The on-demand CRM model has enjoyed a good year, bringing double digit growth rates for vendors and maintaining its status as the poster-child for alternative delivery models in CRM. It has gained accelerated adoption across enterprises of various sizes in 2008 and reshaped customer perceptions, dispelling some myths regarding the limitations of on-demand solutions.
The persistent interests of larger vendors, such as SAP, Oracle, and Microsoft, in this model have also helped assure customers of the model's validity. However, not all stakeholders have laughed their way to the bank — many on-demand vendors, leading ones included, have faced unique competitive pressures and are still on the road to profitability in this high-growth market.
The on-demand CRM model witnessed accelerated adoption in 2008, helping some vendors record solid revenue growth rates. On average, on-demand CRM vendors have been growing revenue at rates higher than on-premise CRM vendors for the past few years, and 2008 has been no exception. The on-demand CRM market (estimated at about $1.7bn in 2008 in subscription revenue alone) is expected to experience a high compound annual growth rate (CAGR) of almost 18% during 2008–2013, to reach $3.8bn in 2013, estimates Datamonitor in its latest report, 'On-demand CRM: From Top-lines to Bottom-lines'. Vendors who currently offer on-demand solutions should capitalise on this high-growth period to expand their customer base.
While the mid-segment has generally been the pioneer in adopting on-demand solutions, large enterprises are also warming to on-demand. The maturity of vendor offerings and the possibility of extending the benefits of the on-demand model to a large number of users are helping to reshape customer perception and dispel myths regarding the limitations of on-demand solutions.
Profits still not materialising
Although on-demand CRM vendors are reporting above-average revenue growth rates, the benefits are clearly not trickling down to their bottom lines yet. Very few vendors other than Salesforce.com have reported net profits, due mainly to the intrinsic expenses needed to establish and maintain an on-demand setup. However, such expenses need to be seen in the light of the relative nascence of this model compared to the more entrenched on-premise models. To challenge other models and yet provide customer delight, it will be important for on-demand vendors to spend more on customer acquisition and datacenters in the formative years.
One of the key expenses that on-demand vendors are incurring relates to selling and marketing (S&M) costs. Given the fact that major vendors in this market and the model itself are both relatively new, vendors are spending unusually large portions of their revenue in marketing efforts, sometimes exceeding 50% of their sales. While such high S&M costs could be difficult to sustain, marketing spend could be reduced over the longer term, once the on-demand model gains more credence and as the principal on-demand CRM vendors boost their mindshare among the enterprises. However, in the near-term, vendors are unlikely to reduce S&M spends by a substantial amount. Another key area for on-demand vendors to watch is asset utilisation. Datamonitor believes some on-demand vendors could utilise their existing datacenters more efficiently and serve more customers with fewer resources after their expansion phase.
Integration and customisation are the new battlefields
The evolution of on-demand CRM has brought many of the traditional problems that challenge on-premise vendors to the surface. As on-demand offerings are developing from horizontal departmental point-solutions into enterprise-wide multi-faceted systems, the key technological focus for vendors needs to be integration, interoperability and customisation. Datamonitor believes integration technologies currently look promising, but end users would do well to stress-test on-demand integration functionalities.
Vendors are currently offering a range of SOA-based integration services and applications to satisfy end-user needs. Emerging on-demand development platforms, sometimes referred to as platform as a service offerings, such as Salesforce.com's Force.com and Netsuite's NS-BOS are creating partner ecosystems, while application exchange communities are also adding value. End users and partners will increasingly find value in using these to access, exchange, develop, and sell customised solutions.
While easy delivery over the web will continue to be the cornerstone of all go-to-market strategies, the on-demand model will face increasingly complex end-user scenarios. To deliver successfully in these situations, vendors will need to form extensive partnerships that expand sales organisation, increase industry-centric customisation and foster integration efforts.
CRM end-user organisations need to be educated on the benefits of the model
The on-demand model has provided a viable alternative for customers looking beyond on-premise CRM. Apart from the technological benefits, vendors should also communicate the financial benefits of the model to decision makers, in order to gain higher adoption. A large number of soft benefits also exist for end users, and vendors would do well to present an holistic message to increase the perceived value of their solutions.
One of the key considerations around the on-demand model is its sizeable impact on company financials, and vendors should target their communication more at the finance department. All purchase decisions ultimately pass through the office of the CFO, which primarily assesses the impact of the purchase on the company's financial position. The on-demand model presents some unique considerations for the finance team in organisations. Targeted information dissemination on the financial benefits of the on-demand model will reduce the due diligence effort for the internal finance team, resulting in quicker approvals and shorter sales cycles. Over the longer term, vendors would also benefit from nurturing the relationships thus developed with the finance organisation to cross-sell complementary offerings, such as customer analytics and performance management.
In the end, the choice to stay on-premise or go on-demand ultimately rests with the end user. However, the on-demand model now provides a viable alternative for customers looking beyond the traditional delivery models. Vendors should be active in presenting an holistic message to end users, communicating the major benefits of this model. In Datamonitor's view, a combination of the positives from financial benefits, collaborative user interfaces, enhanced remote access, and reduced security concerns will make a compelling argument.
Surya Mukherjee is senior analyst – technology, at Datamonitor