CRM’s Secret Weapon: Hosted Services

Oracle’s acquisition of Siebel underscores the strength of hosted CRM applications in the marketplace and will mean that other big vendors that sell CRM, specifically SAP, had better start competing in the hosted space, analysts say.

Some analysts, in fact, say that Siebel’s hosted application – what it calls on-demand CRM – was a major lure for Oracle, which sells on-premise CRM but did not have its own hosted CRM application.

Recent surveys indicate that the hosted CRM market has enjoyed tremendous growth in the past year. AMR Research found that hosted CRM revenues surged 105 percent in 2004. And the two current leaders in the hosted space – RightNow Technologies and Salesforce.com – enjoyed 97 percent and 83 percent growth rates, respectively, much higher levels of growth than on-premise CRM vendors. 

The success of hosted CRM tells the story of an industry that has increasingly catered to a new generation of technologically adept managers who are looking for cheaper ways to subscribe to CRM – without the long-term deployment and major implementation hassles that large on-premise applications sometimes present.

“You’re dealing with a new generation of workers,” says Paul Greenberg, principal of the 56 Group and author of CRM at the Speed of Light, “Gen X is moving into the role of being good spending customers. They are also moving into business leadership. They are heavily technologically savvy.”

Until this week, SAP has been the CRM industry leader, focusing primarily on on-premise applications. But SAP does not presently have a hosted CRM application and the Oracle acquisition of Siebel will probably force it to catch up in this arena. A Gartner study released Tuesday reported that SAP earned $600 million in license revenue for 2004. Siebel ranked second, garnering $478 million, while Oracle ranked a distant fourth at $122 million. The study also showed that CRM vendors experienced a two percent increase in overall license revenue. This marked a substantial increase from 2003, when the industry declined four percent in license revenue.

“The hosted model has reinvigorated a market that failed to grow over the past several years,” says Rob Bois, senior research analyst at AMR. “The hosted category has changed the whole perception of customer management with faster implementations, quicker time to value, and easy customization.”

Oracle could continue where Siebel left off with hosted-applications and, by doing so, pressure SAP and other industry leaders to follow suit. While analysts acknowledge there will always be a need for on-premise applications, even large Fortune 500 companies are turning to hosted applications for quick and inexpensive CRM solutions within specific departments. And the Web-based nature of hosted applications will allow them to add onto and integrate the applications enterprise-wide. 

“The on-demand model value is that it’s built on web services and SOA,” said Greenberg.

— C.G. Lynch