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Companies Look To Rent, Rather Than Buy, CRM Apps

The Aberdeen Group predicts that CRM licensing revenue will decline over the next few years, but that revenue from subscriptions will grow markedly.

A major shift is under way in how companies are using software for managing business tasks associated with sales and customer service, a market-research firm said Thursday.

The market for customer-relationship management software is expected to reach $17.7 billion by 2006, growing at a tepid average annual rate of 6.7%, the Aberdeen Group said. The bigger trend, however, is customers' shift from licensing the software to leasing the applications over the Internet.

Aberdeen predicts that license revenue will decline at an average annual rate of 4.8% by 2006--while revenue from subscriptions will jump to $2.8 billion.

Several factors are driving the market shift. First, CRM vendors have been aggressively targeting small and midsize businesses, which prefer a subscription model because it avoids the costs of deployment, maintenance, and upgrades.

"Smaller and midmarket companies are more amenable to having something that they can pay for over time," Aberdeen analyst Hugh Bishop said. "It certainly helps with cash flow to have a smaller payment on a quarterly or monthly basis."

Software suppliers are amenable to the arrangement because a subscription business is more stable in terms of revenue than one based on licenses. License revenue is more difficult to predict, because software sales can be seasonal and affected by broader economic conditions. In addition, many deals tend to close at the end of the quarter.

"When times are great, it allows you to ramp up revenue quickly, but in periods of slower growth your revenues tend to swing up and down widely," Bishop said.

Another reason customers are looking to outsource CRM capabilities is to limit risks. Many CRM customers are still smarting over large deployments during the dot-com years that brought disappointing results. A recent survey by Merrill Lynch & Co. found that only 45% of customers were fully satisfied with their purchase of CRM software.

Customer dissatisfaction has caused many buyers to carefully consider all CRM purchases and look for quantifiable return on investment. A subscription model enables them to make a relatively small commitment and to increase use as the applications prove their value. "I can always back out with limited damage to my finances," Bishop said of subscription contracts.

One part of the CRM market not expected to change much is U.S. dominance. In 2002, the United States accounted for $7.14 billion, or 52.2% of the overall market. By 2006, its share is expected to be 51.9%.

CRM software has not been adopted as aggressively in Europe, Asia, and Japan because of slower economic growth, which means companies have less money to spend. In addition, European privacy laws are tougher than in those in the United States, making it more difficult for a company with offices in different countries to move customer data across borders.

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