On-demand applications face growing pains

When Tim Kinsella became chief executive of Hospitality Solutions International in 2003, he came with a set idea of the technology that would help the software company's largely remote sales team pitch its wares to restaurants and hotel chains.

The veteran salesman's first thought was to equip employees with an "on-demand" customer relationship management (CRM) tool to track and automate sales and marketing. His interest reflected the growing popularity among companies of renting software as a hosted service, rather than using the traditional "on-premise" approach of licensing a packaged product.

"Initially, I had the knee-jerk perception that a replication or Web-based system would be the way to go," he says.

Kinsella was not alone. The concept of subscribing to use software over the Web is fast gaining traction, with the lower initial cost and relative ease of deployment opening the door for small and midsize companies without the IT staffs or funds to install expensive and complex systems.

"We are seeing a little bit in areas outside of CRM, but it's the one taking off," says Nathan Schneiderman, an analyst with Wedbush Morgan Securities. "A lot of on-premise customers have been burned by high expenses and high failure rates."

Even conventional software vendors have belatedly signed on to the concept, with Microsoft and CRM giant Siebel Systems among those relenting to the competitive tide and adding on-demand to their product mix. For Siebel, long the gold standard in enterprise CRM, its on-demand business proved among the few bright spots in an otherwise disappointing first quarter.

"People tend to present on-demand and on-premise as mutually exclusive," says Laurent Pacalin, Siebel's executive vice president of CRM products. But some companies opt to use both on-demand and on-premise, mixing and matching along certain divisions, regions or product lines, he said.

Although Salesforce.com, the leading provider of on-demand CRM, with about 267,000 customers, focuses solely on that arena, other players offer both packaged and hosted software. "We win a lot more hosted deals because we have a nonhosted option," says Greg Gianforte, chief executive of RightNow Technologies. "We can host it for them until IT can get it together to host the system."

Hype alert
But as with on-premise CRM in years past, the end results with on-demand don't always live up to the hype, users and analysts say.

"Eighteen months ago, people were selecting on-demand CRM because of the relatively short time to deploy; it was cheaper, and they didn't have to worry about those complicated, hard questions," says Rebecca Wettemann, an analyst at Nucleus Research. "But more and more on-demand customers are saying, 'If I'm planning on making an investment in this, I want to make sure it works.'"

Both approaches involve tradeoffs. The chief benefits of on-demand CRM software are faster deployment, lower up-front costs and reduced in-house support and maintenance requirements. The downside is that, while CRM software can be customized, it's often easier for users to change a system they own and administer in-house. Also, for some, having the system reside outside the user's firewall is a security concern. And while on-demand's lower initial costs and IT needs have opened the door for many smaller and midsize firms to use CRM, the total cost of ownership over the life of a contract exceeds that for packaged on-premise software, experts say.

"Is it less expensive to lease or buy a car? If you don't have a down payment, a lease looks pretty attractive," says Bob Thompson, founder of CRMguru.com, an industry information portal. But if the total overall cost is the main concern, the best strategy is to buy a car and "drive it into the dirt," he said.

Still, Thompson and others maintain that cost is not the central appeal of on-demand CRM. For corporate executives, its chief appeal is being able to pay someone else to run and maintain the system, as well as the relative ease in switching technologies or vendors without requiring a long and costly overhaul.

That said, the difficulties with both on-demand and on-premise involve technology, as well as aligning the processes and people needed to make CRM more than just a sales force automation, or SFA, tool.

"It really isn't about the software in terms of a project being successful or not," Thompson said. "The areas where people get tripped up have to do with not having a good strategy to begin with."

Big hurdle
One big hurdle, for example, remains integration, "despite what the vendors might say," Thompson said. Beginning in the 1980s, companies, particularly in financial services, spent billions on SFA and other CRM products. For the most part, they bombed, delivering minimal return on investment. But these legacy CRM systems remain in use, making it tricky to meld them with newer Internet-based technologies.

"The real world has all these old, tired, ugly systems, so it makes it more challenging for big companies to integrate these on-demand systems," Thompson said.

A case in point is Cisco Systems. In a June 23 research note, JMP Securities analysts Patrick Walravens and Denny Fish wrote that the networking giant is "struggling" to implement Salesforce.com's software. The CRM vendor does not support many of the tools used by Cisco's sales team, and Cisco's IT staff is

finding it difficult to integrate those tools with the hosted application, the analysts say. In addition, management is questioning the value "of rocking the sales operations for a new software vendor."

The analysts indicate that Cisco signed up with Salesforce.com in the second half of 2004, initially subscribing for 1,000 to 2,000 seats, with that count expected to rise to about 10,000 in June 2005. But Cisco has yet to scale up, and "many sales people are simply reverting to their legacy nonhosted CRM applications, to which they still have access," Walravens and Fish write.

Salesforce.com spokesman Bruce Francis declined to comment on the implementation, but said Cisco, which also declined comment, remains a customer. Francis also points to the company's recent deal with Merrill Lynch, which in June signed on for 5,000 seats.

Yet in a May report based on data from 29 Salesforce.com customers, Nucleus Research raised questions about whether the vendor could support enterprises with more than 2,000 users. Noting that many large companies are Salesforce.com reference customers, the report found that most use the vendor "on a divisional or regional basis and did not have more than 1,000 users. In fact, 93 percent of Salesforce.com customers had fewer than 500 users, suggesting that Salesforce.com is more likely to be deployed by small and midsized organizations than large enterprises."

Throwing his weight into ring, RightNow's Gianforte in late July told analysts the vendor added more than 3,000 users at Cisco in the second quarter.

Wettemann says it remains to be seen whether on-demand software is scalable enough for large customers. One issue, she says, is bandwidth, a concern when you have "lots of users hitting a remote database somewhere."

Islands of data
Beyond technical issues, getting workers to adopt any CRM system remains a major organizational hurdle, since it involves getting people to share information, a task that often meets resistance from computer-averse employees.

Barbara Kuntz, the marketing and communications manager at welding equipment maker Miyachi Unitek and a satisfied Salesforce.com customer for the past year, concurs.

"That's a problem with any kind of CRM--salespeople are going to resist 'paperwork,' as opposed to being out in the field," she said, adding that any CRM system is only as good as the information put into it.

Corporate managers typically want a maximum of customer information, but some sales representatives rebel at systems they view as too complicated or time consuming to use.

"The kind of things companies can do with technology is just stunning," Thompson said. "But the problem is we buy stuff that we don't have the capacity to learn in a reasonable amount of time. Did a secretary fail her job because (Microsoft Word) didn't have enough functionality?"

When Kinsella joined HSI, a unit of Micros Systems, two years ago, the company was using Sage Software's popular Act contact management software and had 18 salespeople and three managers. The Act product worked well for individual users but not for creating a centralized database and lead tracking system that the corporation could leverage, Kinsella says.

"I didn't want islands of data sitting out there," he says.

In sorting through the available vendors, Kinsella was quickly drawn to Salesforce.com and nearly signed up with the on-demand vendor. "We were pretty far down the line," he said. "I like their product--it has a real sexy front-end."

Yet Kinsella also had visions of his salespeople sitting in cars or airport lobbies, unable to connect after meetings while on the road, where getting access through a dial-up phone line may not be feasible.

Hard choices
In the end, HSI opted to upgrade from Act to another Sage Software product, SalesLogix, in part because it was account-based, as opposed to contact-based, an important distinction for Kinsella. "With our products, you need to sell to six different people at six different levels," he said of the need to view an account with all the pertinent contacts.

And, while traditional on-premise CRM consumes more time and money up front, Kinsella concluded that over the long term it was the more cost-effective option. "When I did the total-cost-of-ownership analysis, it was clear that SalesLogix would be far less expensive over a three- to five-year period."

Kinsella's rough numbers pegged the total cost of owning the SalesLogix system over a three-year period at $62,000, versus $86,000 for Salesforce.com's on-demand system.

"There is a lot of hype around on-demand--after the hype subsides, there is a downside," said Anthony Wooton, a vice president of product management at Sage.

For others, the higher tab of on-demand is well worth the benefit of not having to maintain an installed system. Miyachi Unitek, for instance, pays Salesforce.com about $140,000 a year in licensing costs to cover its 130 users, and it spent another $180,000 or so in start-up costs, such as consulting and training.

"It probably is more expensive on an ongoing basis, but we save a lot of money in IT expenses and headaches," Kuntz said. "It wasn't feasible for us to have to implement software and then call in everybody's laptops to update when new versions come in."

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