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A Disruptive Technology

According to analyst firm IDC, the CRM market is expected to grow around 9 percent per year, from $7.2 billion in 2003 to $11 billion by 2008. But 76 percent of that growth will come from the on-demand market--hosted or Application Service Provider (ASP) solutions--which IDC says will grow from $700 million to $3.6 billion in the same time period.

This new way of delivering CRM functionality is a "disruptive technology" as defined by Harvard Business School professor Clayton Christensen, author of The Innovator's Dilemma. Disruption starts when a new technology gains a foothold in the low-end of a market, then improves rapidly and attacks higher margin segments with a better value proposition and lower cost model than the incumbents. Christensen says Amazon, Dell, Southwest Airlines and Schwab are examples of industry disrupters.

The adoption of on-demand CRM is a great example of Christensen's theory at work. Major growth drivers include:

  • Ubiquitous Internet access. According to Computer Industry Almanac, Netizens totaled 934 million in 2004 and will grow another 45 percent by 2007. Broadband access is proliferating, with penetration rates reaching 50 percent or more in developed countries, and wireless access is growing by leaps and bounds as well. Amazon, eBay and AOL have trained the public that it's safe to do business and communicate online.
  • Rapid improvement in application functionality. Online CRM systems are evolving from standalone contact managers to full fledged CRM applications and in many cases, out performing their decades-old client/server predecessors.
  • Backlash against software licensing model. Let's face it, software vendors don't have the best reputation. Their business models are based on selling licenses and locking in customers. Unfortunately, there have been far too many sell-it-and-run vendors. For instance, Oracle is known as a drive-by sales organization. On-demand CRM makes vendors more accountable for keeping customers happy after the sale. It's in their own self-interest, because easy on also means easier off.
  • Improved integration and security. XML-based web services have made integration easier (although further improvement must continue to be made). The market recognizes and requests Web services to integrate on-premise and/or hosted software systems inside or outside the firewall. As for security, I could argue that for most small to medium-size businesses, their data is far more secure at a hosted CRM provider. Have you backed up lately? Could you recover from a fire or natural disaster? In any case, the fear of having customer data somewhere else seems to have subsided.
  • Reduced up-front cost and risk. Clearly on-demand CRM solutions are popular because you can turn them on with a modest investment, and the perception, at least, is that you're not locked in quite the same way as you would be with a software license. I think the economic doldrums of 2000 to 2003 was the perfect environment for on-demand vendors, because companies were more likely to accept "good enough" if they could save some money, get started right away and have an easier out if the solution didn't work.

Salesforce.com's business plan believes that disparate, stand-alone CRM applications will be replaced by integrated, single-vendor applications. Company management further believe that product consolidation will be followed by vendor consolidation.


Online CRM Industry Growth
Research firm IDC estimates the U.S. market for Web-based and Web-services applications--of which hosted applications vendors make up a significant part--will grow by 41% annually, reaching nearly $3.7 billion in 2008, up from $665.9 million last year . According to Karen Smith, Research Director of CRM, at market research firm Aberdeen Group, there are about six million companies needing CRM in the combined SMB and mid-market segments. Although hosted business applications are a relatively new concept, the value proposition is compelling, and there is unusually strong consensus among the CRM industry analysts regarding the near-term adoption and growth rate. Major analysts research provides the following endorsements:

  • "Outsourcing is the major trend in both ERP and CRM segments. Some 75% of the SME companies will outsource at least part of their ERP/CRM systems by 2003”. Source: Meta Group
  • “50 percent of midsize enterprises will host some portion of their applications and 40 percent of large enterprises will host business applications with ASP’s by 2003”. Source: Gartner Group
  • “Application Hosting gets 22% of all applications by 2003.” Source: Forrester Research
  • The sharpest increase in CRM deployments will occur in companies with revenues ranging from $500 million to $1 billion according to Gartner Dataquest (April 2004).




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