Internet churn makes customer relationship management (CRM) a practical necessity for those companies seeking to maximize the value of a customer relationship over its lifetime. With the rapid evolution of e-commerce, customer loyalty is becoming an anachronism. With a few mouse clicks customers have discovered they can instantly go off to chase a slightly better deal, leaving their current vendor in the dust. For the vendor, the gains made using the Internet as a low-cost/high-volume sales tool can be eroded by the higher costs of increased competition for every customer dollar. No wonder then that in 1999 the global market for CRM systems grew to $3.8 billion. According to many estimates, it will balloon to more than $5 billion in 2000.

As CRM takes on the role of a mainstream business application, it shifts from being something only large companies could afford into an indispensable part of everyday business for any company, regardless of size. The simple reason behind this growth is that CRM is a revenue driver, not simply a cost-containment tool. CRM puts powerful capabilities in the hands of the sales force, and others with customer contact, to help them keep the customer satisfied.

Many larger companies have already taken on CRM, driving many of their smaller competitors to realize they need to play catch-up in order to compete globally. But many, if not most, of these companies will not be able to contend with the long implementation cycles and high capital outlays that larger companies have recently encountered implementing CRM systems.

The emergence of application service providers (ASPs) in the CRM space addresses many of the issues important to mid-market companies. As they have with other applications (e.g., ERP), ASPs can provide hardware, integration, application, implementation and training to get a company up and running at an attractive price point. For these reasons, many experts are predicting that the ASPs will become the predominant mode for delivering CRM functionality to the mid-market over the next two years. But all ASPs are not the same. Several variants appealing to different market segments have appeared, and innovation in the market suggests additional models will develop.

A Definition

Broadly speaking, an ASP provides access to business applications installed on the ASP's premises in exchange for a monthly service charge. The ASP is responsible for most or all of the infrastructure needed to deliver reliable application access, including enterprise applications, hardware platforms, operating systems, database systems, network hardware as well as the technical expertise to make it all work and live up to contracted service level agreements (SLAs). Typically, SLAs are written for multiple years and stipulate the service deliverables including a minimum level of availability, usually in excess of 99 percent.

Depending on the services they provide and their business models, ASPs can be divided into several categories:

Hosted ASPs: These companies provide access to hosted applications as their only source of revenue. These companies do not typically design or build any software of their own, but instead rely on applications sourced from supplier organizations. In addition to providing the hardware, software and networking infrastructures required to host applications, the hosted ASP company also provides analysis, systems integration, training and implementation services. This total service model enables companies to deal with a single provider for their application requirements and helps to reduce or eliminate any incremental services or support that would otherwise need to be provided by the end-user's internal IS staff or an external systems integration or consulting organization.

Supplier ASPs: The primary focus of these companies is to develop enterprise applications software. However, in addition to developing CRM business applications, these companies are also providing access to their applications on an ASP basis. By leveraging the ASP model, these suppliers are attempting to generate incremental revenue through monthly "rental" access of their applications, to adapt to new or changing market conditions or to gain access to new markets through the new ASP hosting model. There are a number of variations on this model. Lately, some supplier organizations have been teaming up with hosted ASPs to provide tighter end-to-end service integration. In another twist, some suppliers have begun providing value-added services in areas such as marketing by providing, for example, campaign design, production, analysis and data management.

Infrastructure ASPs: These companies provide the hardware, operating system, database and network platforms used for hosting ASP applications. However, they do not develop applications software (as in the supplier ASP model), and they do not provide full systems consulting, integration and application support (as in the hosted ASP model).

ASP Value Proposition and Evaluation Criteria

In the CRM market, the ASP model is attractive for several reasons, at least some of which relate to what an ASP does not provide. Many mid-market companies have long memories of project and cost overruns associated with their own ERP implementations or those of well-known companies related in the press. Many of them would do much to avoid a repetition with CRM. Then, too, the revenue- generating potential of these systems drives many executives to demand fast and reliable implementation. Here are some issues to consider when selecting your ASP.

Integration, implementation and training: Treat this project just as you would an internal system implementation by organizing a project team made up of users and IT professionals and draw on their strengths to evaluate all aspects of the potential implementation.

Regardless of where the hardware and software are housed, the people using the application still need to be trained and an implementation plan still needs to be drawn up. One of the criticisms of ERP system implementations was of scope creep and resulting cost overruns and delivery delays. Fortunately the ASP model rewards on-time and on- budget delivery in ways that other delivery models do not. Usually ASPs begin to get paid only when a system becomes operational, so ASPs seek to avoid delays and overruns as much as their clients. Nevertheless, customers need to insure that the system as delivered meets their original needs and that their people are able to make use of it. It makes good sense then for both parties to spend the time needed to develop a complete project plan.

As with any systems integrator, the ASP must be able to demonstrate considerable depth of knowledge in enterprise application integration (EAI). Some CRM vendors have already integrated their products with popular ERP systems, providing an important link between customer management and operational systems. Customers that already have ERP systems from these vendors will potentially find implementing the add-on technology more straightforward. But such pre- integration can also mean a limit to the available choices. Whatever your selection, make sure you get the functionality you need. If you plan to customize the CRM application, make sure you are comfortable with your vendor's experience and ability.

Finally, the ASP model is relatively young, and many of the best practices and skills required to effectively manage the technology are just being put into place. Also, some ASPs may not yet have the depth and experience in training required in large-scale enterprise systems, so evaluate your potential vendor with this in mind.

Support: One of the primary reasons to pursue an ASP strategy is to ensure application stability and availability. As such, the ASP must credibly guarantee 99+ percent infrastructure uptime. This requires complete data and network redundancy as well as provisions for disaster protection (e.g., fire suppression systems) and uninterruptible power supplies. The ASP must also have personnel on hand around the clock with expertise in both the applications used by the end user as well as the infrastructure upon which they are running.

Cost savings: The other main attraction of the ASP model is cost savings, which is very important for fast-growing companies with multiple demands on available capital. These savings come in two general areas: reduced up-front investment, and reduced integration and customization costs. Since all these costs are easily quantified, make sure you run the numbers, know up front what to expect in savings and compare on a net present value (NPV) or ROI basis what your savings will be over the life of the SLA contract.

Performance: No system is more expensive than the one that doesn't deliver the expected benefits, and that is especially true of one that is supposed to help you make money. The IT representative(s) on your team should verify the vendor's ability to deliver network capabilities, load balancing, cluster servers and the like. Also, the depth and breadth of an ASP is dictated by the depth and breadth of its software, hardware and networking partners. If the ASP is not able to attract best-of-breed partners in any of these categories, no amount of uptime, customer care or security will compensate.

Security: By definition, mission-critical enterprise applications contain data that is vital and highly proprietary. One of the significant drawbacks some companies will see between the ASP model and full ownership of a CRM system is that when the server is out of the building so is the data. Some managers will be reluctant to let sensitive leads data from a recent campaign or trade show, for example, go out the door. This ultimately boils down to a business decision, not one of technology, and becomes a question of trust between vendor and client. To address this issue, ASPs must provide high levels of both data and physical security. Insofar as data security, this entails firewall management, token-based authentication and encrypted VPN. Physical site security including personnel access procedures, alarm systems and more are often overlooked by first time ASP customers; but this should be an important consideration in any evaluation.

Coming Soon: Fragmentation and Consolidation

The ASP market is already becoming complex and somewhat fragmented. New ASPs are being announced on a weekly basis, with new suppliers coming from a variety of ISV, telecommunications and systems integration backgrounds. Finally, industry heavyweights, notably Microsoft, are making large investments in ASPs. These ASP suppliers have developed widely different product and service models ­ usually based on the supplier's historical expertise and on their proprietary technology interests ­ which has caused confusion in the marketplace as customers strive to sort out and assimilate the different service plans offered by potential suppliers.

As the market continues its rapid growth, it is reaching a maturity level that is attracting some of the biggest players in high tech. So far, many, if not most, of the leading CRM suppliers have announced some level of ASP service ­ often through partnerships. While some suppliers view the ASP model as a potential threat to their revenue stream and are taking a defensive approach to this new challenge, other CRM providers such as Oracle are aggressively adopting the model by providing ASP access to their applications and treating the ASP as a new channel made possible by the Internet. However, the proliferation of vendors is not sustainable over the long term, and consolidation is inevitable. Those users that do not choose to leverage ASPs today should carefully evaluate their CRM provider to ensure this will be an option in the future ­ should the customer choose to move in that direction.

Market-leading CRM vendors will continue to innovate, incorporating additional technologies in an effort to deliver whole product solutions. Assuming the incorporation is of partner-developed applications, rather than in- house developed technology, yet another level of complexity may be added to the ASP equation. All of this argues for including your corporate counsel on the project team to review all the contracts.

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