Jason, it is possible for users to create their own groups in webmail, but it's not very intuitive (SM calls them categories) and somewhat awkward as you have to edit each contact.
I suggested a simple enhancement to add a Group folder pane like Gmail has. You can create a new Group just like you create a new Folder for email. Vote for it here:
http://portal.smartertools.com/community/a86530/add-category-group-pane-to-contacts.aspx