Understanding Total Cost of Ownership of a Hosted vs. Premises-Based CRM Solution

Transcription

1 Customer Relationship Management Strategies by Sheryl Kingstone June 2004 Understanding Total Cost of Ownership of a Hosted vs. Premises-Based CRM Solution Executive Summary Many companies are unaware of all the costs involved in implementing a CRM system. Few companies understand that the application license is only a small part of the overall cost of ownership. The largest part of the overall cost comes after the initial licensing costs are incurred. Companies have typically evaluated capital expenditures, such as hardware and software, but rarely account for the complete spectrum of post-deployment costs. Companies seeking to document all expenses of CRM need to understand the many hidden costs, which can be challenging to estimate in advance. TCO analysis for a fully loaded CRM deployment falls into the following major categories: Needs analysis and site preparation Software purchases and license support Implementation and deployment costs Ongoing operational support Strategic development costs Businesses require a complete grasp of the all the deployment options available, along with the associated costs over a 5-year period. Without a thorough knowledge of the options that are available, CRM cost estimates will likely be incomplete. To provide a more complete cost perspective, The Yankee Group analyzed CRM implementations ranging from 40 seats to more than 300 seats for both SalesLogix and salesforce.com. Exhibit 1 highlights the average hosted and premisesbased TCO scenarios for a 200-seat implementation. This report reviews the related costs for not only a baseline TCO, but also the fully loaded cost of implementing a strategic CRM solution that includes advanced customization, integration, data center management, reporting, and dashboards. Exhibit Seat TCO Premises-Based vs. Hosted Source: The Yankee Group, 2004 In Thousands of U.S. Dollars 1,800 1,600 1,400 1,200 1, Year Fully Loaded TCO SalesLogix Baseline TCO SalesLogix Fully Loaded TCO salesforce.com Baseline TCO salesforce.com 4 5 The Yankee Group Consulting Report is published for the sole use of Yankee Group clients. It may not be duplicated, reproduced, or transmitted in whole or in part without the express permission of the Yankee Group, 31 St. James Avenue, Boston, MA For more information, contact the Yankee Group: info@yankeegroup.com; Phone: All rights reserved. All opinions and estimates herein constitute our judgment as of this date and are subject to change without notice.

2 Table of Contents I. Introduction II. A Deep Dive into Major Components of Identifying Hidden Costs A Total Cost of Ownership Scenario III. Conclusions Enterprise Recommendations I. Introduction The cost of CRM is significant to any organization and is worthy of detailed exploration to present the most accurate analysis. On average, many midsize companies or divisions of large organizations spend $500,000 to $1 million implementing a solution to improve sales productivity, marketing effectiveness and customer retention. The cost of solution deployments varies greatly because all solutions are not created equal, and every implementation is unique. Also, each CRM deployment may vary substantially based on the following factors: Application focus: CRM software breaks into three categories sales, services, and marketing along with the primary users of the application employees, partners, and customers. There are also fundamental differences in the depth of application development and deployment. For example, there may be dramatic TCO swings based on the number of strategic development resources required for advanced integration and customization, interactive real-time dashboards, advanced data center operations, and custom reporting. Delivery method: There are two markedly different deployment options for CRM: traditional premises-based licenses and subscriptions to hosted CRM as a service. Each comes with different cost, cash flow and operational pros and cons. Technical environment: Companies must solve a number of issues, such as thin versus thick client, along with different hardware and operating systems that will affect the ongoing maintenance and upkeep of the CRM system. Another major consideration that can dramatically change TCO that is not reflected in this report is the number of instances required for global operations. Even deployments in the 200-seat range may have operations in North America, Europe and Asia- Pacific. In such a global deployment, premises-based CRM solutions would require additional hardware, database, and network components. They would also require additional IT resources to apply fixes, patches and upgrades multiple times. Multiple global instances often require synchronization or data replication, which further extends the complexity of the premises-based deployment. The TCO of a global premises-based solution would need to almost double, if not triple, the single-instance premises-based TCO listed in this report. Existing resources: The availability of existing IT support for data center operations, network infrastructure and application customization may also affect capital expenditures in the first year and beyond. Even with some existing IT resources, many companies in the survey found that external consultants and expertise were required for advanced deployments and ongoing maintenance of SalesLogix. Hidden and intangible costs: A broad variety of departments within a company incur costs related to CRM. The inability of the software to meet specific business goals may result in significant opportunity costs, which are difficult to estimate. There are also major value gaps associated with a lack of usability, low adoption, decreased employee productivity, hidden downtime from synchronization bottlenecks and poor decision-making based on historical data. Given these challenges, it is clear why companies struggle to understand the TCO of a CRM application. However, TCO is the most important analysis to understand the budget requirements and ultimately the ROI of a CRM project. 2

3 II. A Deep Dive into Major Components of Identifying Hidden Costs Our TCO breakdown reflects the total expense involved in purchasing, deploying and maintaining a SalesLogix or salesforce.com CRM solution. With budgets under tight scrutiny, many business executives are demanding a better understanding of the TCO before embarking on any CRM initiative. In Exhibit 2, the Yankee Group summarizes the gap between the TCO for a basic CRM solution and the TCO for a fully loaded solution (which includes advanced functionality and strategic initiatives that involve custom development). Based on list prices, we estimate a fully loaded premises-based system will have a TCO of $4.1 million; a hosted solution will come in at $2.2 million over 5 years. Exhibits 3 and 4 (see pages 5-8) outline the details for building a framework to analyze TCO. The following cost category analysis will help illuminate the numbers: Needs analysis and site preparation: The major differences between premises-based and hosted systems stem from the time associated with understanding the current infrastructure requirements to meet future premises-based application needs. The costs associated with strategy and business process consultation are similar for both premises-based and hosted, but can vary dramatically based on operational needs and baseline understanding of the business process. Lower TCO = Hosted Exhibit 2 TCO Breakdown Source: The Yankee Group, 2004 Total TCO Baseline TCO Licenses Other Strategic Ongoing Operational Support Implementation and Deployment Needs Analysis and Site Prep Hosted Premises-based In Millions of U.S. Dollars Software purchases and license support: Our model assumes the average per user list price license cost for a premises-based employee-facing enterprise application for a mid-sized company ranges from $800 to $2,500. While the Yankee Group uses list price, it is common to negotiate a discount based on either number of seats or years. Most TCO models only account for user licenses and a single server license; however, most premisesbased implementations also need synchronization modules, external Web access licenses and additional modules, such as sales methodology. In addition, annual support fees associated with a premises-based solution can range from 18 to 24 percent of the cost of the license. In a hosted model, subscription fees can range from $50 per user per month to $125 per user per month for an employee-facing CRM solution. For salesforce.com, these subscription fees included standard maintenance, support, upgrades, and free Web-based training. For a hosted deployment, the license subscriptions will be the major annual cost component over 5 years and will exceed the cost of premises-based licensing and maintenance fees. Lower TCO = Premises-Based Implementation and deployment costs: The cost of researching and procuring hardware for a premises-based solution varies based on the implementation requirements and the customer s existing hardware. In the Yankee Group model, we included the cost of researching and procuring three servers (an application server, synchronization server and Web server) and replacing 20 percent of the existing notebooks for a premises-based solution. Some companies may already have purchased newer hardware, but some may have to replace all of it. Although desktop computer requirements are not as stringent with a hosted solution, a reliable TCO should still account for some hardware costs for hosted users. Premises-based solutions also require a variety of application and infrastructure testing and deployment to understand the effect on other IT investments; this adds substantial time and costs to the initial rollout. Both premises-based and hosted solutions require customization and integration to meet business-process demands. 3

4 Because changes to a premises-based solution require changes to the database schema and time to resolve synchronization complexity these solutions have higher implementation and deployment costs. Lower TCO = Hosted Ongoing operational support: On average, premisesbased solutions require 1 1/2 to 4 people for ongoing maintenance and support. However, the majority of companies interviewed used a combination of 1 1/2 in-house personnel plus outside consultants. The outside consultants range from $125 per hour to $200 per hour. Although internal staff can handle general patches, performance tuning, basic UI refinement, and basic reporting, the complexity of a major upgrade (which usually comes in the third year, along with business process change management and more advanced reporting) makes it better suited for a professional systems consultant. Upgrades with a hosted solution occur behind the scenes. Over the course of 5 years, hosted users will see an average of three to four releases a year with new features and minimal additional cost. Training costs are also higher with a premises-based solution due to the less intuitive user interfaces and the more complex navigation and clicks required to execute business processes. Lower TCO = Hosted Future strategic developments: This category significantly differentiates the TCO investment for SalesLogix versus salesforce.com. The Yankee Group s TCO comparison separated a conservative baseline comparison from other strategic initiatives, which may often exceed typical customer requirements. Some examples of strategic initiatives would include building a state-of-the-art data center, advanced customization and integration, and developing more sophisticated CRM functionality (such as real-time dashboards). While these initiatives are not considered typical for this analysis, most salesforce.com customers stated that deployment of interactive dashboards and custom reporting significantly increased user adoption within their enterprises. Lower TCO = Hosted A Total Cost of Ownership Scenario The Yankee Group analyzed 40 to 300 seat implementations of SalesLogix and salesforce.com. Primarily, we interviewed customers that had deployed both a premises-based and hosted solution. In addition, the Yankee Group also interviewed some premises-based-only implementations, hosted-only implementations, and resellers/system integrators of CRM technology. Exhibit 3 (see pages 5 and 6) illustrates the major hidden TCO components of a standard premises-based CRM implementation by issue, task and estimated hours. The hours are estimates for an average implementation for direct and indirect costs and reflect the hours associated for 60 to 300 seats. To uncover the hidden costs of premises-based CRM deployments, the Yankee Group identified the majority of the tasks associated with an implementation along with an estimate of the hours required to accomplish the goal. Complex business processes can drive up the number of hours significantly. As a result, a complex 60-seat deployment could consume many hours because of customization, integration and strategic development, while a simple 300-seat implementation might take less time. 4

5 Exhibit 3 Hidden Costs for Premises-Based TCO by Issue, Task, Hours Source: The Yankee Group, 2004 Issue Task Needs Analysis and Site Prep Annual Hours (Estimate) Site Assessment and Testing Strategy and Business Process Consultation Hardware Procurement and Selection Basic Infrastructure Testing and Deployment Application Testing and Deployment Customization and Integration Ensure existing hardware and internal network supports new applications Document goals and objectives Assess business-process automation Implementation/Deployment Costs Research and procure 3 to 4 servers, and replace an estimated 20% of client computers Server installation Install CRM server Install exchange router Install integration server Install Microsoft operating environment, configure and test software: operating system, database, applications and utilities Establish synchronized directories Install and configure hardware and software firewalls and load balancers Configure, test and run diagnostics on network environment Set up and test integration, set up and test virus scanning servers Set up and test SSL access and acceleration Reconfigure network Install and configure servers, including application servers, database servers and synch servers Install and configure desktops, including the module for remote users (for the first install, all laptops need to be recalled) IT customizes business functionality using development tool to configure interface and underlying data objects Create and modify user interface Create and modify custom reports Create database schema Deploy to servers and users desktops Resolve synchronization issues Integrate with legacy systems 60 to 100 (Year 1) 125 to 200 (Year 1) 60 to 100 (Years 1 and 4) 125 to 350 (Year 1) 75 to 160 (Year 1) 200 to 400 (Year 1) 5

6 Exhibit 3 (Cont.) Hidden Costs for Premises-Based TCO by Issue, Task, Hours Source: The Yankee Group, 2004 Issue Basic Data Center Operations General Patches, Performance Tuning, Basic UI Refinement Upgrades Business Process Change Management and Customization Dedicated IT Staff Advanced Integration and Customization (Incremental) Task Ongoing Operational Support Monitoring and backup, including adding application servers to the intrusion detection system, configuring monitoring software and building tape backup facility Apply maintenance patches and upgrades to multiple machines Add, modify user accounts Troubleshoot client desktop issues for remote users Troubleshoot performance issues General maintenance of multiple servers (application servers, Web servers, synchronization servers, database servers, reporting server, wireless server) Major schema changes resulting from new release Migrate customizations (interface, reporting, DB) to new platform Roll out code to servers Hardware upgrades, performance tweaking, changes in customization to reflect business change management Reconfigure based on new business issues IT uses development tool to configure interface and underlying data objects Create or modify user interface Create or modify custom reports, modify database schema Deploy to servers and users desktops Resolve synchronization issues; write custom reports Basic reporting Ongoing end-user support Baseline TCO Other Strategic Costs Integration of critical applications, such as financials, HR, intranet, marketing, BI portal software Annual Hours (Estimate) 225 to 300 (Years 1-5) 120 to 200 (Years 1-5) 500 to 900 (Years 1-5) 250 to 400 (Years 2, 4, 5) 1 to 3 Full-Time Employees (Average, Years 1-5) 150 to 300 (Year 1) Downtime 4 hours per month, per employee 20 to 80 per Employee (Years 1-5) Interactive Real-Time Dashboards Custom Reporting Development time for creating interactive dashboards for executive decision-making Development and creation of one-off reports for a variety of line of business managers 150 to 300 (Years 1-5) 200 to 400 (Years 1-5) 6

7 Exhibit 4 (see pages 7 and 8) explores the detailed cost comparison over 5 years for a 200-seat deployment. The exhibit outlines an average SalesLogix and salesforce.com implementation based on hours or applicable dollars associated for certain tasks. For a business with simpler or more complex processes, the numbers can be adjusted based on the hours listed in Exhibit 3. The baseline model TCO is an unbiased and measured representation of interview-based information comparing SalesLogix and salesforce.com implementations. To create a fair comparison, the TCO is separated into two scenarios baseline TCO and fully loaded TCO. Because the majority of SalesLogix customers interviewed did not embark on deep integration or create interactive real-time dashboards for their employees, the Yankee Group placed these costs in the fully loaded TCO section. The costs in Exhibit 4 are derived from a blend of internal and external hourly rates along with estimates of the average hours needed to complete the task. Exhibit 4 SalesLogix vs. salesforce.com 5-Year TCO Source: The Yankee Group, 2004 Site Assessment and Testing Strategy and Business Process Consultation Year 1 Year 2 Year 3 Year 4 Year 5 Needs Analysis and Site Prep Premises- Based Hosted Premises- Based Hosted Premises- Based Hosted Premises- Based Hosted Premises- Based $14,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $28,000 $28,000 $0 $0 $0 $0 $0 $0 $0 $0 Software Purchases and License Support Web/Wireless Servers $9,995 $0 $0 $0 $0 $0 $0 $0 $0 $0 User Licenses/ $230,000 $300,000 $0 $300,000 $0 $300,000 $0 $300,000 $0 $300,000 Subscriptions Synchronization $3,995 $0 $0 $0 $0 $0 $0 $0 $0 $0 Module Other Modules: Sales Methodology, etc. $7,900 $0 $0 $0 $0 $0 $0 $0 $0 $0 External Web Access $1,250 $0 $0 $0 $0 $0 $0 $0 $0 $0 Maintenance and Tech Support $50,628 $0 $50,628 $0 $50,628 $0 $50,628 $0 $50,628 $0 Hardware Procurement and Selection Basic Infrastructure Testing and Deployment Application Testing and Deployment Basic Customization and Integration Implementation and Deployment Costs $120,280 $0 $0 $0 $0 $0 $0 $0 $15,000 $0 $52,500 $0 $0 $0 $0 $0 $0 $0 $0 $0 $24,609 $0 $0 $0 $0 $0 $0 $0 $0 $0 $63,984 $30,762 $0 $0 $0 $0 $0 $0 $0 $0 Hosted 7

8 Exhibit 4 (Cont.) SalesLogix vs. salesforce.com 5-Year TCO Source: The Yankee Group, 2004 Basic Data Center Operations General Patches, Performance Tuning, Basic UI Refinement Year 1 Year 2 Year 3 Year 4 Year 5 Ongoing Operational Support $16,335 $0 $16,335 $0 $16,320 $0 $16,320 $0 $16,320 $0 $15,600 $0 $15,600 $0 $15,600 $0 $15,600 $0 $15,600 $0 Upgrades $0 $0 $0 $0 $165,620 $0 $0 $0 $0 $0 Business Process Change Management and Customization $0 $0 $61,523 $0 $0 $0 $61,523 $0 $61,523 $0 Dedicated IT Staff $120,000 $45,000 $120,000 $45,000 $120,000 $45,000 $120,000 $45,000 $120,000 $45,000 Training $50,000 $20,000 $50,000 $20,000 $50,000 $20,000 $50,000 $20,000 $50,000 $20,000 Baseline TCO Subtotal $809,077 $423,762 $314,086 $365,000 $418,168 $365,000 $314,071 $365,000 $329,071 $365,000 Other Strategic Costs Advanced Integration $68,359 $34,180 and Customization Downtime $240,000 $60,000 $240,000 $60,000 $240,000 $60,000 $240,000 $60,000 $240,000 $60,000 Advanced Data $425,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 Center Buildout Interactive Real-Time $120,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 Dashboards Custom Reporting $0 $0 $43,750 $0 $43,750 $0 $43,750 $0 $43,750 $0 Other Strategic $853,359 $94,180 $283,750 $60,000 $283,750 $60,000 $283,750 $60,000 $283,750 $60,000 Costs Subtotal Fully Loaded TCO $1,662,436 $517,941 $597,836 $425,000 $701,918 $425,000 $597,821 $425,000 $612,821 $425,000 Notes:. (1) Licenses: Licenses are list price for an average employee-facing CRM implementation. The scope includes major components such as sales, forecasting, basic quotes, basic campaign management, case management, advanced customization and configuration, self-service ticket, Web reporting, lead capture and external access. Exhibit 4 also outlines additional add-on modules, such as one from Miller Heiman. (2) Upgrades: Third-year upgrades come at a substantial cost with SalesLogix. The complexity of a major upgrade can be anywhere from $50,000 to $200,000 depending on how much customization and integration of the application had been made to the application in the first two years. In addition, it is very difficult to make straight comparisons with a hosted solution, because hosted upgrades occur on average 3 to 4 times a year with new features and minimal cost impact. (3) Business-Process Change Management: The main reason a company chooses a premises-based solution is control over business process and integration. Having the data on site also provides a company with reassurance and meets certain regulatory requirements. However,. many salesforce.com customers have deeply customized their application for specialized business processes and have integrated data to internal systems. All customers the Yankee Group interviewed completed the customization and integration with in-house personnel. The higher costs associated with SalesLogix are due to the complexity of change management and application customization. As a result, SalesLogix customers relied heavily on outside consultants to make the necessary changes to the application. These costs are incurred in the second, fourth and fifth years. In the third year, the changes are embedded into the upgrade expense. (4) Data center buildout: Companies should understand the distinction between basic data center operations and advanced data center operations. Building an infrastructure that will provide percent uptime is a complex and costly task. It would cost millions of dollars in capital expenditures and personnel hours for a premises-based solution to match the software and hardware infrastructure of a hosted solution. Most customers cannot justify this cost and end up installing the minimal hardware and software required. The Yankee Group placed some costs in the advanced data center operations. The costs represent a subset of functionality to replicate a more advanced data center. However, this contributes to an uptime metric in the neighborhood of only 80 percent. The cost incurred from downtime as well as the man-hours spent scrambling to restore the system can be sizable. The intangible costs incurred from lost productivity of end users and poor user adoption due to frustration of poor performance are hard to calculate. (5) Custom reporting: This has also been placed in the fully loaded TCO primarily because of the extra effort required by some premises-based deployments created to meet the demands of their end users. However, the Yankee Group believes customers should consider this cost a must-have in future implementations and deployments. 8

9 III. Conclusions TCO calculations can vary broadly depending upon complexity of business processes, existing company infrastructure, and choice of application and deployment method. Our model identifies the major elements of a typical implementation and how much each element contributes to TCO. CRM is a strategic business initiative that will come at a significant cost to any organization. Even if deployed cost effectively, a CRM initiative may not deliver the projected value for business users or the organization as a whole. Companies seeking to document the cost of a solution deployment need to understand that all solutions are not created equal and all implementations are unique. Any CRM system requires substantial time and resource commitments to implement, even when using a packaged application. In addition, the system will have a dramatic ripple effect throughout the entire IT organization for business process strategy, application integration, and larger network and infrastructure decisions. In a premises-based solution, the necessary outside resources (i.e., in-demand IT personnel with a solid understanding of programming, databases and network architecture) will be expensive. Even though Web-based thin-client solutions are popular and can drive down TCO by avoiding the management costs of a thick-client, companies are still deploying offline applications for traveling salesforces. By eliminating significant set-up, maintenance and upgrade costs, hosted solutions like salesforce.com provide a deployment option with lower overall 5-year TCO than premises-based solutions. Enterprise Recommendations Implementing any CRM application is difficult; however, the good news is that applications share a number of options that are now available for evaluation. The Yankee Group does not recommend basing a CRM decision on TCO alone. We recommend the following: Choose the solution with the best 5-year TCO. The hosted model wins on that count by lowering the cost of professional services, eliminating infrastructure setup and baseline implementation costs, while drastically reducing ongoing maintenance, upgrades, and support of customizations and integrations. Although salesforce.com ranked higher than SalesLogix in this survey, some enterprise CRM solutions offer more functionality, such as verticals, deeper product configuration and order management. However, that incremental functionality also comes at a significantly higher cost and complexity to deploy. A fully loaded enterprise CRM solution ranges from $5,000 to $15,000 per user. For critical requirements such as usability, interactive dashboards and ease of reporting, go with a salesforce.com solution. These factors were the reasons many companies chose salesforce.com. Key evaluation criteria include the number of clicks necessary to access information along with the interactivity of the application. Many businesses with SalesLogix were paying outside consultants to recreate much of the reporting and dashboard functionality found in salesforce.com. There was also dissatisfaction with the application, even after spending on experts to develop custom functionality. Companies with IT resource constraints should use a hosted solution to speed time-to-market and minimize ongoing maintenance requirements. Many companies have already spent a large amount of money on a premises-based SFA solution that sales representatives do not use. Companies looking to replace such a system quickly without the worry of IT involvement should choose a hosted CRM solution. Eliminate upgrade complexity and infrastructure demands, which drive up costs for premises-based deployments. If choosing a premises-based deployment, limit customizations and complex integrations to drive down professional services costs. Unique business processes, perceived security threats and governmental constraints can push users to premises-based alternatives. Hosting provides advanced customization and integration capabilities; however, some enterprises require significant customization, specific workflow requirements and retention of information behind the enterprise firewall. 9

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