August 1, 2008
By Donna Fluss, president, DMG Consulting, Beth Eisenfeld, Senior consultant, DMG Consulting

The Hosted Contact Center: A Paradox No Longer

The hosted contact center infrastructure market is coming on strong. End users can now acquire feature-rich contact center solutions from traditional providers selling premise-based solutions, or they can tap into the offerings from the emerging hosting vendors. These vendors include relatively new entrants that concentrate solely on the hosted market, such as Contactual, Cosmocom, and UCN; enterprise software providers, such as Oracle; outsourcing vendors, such as West; and the better-known contact center infrastructure manufacturers such as Aspect Software, Cisco Systems, Genesys Telecommunications Laboratories, and Interactive Intelligence, all of which have actively entered this segment, strengthening its position as a viable market.

Innovative technology has been instrumental in opening up the hosted contact center market. Internet protocol (IP) and multitenancy technology have played important roles in making the hosted business model not just financially viable for vendors but economically practical for end users as well. The emergence of relatively inexpensive blade servers is likely to further speed adoption, as it reduces the need for vendors to build multitenant-capable software in order to be price-competitive.

The growing acceptance of hosted solutions to meet a variety of enterprise needs is helping to build this market. [See "Believe the Hype about Hosted Contact Centers," June 2008, for more on hosted offerings. -Ed.] The high-profile success of Salesforce.com has attracted a lot of attention and investments in different segments of the hosted market?a market now known by many terms, including on-demand and software-as-a-service (SaaS).

Benefits of Hosted Contact Center Infrastructure Solutions
Hosted contact center infrastructure offerings themselves are not new; what is new are the variety, capabilities, and sophistication of the current generation of hosted applications. By the end of 2004, a couple of these solutions had become almost as feature-rich as leading premise-based offerings; by the end of 2006, many of the leading contact center infrastructure vendors were offering hosted solutions. This changed the landscape of the contact center market, giving end users attractive new alternatives for acquiring these solutions. Our prediction is that, by the end of 2011, 30 percent to 35 percent of all new contact center seats will be hosted. There are many factors driving this trend, including:

Availability of functionally rich, competitive hosted contact center offerings
Viability of IP, which is altering the dynamics of contact centers
Increasing number of virtual contact center environments that use at-home agents
Growing need for flexible, multisite solutions that can easily and cost-effectively span the globe
Desire to minimize unnecessary financial risks for the company and its management
Ability to change providers without large penalties or write-offs
Avoidance of large capital investments and start-up costs
Need for technology-investment protection to ensure that solutions remain current without undergoing costly and time-consuming upgrades
Reductions in corporate technical resources
Low prioritization of contact center technology requirements by corporate technology executives
Desire of contact center managers to sidestep irrelevant technology standards set by IT for premises-based systems
High incentive for on-demand vendors to earn their customers? business on a monthly basis

Return on Investment
Return on investment (ROI) is a measure used by companies to determine the financial outcome of an initiative. In its broadest sense, it is calculated by subtracting the cost of an investment from the benefits. However, ROI is really an investment analysis that uses commonly accepted investment calculations, such as net present value (NPV), internal rate of return (IRR), or payback period (generally expressed in months or years). Most organizations use one or a combination of these methods to identify the financial benefits realized from investments.

The key to identifying the ROI is to focus on hard benefits that can be quantified, such as cost savings, productivity gains, increased revenue, or improved customer retention. Soft benefits represent items such as improved customer service and brand image; while very significant, it?s often difficult to measure (and hard to associate a dollar value to) these benefits. Chief financial officers are more likely to approve investments where the gains can be quantified, particularly in tough economic times. For this reason, it is recommended that hard benefits be used in business cases to obtain approval for investments. Soft benefits may be used to lend additional support to business cases, but they should not be used alone. From an ROI perspective, hosted contact center infrastructure solutions generally shorten time-to-value.

Prospects should carefully calculate their ROI prior to making an investment. Most vendors tend to express ROI in terms of a payback period in months. The average payback for hosted contact center infrastructure solutions from five leading vendors varies from two months to six months, with the most typically cited time frame being approximately two to three months. (See Figure 1.)

Total Cost of Ownership
ROI is used to measure the impact of a cash outlay; total cost of ownership (TCO) takes into account ongoing costs associated with an investment. Typically, a TCO analysis for an on-premise contact center solution takes into account costs for vendor hardware, software, applications, start-up, training, professional services, and ongoing maintenance and support (for both the software and hardware). A TCO analysis should also include internal staff (contact center and IT personnel) and other costs, such as disaster-recovery systems, real estate, travel, and software and hardware upgrades that are outside of regular maintenance and support.

With a hosted solution, many of these costs become transparent because they are incorporated into the monthly fees. Many businesses choose the hosted model because they can achieve a robust solution without the initial capital expense. They eliminate expenses for software and hardware purchase and implementation, as well as ongoing maintenance and upgrades, as the hosting vendor bears these responsibilities. Because the initial costs are less for hosted solutions than for traditional on-premise implementation projects, the avoidance of first-year costs -- accompanied by savings from reductions in internal contact center and technology support staff and the elimination of upgrade fees -- translates into a considerably shortened payback period and a lower TCO. If a hosted contact center solution is going to be used for a long period of time, however, prospects should assess the hosting lease by conducting a lease-versus-buy analysis?that will help determine if and at what point the ongoing lease payments exceed the savings realized from avoiding large upfront costs. [For more on this value proposition, see "The Hidden Cost of SaaS," May 2008. -Ed.]

Conclusion
The adoption rate for hosted contact center infrastructure has been slower than projected, but is expected to pick up in the next 24 months, particularly if the economy goes into a full recession. Hosting is an attractive approach to acquiring technology without a large capital investment. The current set of hosted solutions is compelling, while still maturing. This market has been confronting a paradox: The standalone contact center vendors were waiting for the market to pick up before making significant additional investments in their offerings, and end users were waiting for the vendors to further enhance their solutions before they invested. This dilemma is finally over: There are many good hosted contact center solutions available in the market from both infrastructure vendors and standalone providers. End users interested in acquiring a hosted solution should conduct a selection process as thoroughly as if they were purchasing the solution.

Donna Fluss (donna.fluss@dmgconsult.com) is founder and president of DMG Consulting LLC, a leading provider of contact center and analytics research, market analysis, and consulting. Beth Eisenfeld (beth.eisenfeld@dmgconsult.com) is a senior consultant at the firm.

Every month, CRM magazine covers the customer relationship management industry and beyond. To subscribe, please visit http://www.destinationcrm.com/subscribe/.