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 rollouts 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 U.S. 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."