January 2003

By Aradhana Roy and Anurag Juneja, eGain

Customer relationship management (CRM), with an emphasis on customer service, is crucial to business sustenance, especially in today's economy in which companies are increasingly relying on business from their existing customer base. When it comes to CRM application deployments, there are primarily two approaches: in-house licensing and using software as a hosted service. The questionable ROI track record and long implementation cycles of legacy CRM applications that are available only as in-house implementations that require extensive consulting and customization services has led companies to consider hosted, Internet-architected CRM applications as cost-effective, low-risk alternatives. 

There are three main classes of hosted solution providers: ASP intermediaries that host and support software but do not develop the software, self-hosting ISVs (independent software vendors) that not only develop and license their own software, but also offer it as a hosted service using third-party hosting infrastructure, and outsourcing service providers (OSPs or outsourcers) that use in-house or hosted software to serve multiple enterprises. In addition to the technology, OSPs provide other outsourced services such as staffing and business process execution. Additionally, self-hosting ISVs fall into two categories ' hosting-only ISVs and hybrid ISVs that provide in-house implementations as well as hosted offerings. While the hosting-only ISVs rely mainly on a one-to-many application delivery business model, the latter class of ISVs base their business model on a hybrid strategy ' customized one-to-one in-house or hosted implementations, as well as the one-to-many hosted approach. Some of these hybrid ISVs tend to produce best-of-breed software that can address the functionality, customization and integration requirements of the most demanding enterprises, while at the same time incorporating hosting-centric capabilities continually in their new products. The decision on the optimal approach ' in-house implementations or the hosted option, and which hosted option to go with ' should be based on several factors. This article examines what considerations companies should take into account when evaluating these alternatives.

Hosted Or In-House?
A 1999 study by Forrester indicated that most large companies were not willing to host their applications externally. Since then, application hosting has been gaining acceptance as a low-risk, high-return model for companies of all sizes. In fact, it no longer makes sense to determine the viability of application hosting for companies based solely on their size. This is the result of an increased cost consciousness among companies across the board, and the increase in the sophistication and scalability of hosted infrastructure and offerings. Today, software as service from vendors with significant hosting experience can scale to meet the usage and security requirements of even the largest enterprises.

Then, how should a company decide whether or not it should host its CRM solution? We have defined a set of criteria to help make this decision.

Is your company an early adopter of new technology? Early adopters use innovative technologies to gain competitive advantage by technology-enabling best-in-class business processes, and doing so sooner than their competitors. While the in-house licensing option is recommended for these companies, they could consider application hosting as a viable option if they do not have high customization and integration requirements. However, when evaluating a hosted CRM solution, these companies must partner either with ASP intermediaries that specialize in hosting best-of-breed software, or with self-hosting ISVs that also develop and provide best-of-breed software. Using ASPs simply for hardware infrastructure and generic IT manpower is not enough to help companies achieve their business goal of competitive advantage and accelerated ROI from technology. 

Conservative adopters typically view technology as a means to incrementally enhance operational efficiency rather than to gain strategic competitive advantage. These companies do not necessarily seek leading-edge functionality, but rather low-cost solutions with adequate functionality and minimal risk. CRM hosting represents a viable option for these companies, at least as an interim solution, to improve operational efficiency in customer-facing processes with low up-front investment and short implementation time. It may not be difficult for conservative adopters of technology to find ASPs that host functionally adequate software.

Does your company have adequate in-house IT resources? In-house implementations are more suited to companies with a large IT infrastructure and skilled IT resources that are required for application implementation and management. The availability of extensive IT resources allows these companies to maintain applications in-house without losing focus on other areas of their core business. However, IT budget cuts, common in today's environment, may force some of these companies to consider hosting their CRM applications. 

Companies that do not have a large IT organization are better off using software as a hosted service. These companies do not have the budget to hire, train and retain a large IT staff, and to create and maintain internal help desks to support users. The hosted option allows these companies to get access to essential CRM capabilities without needing large in-house IT and help desk staff. 

Do you anticipate significant customization requirements? Companies with high customization needs should consider solutions from hybrid ISVs that are willing to provide one-to-one customized solutions as in-house or hosted deployments, although the buyers that have these requirements typically have other requirements that lean them towards the in-house option. Providers that rely heavily on a one-to-many hosted delivery model such as ASP intermediaries, OSPs and hosting-only ISVs will not typically be able to meet the high customization requirements of these buyers due to their focus on one-to-many economies of scale.

Are you in an industry sector with stringent security policies? Companies that have already made significant investments in business systems want to leverage these systems to enable customer-related business processes. CRM applications, hosted or in-house, should be able to integrate seamlessly with these systems. If you are in an industry that has stringent security policies that do not allow external applications to access systems within your firewall, you should implement your CRM application in-house. On the other hand, you should be aware that integration technologies such as Web Services, XML and HTTPS provide secure access to your systems from outside your firewall. The better hosted applications use these standards to allow companies to integrate their hosted CRM applications with in-house systems. That said, in-house deployments provide a broader array of integration options.

Can you afford to make a larger upfront investment? An in-house CRM implementation will require significant up-front investment by companies, not only in software licenses, but also in hardware, infrastructure and resources. On the other hand, ASP intermediaries and self-hosting ISVs offer a model of recurring, predictable costs without requiring a large, immediate investment. As you evaluate cost of ownership for in-house CRM deployments, you should ensure that the TCO includes costs related to software and hardware, training, network infrastructure, in-house staff (such as application developers, DBAs, security infrastructure personnel, report writers, help desk staff, etc.), hardware and software maintenance, facilities, telecom, bandwidth and implementation costs.

Also essential to this assessment is the opportunity cost of in-house implementations; i.e., the return on investment you would get if you had dedicated the upfront investment to your core business rather than the in-house CRM implementation. What if you had been able to get to market sooner with a hosted solution? What if you are in a fast-moving industry and you lose touch with your customers or lose them to the competition before you could complete an in-house implementation? According to IDC, by choosing an external provider to host their CRM applications, companies enhance their benefits through 'value acceleration,' an economic term that refers to the 'tangible value for a company to experience benefits sooner rather than later.'¹

Once you decide to host your applications externally, it is important to ensure that your solution provider contract provides ample visibility into the solution performance and ROI. It is best to sign up for a two-year contract with a clear, mutual understanding that you will perform a comprehensive review of the service and ROI at the end of 12 months for continued subscription to the service in the second year.

It Does Not Have To Be Either-Or
Another emerging trend is that companies adopt hosted solutions as a low-risk way of evaluating ROI and CRM solution capabilities before they embark on an in-house implementation. This approach allows companies to mitigate risk and experience the benefits of rapid time-to-value. ISVs that offer hosted and in-house solutions represent the best alternative for this approach since they allow seamless switching from a hosted environment to an in-house deployment.

Equally important is the fact that self-hosted ISVs that are agnostic to in-house licensing or hosted approaches ensure that both approaches work for customers. Accordingly, they factor in the requirements and environment of in-house as well as hosted customers in planning future releases and ease of upgrades. 

Most traditional ISVs in the market have little or no experience in hosting solutions. They have preferred to stay away from the hosting model or have discontinued their hosted operations either because their architectures are not suited for hosting or their financial accounting model relies heavily on rapid revenue recognition. 

Weigh All These Factors
Clearly, the decision between an in-house implementation and a hosted solution is based on multiple factors. It is important to assess your business profile, business objectives, technology strategy, risk profile, IT budgets, IT resources, opportunity costs, customization requirements and industry-sector requirements before you make the decision. Even after the decision is made, you should evaluate the value proposition offered by multiple classes of hosted solution providers. Since the evaluation criteria for the various in-house solutions in the market are reasonably well-known, in the next section we focus on the criteria against which you should evaluate hosted solutions.

Choosing The Right Hosted Solution
Once you have chosen the right class of hosted solution providers from amongst ASP intermediaries, OSPs, hosting-only ISVs and hybrid ISVs, how should you distinguish among solutions in the same class when it comes to hosting capabilities? We define some major criteria for this evaluation:

Speed. Rapid time-to-benefit is a key value proposition for hosted solution providers. Your hosted solution provider should be able to guarantee that your application is up and running quickly. 

Security. The hosting network architecture should include multilevel security that eliminates single points of failure and security risks within the network, systems and physical locations. Your hosted solution provider should house your applications and data in world-class data centers to ensure data security.

Both availability and performance. Ensure that your service provider can guarantee near-100 percent availability. Look for built-in redundancies, failover, disaster recovery and wrap-around security for round-the-clock availability. Moreover, your hosted solution provider should be able to demonstrate its ability to perform proactive monitoring and maintenance for all critical services to ensure peak performance. 

Integration. Your hosted CRM solution provider should have both the capability and experience of providing integrations with your in-house systems to allow you to leverage current investments. Look for out-of-the-box integrations that minimize cost of ownership. In addition, your solution provider should be able to offer consulting services for business planning to ensure your systems can evolve with your business, technology advancements and the marketplace.

Co-location facility. Ensure that your provider has reliable co-location facilities and that its practices are in compliance with standard industry regulations for security and risk mitigation. 

Tools and services. Look for providers that offer additional tools and services such as network consulting services, testing lab resources, remote access, custom reporting, additional failover protection measures, performance monitoring, etc.

The decision on in-house implementation versus hosted CRM applications depends on factors such as your business objectives, technology adoption profile, risk profile, initial and ongoing availability of in-house IT budgets and resources, customization requirements and industry-specific security requirements. Hosted solutions are preferred in the following scenarios:
' Your company is a conservative adopter of technology and uses technology for operational improvement and not necessarily for strategic competitive advantage.
' You want to minimize the risk of an up-front investment, while reducing implementation time.
' You do not have adequate IT resources or do not want to invest heavily in building and training in-house IT resources, and would rather focus all your resources on your core business
' You do not have stringent industry-specific security requirements that restrict access to your business data from outside your firewall.

A hybrid approach that starts with initial hosting followed by an in-house deployment is emerging as a popular option for businesses of all sizes. This allows companies to evaluate CRM application ROI in a low-risk manner and quickly reap benefits, while mitigating up-front investment risk. Once companies are convinced of the ROI, they can choose to bring the solution in-house. 

In the hosted solution space itself, there are alternatives ' solutions from ASP intermediaries, self-hosting ISVs and OSPs. Self-hosting ISVs fall into two categories: hosting-only ISVs and hybrid ISVs that offer in-house implementations as well as hosted offerings. Hybrid ISVs that have viable in-house as well as hosted business models are the best suited to meet the requirements of the complete spectrum of customers and requirements discussed in this article.
Companies should consider the decision criteria described in this article while evaluating the optimal approach to CRM application implementation and in selecting the right solution provider.

Aradhana Roy is business development manager, and Anurag Juneja, vice president of eGain Solutions and Services Group, responsible for application implementation, consulting and hosting services. eGain is a provider of software and services that enable knowledge-powered multichannel customer service. The company provides a comprehensive software suite for customer service, also available as a hosted service, that includes integrated applications for knowledge management, Web self-service, e-mail management and Web collaboration, as well as productized integrations with existing call center infrastructure and business systems. Additionally, eGain offers a comprehensive set of professional services including business consulting, implementation services, 24x7 support, education and training. 

¹ 'The Financial Returns of Software as a Service,' Amy Mizoras, The IDC Group, March 2002.