Hosted, on-demand CRM is sometimes cheaper and easier to roll out than the software that lives on your own machines. But if you think on-demand means that all you have to do is flip a switch, you're dead wrong.

READER ROI

• Why the rush to on-demand CRM
• How to figure out whether on-demand is right for you
• Why on-premise CRM remains the best choice for many

When Alex Marxer began looking at customer relationship management software, on-demand CRM wasn't even on his radar screen. As vice president of financial services for ResortCom International, a $US15 million business-process outsourcing company for vacation property developers and managers, Marxer was looking for an enterprise CRM system for sales, marketing, customer support, self-service and analytics. He needed software that was flexible enough to accommodate the changing needs of his sales and marketing staff yet would integrate well with the company's home-grown back-office applications containing all its customer contracts, invoices and financial transactions. So he had his sights set on traditional offerings from vendors like Siebel, Kana and Pivotal.

But then Marxer came across a hosted - or on-demand - CRM offering from RightNow Technologies that seemed to provide most of the functionality his business would need coupled with a particularly user-friendly interface. He was impressed with the price tag - just $US125 per user per month compared with the $US300,000 ResortCom would have to shell out for an on-site solution (not including implementation, infrastructure and support costs). So he signed a three-year contract with RightNow. "When we did the ROI calculations, it was an unbeatable value proposition," Marxer says.

Once the implementation began, however, Marxer ran into some problems. He wanted users to be able to launch RightNow applications as tabs within his back-office system. But that was impossible using RightNow's application programming interface (API) tools out of the box. RightNow sent a team to Marxer's San Diego office to work through a solution, which extended the implementation from the promised one month to three. Since ResortCom was entering its busy season (November through March), Marxer had to delay deployment until April. Since then, he has found that upgrading the RightNow software causes the integration with the back-office application to break. So he's had to hold off on upgrading to any new versions of the software - and forgo the valuable new functionality those upgrades would bring.

Marxer is one of thousands of executives who've made the decision to take a chance on the on-demand CRM model. It's a booming market - revenue from hosted CRM applications grew 105 percent last year, according to AMR Research. Small and midsize businesses and departments within larger companies have been drawn to these software-as-a-service solutions (payable on a monthly basis) because they're much cheaper than licensed on-premise software, which can cost anywhere from several hundred thousand dollars to several million up front. Salesforce.com, which created the model for hosted CRM in 1999 and developed a strong foothold in the mid-market, is now offering functionality beyond sales-force automation and trying to sell its product to much larger customers. And traditional CRM players like Siebel (now owned by Oracle) and RightNow have been forced by Salesforce.com's success to create hosted CRM solutions. Microsoft also recently announced plans to roll out an on-demand CRM product soon.

But despite the hype, the truth is that hosted solutions aren't going to take over the CRM world anytime soon. As Marxer found, implementing on-demand CRM software is not always as simple as vendors would have you believe. Customization can be problematic. Hosted CRM vendors' API tools cannot provide the degree of integration that is possible with onsite applications. Getting a hosted CRM system working shouldn't take as long as a traditional software package, but larger and more complex roll-outs can still take a year or more. And while the hosted option reduces the need for in-house technical support, upgrades can still sometimes be technically tricky, and ongoing business support of the software is critical. In addition, some companies with particularly sensitive customer data, such as those in financial services and health-care, do not want to relinquish control of their data to a hosted third party for security reasons. As a result, AMR Research predicts that by 2009, hosted CRM applications will account for only 12 percent of the total US CRM market.

"There's an expectation gap in the market," says Rob Bois, senior research analyst for AMR. Companies, he says, believe that "the on-demand model eliminates the up-front cost and effort required in implementing a CRM system; that it's just like turning on a switch. But the integration and customization requirements are not that dramatically different from traditional software when you get into more complex implementations. There's still a lot of work involved."

There are, of course, many situations in which the on-demand option will be the best choice: It should work well for companies that want to implement standard CRM processes, are able to use out-of-the-box data structures, have little or no IT support, or don't require complex or real-time integration with back-office systems. But as on-demand CRM extends further throughout the enterprise, it faces the same challenges as traditional CRM: ensuring widespread user adoption and integrating the system with other applications, says Rebecca Wetteman, vice president of Nucleus Research.

Some of the CIOs interviewed for this article chose an on-demand package, while others went with on-premise. They are candid about the pitfalls of either approach, but all agreed on one point: First you have to figure out exactly what your company wants from the CRM initiative and proceed from there. Price, they say, should be the last thing you consider.

"You have to have a strategic plan for what you want from your CRM initiative," agrees Paul Greenberg, president of The 56 Group and author of CRM at the Speed of Light. "Define your processes, figure out what your requirements are, decide who will execute on it. Then you can go through the costs of each model that actually meets your requirements and make a decision."