What's the Real Cost of a Hosted-CRM Solution?

Updated: April 30, 2009

Introduction

While general wisdom holds that hosted , or SaaS (software as a service) CRM is much less expensive than the on-premise alternative, that doesn't necessarily mean that hosted CRM is cheap. There are many factors to consider in calculating total cost of ownership and ROI (return on investment).

Analysis

Read the Fine Print

On the implementation side of the equation, the financial situation appears quite simple. "Software as a service, or hosted, has one main subscription cost per user per year," explained Andrew McGuire, who works in enterprise business development at Salesforce.com Inc .

Nevertheless, the fine print of any contract — including that of hosted-CRM agreements — should be evaluated as closely as line items with dollar figures to reveal the total cost obligation. "It's worth keeping in mind that some hosted vendors, like Salesforce.com, now require customers to pay one to two years of license fees up front," warned Mark Parker, owner of Salesnet Australia Pty Ltd . "This is a significant burden and makes it almost impossible for customers to vary the cost of a solution as user numbers vary."

But McGuire said there's no trick to the SaaS CRM business. "The only ‘hidden' cost would be any additional training or implementation costs you may need. This is usually utilized for larger implementations. It all depends on the size of your business and what types of systems you are looking to integrate the application with," he explained.

Operational Costs

Using hosted CRM incurs a number of related expenses that are also necessary to consider. "Costs of developing, hosting and supporting integration services between any existing customer-data sources you may have — and want to keep — or need to validate against are important considerations," said Patrick Greene, IT business consultant and manager at Florida's Agency for Workforce Innovation .

Greene said examples of these data sources might include another hosted business system (like Salesforce to Microsoft Dynamics CRM), internal HR databases (employees may be customers too) and legacy case-management systems.

Real Experience

As a case study in hosted CRM and its related cost and ROI, ORCO PRAGUE IT project manager Jiri Kram shared his experience with a 2005-2006 Salesforce.com rollout and subsequent switchover to Microsoft Dynamics AX.

Kram said that CRM costs first depend on company expectations. "If you need CRM only, then hosted solutions such as Salesforce.com are the winners," he said. "If you are expecting some more sophisticated functionality such as integration with your other enterprise systems such as SAP, Oracle or Microsoft Dynamics AX, a hosted solution could be more expensive and less capable to do what you need."

Kram explained this is because so many ERP providers, such as SAP , include CRM in their solutions and thus are well connected with other modules, such as accounting or product databases.

ORCO PRAGUE calculated its CRM costs using a five-year outlook. Kram explained the company's math and reasoning was based on cost per user, independent of whether a user was active. Under that assumption, according to Kram, the company would pay 90 euros per month for the 200 users needed in five years.

The licensing for ORCO PRAGUE proved to be more costly with Salesforce.com than Microsoft Dynamics AX for this situation. "Salesforce.com licenses per employee name no matter if that named user is using it or not," said Kram. "In comparison, Microsoft Dynamics AX licensing allows me to buy a pack of 100 users that is not accountable by individual username but rather a group simultaneously working, and thus is calculated by number of people actively using the system."

Kram noted that additional costs, such as integration with ORCO PRAGUE's internal system, pushed the price of Salesforce.com's hosted solution above that of an ERP alternative. The company was therefore motivated to invest in a new ERP system. "In our case, we calculated that in three years, cost per user will be higher in the hosted solution than if we buy the full ERP pack with concurrent users. In any case we would need, and it turned out we did need, some kind of integration with our other systems."

Based on this experience, Kram suggested hosted CRM is mainly beneficial for smaller companies for whom costs of a real ERP solution will never be justifiable, and for business units in large enterprises which don't need integration with the rest of the company IT infrastructure.