The next version of Microsoft's customer-relationship-management application will make greater use of its Web services-oriented architecture in an effort to give customers more flexibility, says Dave Batt, senior director of Microsoft CRM. A services-oriented architecture, or SOA, is a system for linking resources, such as data or code, on demand over a network. Microsoft CRM 2005 will be released to manufacturing in March, with general availability to follow later in the year.

The move to make better use of the application's services architecture will enable Microsoft CRM to emulate the way customers do business more accurately, Batt says. Currently, Microsoft CRM customers essentially have to map their business processes to the way the software works, but expanded Web-services capabilities in the next release will help to reverse that equation, making the application more adaptive to existing workflows, Batt says. "Without an SOA, customers are probably compromising their business processes," he says.

Microsoft CRM 2005 will give customers the ability to define objects not typically associated with a CRM system--such as data from a bank account that may be important to customer-service reps at a mortgage company--and make them part of the application's core Web-services layer. That means customers will be able to modify their CRM app to match their business needs without having to do custom development work, saving time and money. One customer, a mortgage-services firm, built an application using Web services on top of its existing Microsoft CRM deployment, Batt says, so it could make calls for loan rates and other financial data needed in customer interactions.

The expanded object-definition capabilities in Microsoft CRM 2005 will simplify that kind of customization, as will an expanded metadata dictionary. Further, the enhanced metadata capabilities are expected to ease the move to future versions of the application because less information will have to be tweaked or re-entered to facilitate upgrades, Batt says.

Microsoft CRM was built with small and medium-sized businesses in mind, and more than 3,000 of them have become customers since the product was launched two years ago. But the product is steadily being pulled up market into divisions and business units within large companies, Batt says.

The reason? Microsoft CRM looks and feels a lot like Microsoft Outlook, which is popular among salespeople. It also hooks easily into Outlook's contact-management features, as well as other Office products where customer information is often stored at the business-unit level.

Still, the product has limitations for wider-scale use. "We don't have the end-all product for the up market," Batt says. "We're optimized for hundreds of users, not tens of thousands."

In contrast to on-demand CRM vendor Salesforce.com Inc., which has built a base of more than 13,000 customers by promoting software as a service, Microsoft reports that fewer than 1% of its customers opt for an on-demand model. (A hosted version of Microsoft CRM is available through dozens of the company's channel partners.)

Most Microsoft CRM customers have determined that when mapped over three years, the costs of on-demand CRM are greater than those of an on-premises application, Batt says. And with more Web-services capabilities underlying its next CRM release, Microsoft is attempting to offer much of the application-tweaking flexibility that has drawn companies to on-demand offerings.

But Denis Pombriant, an analyst at Beagle Research Group, is skeptical of that claim. There are many ways to design an SOA, he says, and customers won't know whether the changes incorporated in the pending release are helpful until they get to try the product.

Pombriant also believes that while it's easy to establish a point at which the cost of an on-demand app exceeds that of an on-premises one, eventually the on-premises app requires new hardware. "The jury's still out as to whether you can ever make an on-premise solution cheaper," he says. "I think we'll continue to see this market evolve in the direction of hosting."