On-Demand vs. On-Premise Customer Relationship Management: A New Hybrid Emerges

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1 I D C I - V I E W Mary Wardley Vice President, Enterprise Applications and CRM Software On-Demand vs. On-Premise Customer Relationship Management: A New Hybrid Emerges September 2007 Adapted from Worldwide On-Demand CRM Applications Forecast and 2005 Vendor Shares: On- Demand Delivery Winning Converts and Building Revenue, by Erin TenWolde, Mary Wardley; IDC # Introduction The market for on-demand customer relationship management (CRM) applications is strong and growing. IDC expects the market for on-demand CRM to increase to $2.2 billion by the end of 2010, representing a 31.1% compound annual growth rate (CAGR) for the forecast period. Despite this strong growth, however, end-user organizations generally see CRM as a bigger initiative than just deployment options that is, either on demand or on premise. Companies are still evaluating the on-demand model for CRM applications to see if and where the model will fit within their internal applications environment. Many companies, particularly larger enterprises, consider a software-on-demand solution as a stopgap choice, and expect to shift from an on-demand version of CRM to an on-premise solution. Meanwhile, recent results from IDC's quarterly AppStats Survey (see Figure 1) demonstrate that end users are considering a hybrid model looking at both on-demand and on-premise delivery models for their CRM implementations.

2 Figure 1 Status of CRM Application Delivery Models n = 288 Note: Multiple responses were allowed; total may exceed 100%. Source: IDC's AppStats Survey, 1Q07 While a majority of organizations have an on-premise install for their CRM application, among those that are actively evaluating or implementing CRM, both hosted application management and software on demand are an active part of the mix. IDC expects this mixed environment view will be the norm for the foreseeable future, requiring applications suppliers to offer choices to their end customers for all three delivery options: On premise Hosted application management On demand Definitions Education Needed IDC defines CRM enterprise applications as those automating the customer-facing business processes within an organization, irrespective of industry specificity (i.e., sales, marketing, customer support, and contact center). Collectively, these applications serve to manage the entire life cycle of a

3 customer including the conversion of a prospect to a customer and help an organization build and maintain successful relationships. IDC views software on demand as a delivery model for software rather than a specific, individual market. Software on demand is characterized by the software, services, and support offerings that are specifically built and designed for one-to-many delivery over the Internet. Software-on-demand providers typically embrace a Web services architecture strategy, and customers share the same public infrastructure. The following are defining characteristics of software on demand: Software. Software is built specifically for network delivery and is not deployed in-house. Some software-on-demand providers offer an offline module to complement their core online solution Pricing. Software license and hosting revenue is combined into one annuity stream whereby the software license and hosting fees cannot be differentiated. There is no upfront licensing fee associated with the offering Flexibility. There is little to no customization of the application apart from the limited configuration that is allowed by the application provider While the terms are often used interchangeably, IDC considers software on demand a subcategory of the Software as a Service (SaaS) market. The second category of SaaS is hosted application management, formerly called application service provisioning (ASP). That said, in IDC surveys, end users make little differentiation between the on-demand delivery model and hosted application management. At the end of the day, particular terminology is likely a moot point for those customers who just want answers to the following questions: Who will take care of the application? Who owns the data? Is the data secure? Who can be contacted if something goes wrong? (Here a single-vendor strategy for support can provide greater efficiency and effectiveness.) Market Trends & Considerations Strong Growth, But Further Integration Needed IDC anticipates that the transition to on demand, and the growth of on-demand products as an increasing percentage of the CRM applications market, will occur well beyond 2010 (the forecast period). Vendors that offer multiple delivery models for CRM applications will be the most competitive. Despite the attractiveness of on-demand and customer adoption, however, there are still concerns about software delivered on demand that contribute to customers' unwillingness to purchase these types of offerings. Beyond functionality concerns, on-demand adoption is inhibited by perceptions of the following: Service provider viability Reliability of software-on-demand products and services Perceived lack of security, customization, and integration capabilities 3

4 IDC expects these concerns to subside over time as offerings reach maturity and rapid release cycles help to enhance existing features and functionality of offerings. Likewise, as vendors demonstrate their long-term viability, as well as their ability to provide enterprise-level support for a long-term CRM strategy, user organizations will become more receptive to an on-demand option. These concerns notwithstanding, evaluation and adoption of CRM applications that are offered on demand continue, including the hybrid model of on demand and on premise. Services that help organizations transition from on demand to on premise, if desired, will play an important role in driving adoption. Such services need to be customizable, tailoring application and infrastructure, which in turn can allow for greater flexibility and enhanced capabilities to support business needs. Examples of these services include ERP integration, dedicated VPN networking, data loads, CRM on-demand customization of screens and reports, and transition to an on-premise CRM enterprise. Also key to the evolution of the on-demand model will be the ability to link to and from these applications into the broader application infrastructure. The on-demand model, in particular, offers organizations the unprecedented ability to essentially "turn on" an enterprise application to hundreds of users overnight. This allows rapid implementation within departments and divisions that may have a strategic or tactical requirement for automation. However, these instances cannot remain isolated long term. Vital to the continued success of an ondemand enterprise application will be its ability to easily exchange data with on-premise applications for example, an on-demand CRM application integrating with an on-premise ERP system. Benefits Lower IT Costs of On Demand Only the Beginning On-demand delivery of enterprise applications can provide the following benefits: Lower equipment costs. Organizations needn't invest in the hardware and expertise it takes to run a datacenter; all that's required is a high-speed Internet connection No maintenance. Gone is expensive and time-consuming application maintenance; the ondemand provider assumes all responsibility for ongoing patches, updates, testing, etc. Faster deployment. Likewise, deployment costs are cut dramatically; companies no longer need to prepare hardware, hire consultants, or provide implementation training; instead of six- or 12- month deployment cycles, new software can be deployed in a matter of a few weeks even across a large enterprise Improved IT staff utilization. Part of software-ownership costs, especially sophisticated enterprise-class software, is the need for full-time, dedicated experts on staff. But those experts typically aren t utilized 100% on a single application, so companies must find other ways for those people to be productive. It s difficult to achieve economies of scale Better focus on business. Perhaps the most important resource consideration is the need for companies to focus on business concerns first innovation and competitive advantage. Daily management of enterprise applications pulls resources away from more value-added integration projects that address these business concerns Access to top-tier technology. The on-demand model makes sophisticated, enterprise-class software available quickly. The more specialized the application, such as with CRM, the better it is to use a vendor with a proven track record of expertise in that application

5 Conclusion Hybrid CRM: A Solution Whose Time Has Come IDC recognizes that the estimated $802 million in worldwide revenue for on-demand CRM applications was a relatively small portion of total CRM software revenue (see Figure 2). Figure 2 Worldwide On-Demand CRM Applications and Total CRM Applications Revenue, Source: IDC, 2006 Software that was deployed on premise makes up the vast majority of worldwide CRM applications revenue. Yet comparing on-premise and on-demand directly can be misleading because on-demand revenue is streamed over time, so penetration is underrepresented in a revenue-based view. Also, on-demand offerings cost dramatically less than traditional software for reasonably comparable purchases, which also under-represents penetration in a revenue-based view. Moreover, adoption of on-demand tends to spread organically, meaning that customers make distinct rather than landscape purchases to start, and then tend to add to the on-demand footprint over time. Due to the highly diversified nature of customers, IDC believes that software vendors have recognized that a variety of pricing, licensing, and delivery options are a likely necessity to satisfy customer requirements for easier software access and flexible purchasing options. As such, a hybrid model of on demand and on premise appears to be a solution whose time has come. ABOUT THIS ANALYST Mary Wardley Joined IDC in 1988 and currently manages IDC's CRM and Enterprise Applications programs. As vice president of the CRM Applications Software program her primary responsibility is delivering leading qualitative and quantitative market sizing and analysis of the CRM software segments. 5

6 ABOUT THIS PUBLICATION This publication was produced by IDC Go-to-Market Services. The opinion, analysis, and research results presented herein are drawn from more detailed research and analysis independently conducted and published by IDC, unless specific vendor sponsorship is noted. IDC Go-to-Market Services makes IDC content available in a wide range of formats for distribution by various companies. A license to distribute IDC content does not imply endorsement of or opinion about the licensee. COPYRIGHT AND RESTRICTIONS Any IDC information or reference to IDC that is to be used in advertising, press releases, or promotional materials requires prior written approval from IDC. For permission requests contact the GMS information line at or Translation and/or localization of this document requires an additional license from IDC. For more information on IDC visit For more information on IDC GMS visit Global Headquarters: 5 Speen Street Framingham, MA USA P F IDC

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