Outsourcing CRM to Hosted Service Providers Enables SMBs
By Bruce McCracken, Business Writer
Small to mid-sized businesses (SMBs) are implementing or evaluating CRM in droves. With limited expertise, infrastructure, and budgets, business demands can exceed internal resources. Outsourcing to a hosted solution allows SMBs to deploy CRM and accommodate these constraints successfully. In so doing, they prepare for the brighter economic times to come so as to exploit future business opportunities.
SMBs Poised for CRM and Outsourcing
Reports by the Aberdeen Group, headquartered in Boston, Massachusetts (Customer Relationship Management: Mid-Market Holds Surprises – June 2002) and AMR Research, headquartered in Boston, Massachusetts (The CRM Application Spending Report, 2002-2004 – August 2002), clearly demonstrate the ripe SMB CRM market as illustrated below.
Figure 1: What is your firm's involvement, if any, with the following CRM applications?
The solution to implementing CRM for many SMBs is outsourcing to an application service provider (ASP). The figures below from the Aberdeen Group demonstrate not only the growth of the ASP model, but that CRM is the most popular category for the outsourcing answer.
Projected ASP Spending in CRM — 2001 – 2005
| Year | 2001 | 2002 | 2003 | 2004 | 2005 |
|---|---|---|---|---|---|
| Total Projected Spending (millions) | $60.60 | $118.99 | $208.00 | $393.90 | $724.50 |
| Source: Aberdeen Group, July 2001. | |||||
ASP Market Segment Year-to-Year Growth Rates — 2001 – 2005
| ASP Segments | 2002* | 2003 | 2004 | 2005 | |
|---|---|---|---|---|---|
| ERP | 52.8% | 46% | 58.6% | 60.7% | |
| Collaboration | 28.3% | 59% | 57.5% | 121.2% | |
| HR | 50.9% | 46.1% | 57.5% | 61.2% | |
| Education and Training | 49.8% | 46.6% | 56% | 60.1% | |
| CRM | 96.3% | 74.8% | 89.4% | 83.9% | |
| e-Commerce Applications | 54.7% | 55% | 61% | 66.8% | |
| Financial and Accounting | 55.5% | 47.3% | 59.9% | 64.2% | |
| Communications | 46.4% | 35.1% | 46% | 35.3% | |
| Growth rates start with 2002 because 2001 is the first year of the period analysed. | |||||
| Source: Aberdeen Group, July 2002. | |||||
From No Go to Let's Go
CRM developed in the early nineties. As with many enterprise tools, mainframe applications were developed followed by the client/server model. The client/server model is now being supplanted by Web-based architecture along with the rise of the ASPs.
Cost effective implementation through ASPs was spearheaded by larger enterprises according to Bob Anderson, research director of Gartner, headquartered in Stamford, CT. “Large enterprises, particularly at the division level, adopted the ASP model beginning a few years ago. They were using the ASP model as a tactical way to not have capital outlays.”
Leaner times combined with the well-publicized CRM deployment failures to require offerings on the terms of the SMBs according to Anderson. “In the past there were more solutions then there was demand coming from the mainstream market, the SMBs. There was immaturity relative to the technology itself. There was the inability to customize, as it was a plain vanilla model. If you want it, you have to take it the way we give it to you.”
Vendors have realized the folly of dictating products that fail to address the business needs of the SMBs, according to Joanie Rufo, research director of AMR Research. “It is an environment where companies need to control costs and the pipeline. Vendors have learned that the largest market inhibitor in deployment is user options. An important role that a hosted solution can play is in user adoption. From about $65 per user, you can learn some key lessons without writing a seven-figure check.”
Denis Pombriant, vice president and managing director CRM of the Aberdeen Group, agrees. “The prime motivator is cost. Anything that vendors can do to make their product less expensive to implement and maintain is going to help in the marketplace. Especially in the mid-market, resources are traditionally less available with greater price sensitivity, not only in software costs but the total cost of ownership.”
Hugh Bishop, senior vice president of the Aberdeen Group points out that, “In this current environment, suppliers in this market are starting to look at their pricing strategy and product mix to make their solutions more available to the mid-market. The smaller companies are using this as a catch up, adding in capabilities that they could not get in 1998-1999.”
The Logic of Outsourcing CRM
A major problem for the SMB with limited resources is that there is often too much demand put on the internal IT staff to take on a new endeavor, particularly when the initiative is outside of their expertise. CRM is often ramped up by IT for sales and marketing. The IT staff often does not understand business and the sales and marketing people frequently do not understand technology. The result can be like a cross between Halloween and Thanksgiving; IT gets tricks and indigestion while sales and marketing get goblins and a turkey.
Many outsource providers specialize with expertise in all facets of their niche as managed service providers (MSPs). Anderson explains the leverage that the SMB can gain. “Whoever provides the application can also provide strategic advice relative to your industry with a business process view combined with the ability to enhance that process and integrate the environment.”
Delegating to the outsource provider is a way to be all things to all people in meeting business objectives with reduced overhead. Most SMBs simply do not have the means to internally do everything required. Anderson proposes that, “We have grown lean and mean and that is not going to change when the economy picks up. The business practices that have been crafted in IT during the recession are going to remain. CIOs are going to have to make hard decisions on how to deploy scarce resources and determine what their core competencies are. The order of the day is to triage. There are important aspects of operations that the business does not need to own and operate.”
Bishop adds, “There is a classic tug of war between trying to maintain quality and trying to contain costs. If it is a non-core process, do you really want to do that with internal resources versus have an expert perform that to cut your costs? You dramatically decrease your fixed costs by moving to a variable cost model that can be rapidly modified to reflect changing business conditions.”
Pombriant submits that, “There is definitely a segment of the market for which the hosted model is ideal. The hosted model has shown that you dont have to buy and maintain your own hardware, networks and infrastructure to have good, solid, reliable CRM. The overall cost is significantly lower. For a growing segment of the marketplace, that is a good solution.”
Getting Ready to Rumble
While the economy is sluggish today, SMBs need to prepare for the time when the green flag drops, according to Anderson. “The rules have changed. The core competency may not be in the doing but in the arranging. The forces felt today will only multiply when the economy improves. The ability to keep up business as the economy improves will force the SMBs to do what they do best. They are not going to be able to do it all on their own.”
Lessons Learned:
- Outsourcing enables SMBs to do more with less.
- Outsourcing frees enterprises to focus on core competencies.
- Outsourcing positions businesses to succeed in the future.
Bruce McCracken is a business writer with specialization in outsourcing. His coverage areas are primarily in IT, eCommerce, CRM, HR, and supply chain/distribution with focus on small to mid-sized companies. His work, useful links, and commentaries with guests may be seen at www.brucemccracken.com. He may be emailed at [email protected].
