Hosted CRM: Ignore It at Your Own Peril?

As swims up market, should SAP, Oracle, and PeopleSoft embrace hosted CRM?

The success of hosted CRM specialist has inspired a fair number of imitators, most notably Siebel Systems Inc.’s much-hyped CRM on Demand service. What’s surprising, however, is that few large application vendors have followed suit—nor do they appear likely to do so.

Take enterprise applications giant SAP AG, for example. In 1997, SAP and Intel Corp. partnered to deliver “Pandesic,” an application services provider (ASP) that the two companies positioned for small- and medium-sized businesses. Pandesic was on the cutting edge of the then-emerging ASP phenomenon, and boasted integrated order-fulfillment, inventory management, warehousing, and accounting functionality.

Relentlessly unprofitable, Pandesic folded in mid-2000. In May of this year, former CEO Hasso Plattner told ComputerWorld that Pandesic was “a very expensive experiment … that couldn’t make money.” For this and other reasons, Plattner admitted that he was “a bit pessimistic about hosted software.”

Nevertheless, Plattner refused to rule out a return to the ASP marketplace, particularly in the red-hot CRM space: “We were probably too early. We'll probably revisit that—we won't exclude it from our future.” But if SAP is toying with a CRM-as-a-service strategy, it’s got a heck of a poker face. In an interview with Information Week published in April, for example, SAP America CEO Bill McDermott effectively ruled out a hosted CRM service.

SAP isn’t alone, of course. Competitors Oracle Corp. and PeopleSoft Inc. have said surprisingly little about hosted CRM. Perhaps, like SAP, both vendors dismiss CRM-as-a-service as an SMB-only play. While that may be true— claims at least 10,700 customers, with more than 161,000 paying subscribers, or about 16 subscribers per customer—it will not always be the case. That’s because has had some success swimming up market, so to speak, to snag accounts of several thousand seats. In other words, is competing in the bread-and-butter small- and medium-enterprise segments that Oracle, PeopleSoft, and SAP take for granted.

Late last month, for example, notched a global CRM deal with networking giant Cisco Systems Inc. that’s believed to be in the multi-thousand-seat range. Similarly, has also contracted with Automatic Data Processing Inc. (ADP) and Corporate Express Inc. for multi-thousand-seat deployments. In addition, the CRM-as-a-service pioneer has touted 2,000- and 1,000-seat deployments with SunTrust Banks and SunGard, respectively.

According to Ian Jacobs, a CRM analyst with consultancy Current Analysis, Oracle, PeopleSoft, and SAP should take notice of’s recent success. “ has begun selling its service in deals with thousands of seats, exactly the type of deal that traditionally only went to the large application suite vendors,” he comments. “While these deals currently only number in the handful, they should be acting as a loud wake-up call for the suite vendors.”

Consider Siebel, which, like SAP, also has a failed e-commerce skeleton in its closet—in this case named Siebel waited about as long as was possible to get into the hosted CRM market, but finally released its CRM on Demand service last October. Since then, however, the CRM giant has been on a tear, acquiring two smaller hosted-CRM players to bolster its CRM On Demand offering.

The irony, says Jacobs, is that Siebel’s November, 2003 acquisition of hosted CRM provider UpShot Corp. for $70 million demonstrates just how low the bar for access to the hosted CRM market is.

“Given the relative low cost for entry … this is a surprising stance, for several reasons,” he writes, noting that a hosted strategy is a “shoo-in” for attracting the mid-market customers that all CRM purveyors are aggressively courting. “At the same time, deals on the enterprise level have become much harder to close; again, a hosted CRM service offered as an easy method to ease into large-scale CRM would seem an obvious benefit for customers,” he writes. “Given the potential customer benefit and the limited costs of … acquiring a hosted CRM vendor, SAP, in particular, should reconsider its stance.”

More to the point, it costs established CRM vendors very little to partner with hosted CRM providers, Jacobs says. This could be an ideal approach for PeopleSoft, which is under siege from Oracle. “PeopleSoft could find business partners that would slap its logo on solid hosted technology with purpose-built connectors into the PeopleSoft CRM data model,” he writes. “This would make an ideal starting point, giving PeopleSoft the ability to offer specialized versions of CRM … while allowing it the freedom to expand its offerings at a later point.”

Oracle, for its part, recently concluded a long-term marketing arrangement with ASP NetSuite Inc. Although that deal may not have brought Oracle much in the way of revenues, it did teach the database giant a thing or two about the hosted market, says Jacobs: “[Oracle] should take the know-how it gained from its NetSuite experience and be looking at bringing similar technology in-house, focusing its efforts on technology that can cater to both mid- market and high-end customers.”

And although Siebel has made several aggressive moves in the hosted CRM space, that company could do still more, Jacobs argues.

“Siebel needs to take a more offensive stance. A good start down this road would be to build an integration platform, similar to its current Universal Application Network, that would help convince enterprise customers that a hosted service would actually be easier to integrate into their existing infrastructure than an on-premise application,” he writes.

All isn’t sweetness and light for, however. On July 21, one month after’s initial public offering (IPO), CFO Steve Cakebread warned analysts that the company’s revenues and estimates for its 2005 fiscal year would not meet consensus estimates. Last week, shareholders sued the hosted CRM pioneer, charging that it had misrepresented its financial performance prior to its IPO.

About the Author

Stephen Swoyer is a Nashville, TN-based freelance journalist who writes about technology.