In-Depth

CRM: Beg, Borrow, or Lease

Non-traditional acquisition methods will increasingly drive CRM adoption

• By Stephen Swoyer
• 07/09/2003

Research firm Aberdeen Group isn’t exactly going out on a limb when it projects that the worldwide market for customer relationship management (CRM) software will recover in the next four years.

What’s unusual is that Aberdeen believes that CRM recovery will be driven not by conventional IT spending—i.e., companies acquire CRM software licenses on a perpetual basis and deploy the software internally—but by a rise in the number of organizations opting for non-traditional delivery methods such as software leasing, subscription software, or utility computing.

According to Hugh Bishop, senior VP with Aberdeen’s emerging technology intelligence group, the CRM market declined by 1.4 percent in 2002. Although CRM, like most other IT technologies, was impacted by the protracted downturn in IT spending, Bishop cites another factor: A rapid decline in application license sales.

Over the next three years, Aberdeen says, total worldwide CRM application license sales (of the perpetual license variety) will continue to decline, plunging to $2.48 billion, down from $3.01 billion in 2002—a drop of 17.8 percent. At the same time, the research firm forecasts that annual subscription revenues from CRM will increase by more than 1000 percent, from $246 million to $2.8 billion. At that point, subscription-based CRM revenues will have eclipsed revenues derived from perpetual software licenses.

During the same period, Aberdeen projects that total worldwide spending on CRM will increase from $13.7 billion in 2002 to $17.7 billion by 2006.

According to Bishop, the growth of non-traditional CRM acquisition methods will help to drive CRM into the small- and medium-sized business (SMB) market. One reason that subscription-based CRM will be popular among SMBs in particular, he writes, is that it negates the initial acquisition cost of the CRM software itself. “No longer required to come up with the cash for a large, up-front license fee, smaller organizations will increase CRM spending at a much greater rate than Fortune 1000-size firms,” he speculates.

Not surprisingly, Bishop notes the SMB uptick will also grow subscription-based CRM revenues. Because of this, he argues, “software and service suppliers that master subscription software sales to the SMB (small to medium business) market will dominate the CRM industry. Those that do not will be relegated to second-tier status.”

CRM Market Dynamics

In 2002, Aberdeen says, the U.S. accounted for more than half (52 percent) of worldwide CRM revenues. The research firm projects that this share will drop slightly over the next three years, but that U.S. customers will continue to spend considerably more than any other country on CRM.

In the U.S. and elsewhere, spending on CRM services continues to outpace hardware and software spending. In 2002, organizations spent almost $8.5 billion on CRM services; by 2006, Aberdeen projects, services-related revenue will increase to nearly $11 billion. Over the same period, the firm says, software-related CRM revenues will increase dramatically, from $3.26 billion in 2002 to $5.28 billion in 2006. Hardware spending, paradoxically, is expected to decline, from $1.96 billion in 2002 to $1.44 billion in 2006.

In 2002, Aberdeen says that three vertical markets accounted for nearly 58 percent of CRM spending in the U.S.: Manufacturing, financial services, and retail. By 2006, the research firm says, all three verticals will still lead the U.S. market, with their respective positions essentially unchanged.

Aberdeen’s recent “Worldwide CRM Spending: 2002-2006” report analyzes CRM spend in terms of seven categories: sales automation, marketing automation, customer service automation, call/contact center management, field service management, partner relationship management, and internal help desk.