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Hosted CRM requires change in vendor sales, channel support

Hosted CRM, or CRM as a Service, is a growing market with lots of opportunities for channel partners -- as long as their vendors focus on services, not just sales.

Microsoft Dynamics CRM 4.0 and Dynamics CRM Live are the latest entries in the growing hosted customer relationship management (CRM) market -- a field that includes Inc., Oracle Corp.'s Siebel, SAP AG and NetSuite Inc. Hosted CRM can offer channel partners more service opportunities than other types of Software as a Service (SaaS), but that depends on each vendor's particular strategy, according to experts.

"There's a huge opportunity for third parties," said Narinder Singh, co-founder of Appirio Inc., a San-Francisco-based partner of "They say on-demand implements itself. For enterprises, that's just not the case."

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Even when a vendor doesn't allow many service opportunities for partners, CRM as a Service can offer other benefits. It's easier and quicker to implement than on-premise CRM software, so solution providers can perform more installations in less time.

But it remains to be seen whether they can sell hosted CRM deployments quickly enough to make up for the lost services revenue, said Darren Bibby, senior channel analyst at IDC in Framingham, Mass. "It's a tradeoff, and I don't know exactly what the answer is," he said.

Microsoft partners are divided not only on the impact of the offerings -- formerly known under the code name Titan and formally announced this week. They're divided on how to sell it.

They could sell and install Dynamics CRM 4.0 on-premise for a customer, host it themselves and charge a monthly fee for access, or set it up at a customer site and sell a contract under which Microsoft manages the service. Microsoft partners can also sell subscriptions to Dynamics CRM Live, the company's hosted version.

"We do believe that it's best for the customers to have choices," said Lance McLean, owner of Streamline Solutions LLC, a Microsoft partner in Irvine, Calif.

Historically, on-premise CRM deployments have been more profitable than selling CRM as a Service, McLean said. It takes high-level work to integrate the software with a customer's existing hardware and software, so Streamline can charge more for on-premise work.

On the other hand, the cost of hosting Microsoft's version is coming down.

The last version -- 3.0 -- allowed only one company's implementation to run on each server. Service providers had to buy a separate machine for each client -- which runs up costs in floor space, hardware, electricity, cooling and maintenance. Dynamics CRM 4.0 eliminates that limitation with a multitenant architecture that allows several implementations on one machine.

"It will allow me to be much more profitable in a hosted CRM model," McLean said. "I think we're about to see some really good success."

Offering CRM as a Service can allow service providers to add individual twists to the product, as well. They could tie Microsoft Virtual Earth in with hosted CRM to let companies match information on a customer's account with the customer's physical location. Hosted versions are easier to roll out as well, McLean said.

"CRM is risky," he said. "A lot of (on-site) CRM implementations fail."

Singh agreed that quick implementations are one of the benefits of CRM as a Service, but he said services are the biggest profit-makers for partners. Most of Appirio's staff focuses on business process development and outcomes -- not the highly technical work -- and the company can generate between $1 and $3 in services revenue for every $1 a customer spends on software licenses, he said.

"We get to work on the fun stuff, and we get the results from that fun stuff," Singh said.

Hosting other vendors' CRM

The platform lets solution providers devise new business process services and other innovations for customers, and that's the key for any vendor's hosted CRM partners to succeed, Singh added.

But not all vendors are taking that strategy. SAP's Business ByDesign is a hosted business process management offering that includes CRM, and SAP is recruiting partners that will only resell the service -- not host it or provide additional services. Still, some SAP partners have said they do see service opportunities.

The idea that Business ByDesign will have service opportunities but also be the "road to volume" for SAP, as the company has said, is "kind of paradoxical," Bibby said. "There should be some services opportunities for partners. That is the real opportunity for Business ByDesign, and I hope SAP provides partners with that."

Singh -- a former SAP employee -- predicts the vendor will change its tune within six to nine months.

"Business ByDesign was started five years ago," Singh said. "The idea that five years ago, someone said, 'We're going to build something that's cutting edge in five years' is part one of the problem."

SAP used to let partners modify its source code. It has now taken the completely opposite approach by not allowing partners to provide any Business ByDesign services, Singh said. That could create some "very challenging" situations for partners, he added.

Business ByDesign is not SAP's only CRM as a Service offering. The company this month announced its CRM 2007 product, which can be hosted or deployed on premise. Also this month, said it will reach 1 million subscribers by the end of the year and NetSuite announced its plans to raise $99 million through an initial public offering.

To help compete in the increasingly crowded hosted CRM market, Microsoft last month announced a 40% cut in fees for its hosting partners. Microsoft partners welcomed the move, but McLean said there are other issues the company must address to help partners compete. He specifically mentioned Microsoft's practice of compensating partners for the Dynamics CRM software licenses they sell but not for what they host.

"It's still a problem," he said.

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