementation serves 14 hotels throughout the Asia Pacific region, with Internet access ranging from advanced broadband services in Singapore and Malaysia to more rudimentary access in remote destinations. More than 500 users handling VIP booking activities are able to view up-to-date information housed in the hotel chains centralized databases. Via an online portal We price MyEntellium so created using eCustomerCenter, theyre also able to view affordably because customer data personalized pages, change personal information and preferis very valuable, and we dont ences, and receive and redeem incentives. The same portal is used by business managers to track booking activities so want our customers making they can identify trends to improve marketing and sales decisions on who gets to see key programs.

data simply based on price.

Customers like Pan Pacific are able to leverage Entelliums extensive functionality for just $45 a month per sales user,

- Natalee Roan, VP, Entellium

$55 per month for customer service user, and $59 per month per user for the integrated suite. Many sales teams, says Roan, are able to pay for Entellium by expensing the fee, much as they would their cell phone bills. Further, Entellium offers read-only access to data through the MyEntellium portal for just $9.95 per user unlike most hosted providers, who require executives who need data access for reporting purposes to buy another license at full price. The same price applies for access to MyEntelliums eCollaborate platform, which is ideal for teams who need to share documents among team members and even with outside parties. Says Roan, We price MyEntellium so affordably because customer data is very valuable, and we dont want our customers making decisions on who gets to see key data simply based on price.

For more information on Entellium, click here.