CRM revenues from hosted independent software vendors (ISVs) will overtake licensed software by 2006, according to the June 2003 report, "Worldwide CRM Spending Forecast and Analysis 2002-2006," by Aberdeen Group, an IT market research and consulting firm in Boston, Massachusetts. The hosted ISVs, also known as application service providers (ASPs), have witnessed tremendous acceptance in the marketplace and will continue to do so at a compound annual growth rate of 84 percent, notes the report.
The report states that up front purchases of perpetual CRM software licenses will decline from $3.01 billion in 2002 to only $2.48 billion in 2006. Over the same period, revenues from hosted, subscription-priced software offered by ASPs and systems integrators will soar from $246 million to $2.8 billion.
The figure below provides a more comprehensive view of the dramatic shift in the market towards the outsourcing of CRM applications to the hosted model.
A major driver in the change is the emergence of the small to mid-sized customer into the IT marketplace. "We anticipate that small-to-medium sized businesses will increase spending at a higher rate than the Fortune 1000. Part of that will be an increase in outsourcing to a subscription-based model. Switching to an ASP is likely to happen since they want to automate a specific business process," says Hugh Bishop, senior vice president of Aberdeen's emerging technology intelligence (ETI) group.
Bishop believes the open architecture of the Web services model heightens the appeal. Integrating functions becomes much less painful since companies can deploy the solution more rapidly. "A key element is standardized capabilities. The Web services model enables companies to link applications outside of the corporate data center."
Denis Pombriant, vice president and CRM research director of Aberdeen Group, adds that companies choose hosted applications because "they are easy to install and don't cost a lot."
The ASP also takes the headaches of implementing and maintaining the new technology off the plate of the IT staff, points out Stephen Lane, research vice president, IT services, at Aberdeen Group. "Do you want to go through all of the bother of doing operations, maintaining infrastructure, and managing applications? The ASP offers a solution without drama. "The value proposition of an ASP is not having to build and operate the underlying infrastructure and manage the application on an ongoing basis. Essentially, all the buyer does is rent the application and the ASP takes care of everything else."
These increased capabilities come at a comfortable price compared to installing the software in-house, says Pombriant. "ASPs, in general, promise cost reduction on at least two fronts: replacing large, up-front capital expenditures for infrastructure with one predictable, 'pay as you go' operational expense; and reducing the total cost of ownership - especially in terms of support and maintenance."
As the ASP is Web-based, users can access the software from any PC with Internet access without having to install client software. This widens the capabilities of the enterprise, notes Pombriant. "Hosting makes it easier for remote users to be networked through the Internet," he observes.
Since ASPs have already invested in the infrastructure which they now support, they need less time to deliver application services. These basic attributes lead to rapid time-to-benefit for organizations investing in the ASP model. "For some companies, it is the ultimate proof-point of the outsourcing proposition," he says.
However, ASPs rarely provide an extremely high level of customization; companies have to determine at what price a high level of customization in a particular function becomes desirable. "If you don't need a high level of customization, the ASP is a compelling argument." says Lane.
Flexibility is also built into the pricing model so buyers can scale for seasonal fluctuations. The number of subscriptions can ramp up or down as needed. Under the licensed model many firms have bought licenses they only use a few peak times during the year. Additionally, if the results are not satisfactory, companies can simply opt out of the subscription if they are on a month-to-month basis.
ASPs Popular on Many CRM Fronts
Sponsored by Quelsys in conjunction with RealMarket, the February 2003 Aberdeen Group research study, CRM Spending and Satisfaction Report, showed that there is tremendous interest in utilizing ASPs. This came following a general slowing in CRM spending in 2002. The respondents cited their concerns on CRM implementations in the figure below. Outsourcing the process to an ASP addresses many of the barriers.
The following chart shows the strong support in the various CRM areas where buyers are considering additional services.
Expensive CRM deployments that failed are accelerating the acceptance of the outsourced ASP model. The September 2003 Aberdeen Group report, Hosted CRM Popularity Continues to Grow - But How Far Will It Go?, reveals tremendous six month growth in interest concerning outsourcing CRM applications to an ASP.
Lane points out that the outsourced hosted model is very attractive, particularly for small businesses. "With a sales force of 20 people, it is hard to justify buying something like Siebel. For many of these companies it is getting something new that they didn't have in a different way."
Bishop notes that the hosted model is changing how vendors do business. "Those offering hosted solutions are forcing the more traditional providers to reconsider their options. Providers are going to have to start offering hosted solutions. We have already seen some announcements and expect to see more. They at least have to have an option in this area."
Offering minimal pain and considerable expertise, the ASP can provide new technology rapidly at an attractive price point. Not only can an organization have its cake and eat it too, it doesn't have to bake it.
Lessons from the Outsourcing Journal:
- The outsourced hosted subscription model is at a compounded annual growth rate of 84 percent and will overtake licensed software revenues by 2006.
- Outsourcing to an ASP increases specialized expertise with a quicker deployment.
- Because the ASP is Web-based, clients can access the software from anywhere.
- Outsourcing allows expanded capabilities without increasing staff or infrastructure.