Madeline Bennett

Demand for hosted customer relationship management (CRM) software has been buoyant recently. According to research published last month by AMR Research, hosted CRM revenues grew by 60 percent last year, while overall revenues for customer management applications increased by just eight percent.

But hosted CRM still has some way to go before it overtakes traditional on-premises software. Hosted revenues generated $645m last year, up from $403m in 2004 and a huge leap from 2003 revenues of $196m. However, CRM software licences brought in $4.4bn last year, up from $4bn in 2004 and $3.8bn the previous year.

The hosted CRM vendors are certainly doing everything they can to generate and retain excitement in the sector. Hardly a week goes by without an update to an on-demand CRM package being announced. Earlier this month, for example, Salesforce.com offered an early glimpse of its Winter '07 release, promising better customisation and development capabilities; while RightNow touted deeper workflow and analytical tools to come in version 8 of its namesake product.

But to keep on the high-growth track, the hosts might need to rethink their sales pitch, as recent separate studies by analysts Quocirca and Forrester Research have cast some doubt on the argument that on-demand always means cheaper.

According to Quocirca, the cost of running hosted software over five years is rarely cheaper than an on-premises version, even when taking into account factors such as server hardware and software, staff and maintenance. Meanwhile, Forrester found that over 10 years, there was little cost difference between hosted and installed software for companies with 250 to 500 seats, while for firms with over 500 seats it generally became cheaper to use an on-premises version. For smaller organisations with under 100 seats, however, hosted tended to be the cheaper option.

But while these reports might have ruffled the feathers of Salesforce et al, I wonder whether the news is really that bad. For firms wanting a solution that is quick to roll out, does not involve a huge financial commitment, and can be tested with just a few users, hosted software remains a great option. And the possibility that the cost of running it over five or 10 years might add up to be similar to that of an installed version is unlikely to sway firms' purchasing decisions if they're keen on the advantages listed above.

What the hosts should be focusing on is ensuring against outages and data losses, factors that firms – especially larger organisations – will take into account when weighing up whether to invest in CRM and whether to go with an on-demand or installed option.

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