The average lifecycle for a CRM solution today is in excess of five years. Arriving at a clear understanding of the likely total cost of ownership (TCO) associated with any new CRM deployment is an important consideration in any selection process. Deployment choice influences this area considerably and companies should compare the investment and cost structures of both models thoroughly before making a decision.
On-Premise CRM will require upfront capital investment which will be written down over the lifetime of the system. On-Demand CRM, by contrast, involves fixed, periodic subscriptions over the solution lifecycle.
On-Demand, therefore, can provide several advantages to companies with limited budgets as it does not require the same upfront expenditure on software, hardware infrastructure or implementation services. When viewed beyond the near-term, however, on-demand solutions can result in higher costs when compared to their on-premise peers.
The total cost associated with the on-demand solution, however, increases at a faster rate than that of the on-premise deployment. By year three, therefore, the on-demand has overtaken the on-premise solution as the most costly, and its TCO is approximately 9 per cent higher than the on-premise solution. By year five, this gap has widened further, and the on-demand deployment is approximately 56 per cent more costly than the on-premise solution. In real-terms, this could equate to a difference of over £25,000 for a typical 50 user deployment over the lifetime of the system. It is also worth noting that as the number of users increases, this difference becomes more pronounced.
On-demand, therefore, will suit organisations that wish to benefit from lower up-front investment thresholds and prefer a predicable, fixed monthly cost. On-premise CRM, by contrast, is more likely to suit companies where a lower medium-to-long term TCO is a key requirement.
Accounting treatment
On-Demand and on-premise deployment models are treated differently for accounting purposes. An on-premise solution can be included on a company’s balance sheet as an asset and written down over a multi-year period.
On-demand subscriptions, however, are generally accounted for in the period that they fall due. Pre-payments of on-demand subscriptions are not typically classified as assets on the balance sheet.
Carrying out a like-for-like cost comparison
Cost comparisons should be carried out on a like-for-like basis as functionality and product capabilities vary significantly between providers. It is also important to understand the functional differences between editions of the same product.
It may be the case that some functionality has been jettisoned from entry-level packages in order to reach a lower cost or to provide for a more compelling upgrade path in the future when further functionality may be required.
Incremental costs
You should also be mindful of charges for incremental service additions. In the case of on-demand, these may include charges for additional storage or backing up of data. You should, therefore, understand clearly what is provided, not provided or an additional cost option, within the potential vendor’s service contact.
Finally, the fact that CRM is delivered on-demand does not preclude the need to retain IT resource for enhancements and system administration. Customisation and integration requirements, for example, can have a significant impact on the TCO for both on-demand and on-premise solutions.
These costs are generally factored into the analysis of on-premise solutions because third party resource requirements are integral to this deployment type. In the case of on-demand, however, these costs are frequently overlooked because of the “plug and play” perception surrounding this deployment type.
Recommendations
1. You should carry out a detailed analysis of all foreseeable costs over the expected lifecycle of your new solution.
2. Regardless of whether on-demand or on-premise is selected, you should factor in a realistic cost for consulting and system administration activities to be carried out on the system over the course of its lifecycle.
3. On-Demand CRM can provide several cost advantages to companies with a limited budget or a requirement for a short term CRM deployment.
4. The ability to migrate from one deployment type to another will allow you to leverage the cost-economies of both models over the long term.
