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Small firms balk at software hosting services

Findings from a forthcoming Forrester Research report contradict earlier analyst assumptions that smaller companies would be the early adopters of this new software delivery model.

The hosted applications market may be in its infancy, but a new survey has turned up what is sure to be surprising about which companies are renting software.

According to a forthcoming survey by Forrester Research, 29 percent of large businesses are hosting applications from an application service providers, or ASP, a new kind of company that provides hosted software.

The report flies in the face of earlier assumptions by analysts that smaller companies would be the early adopters of this new software delivery model-through which an application service provider (ASP) hosts software remotely for a customer, who accesses the application via a browser or leased line.

Everyone from hardware and software makers to telecommunications companies are jumping into the new market. In it, customers pay outside providers to run everything from complicated enterprise software installations to more common desktop applications--often elements that are expensive and difficult to maintain.

However, the new Forrester survey shows that most small to medium-sized companies are taking a "wait and see" approach toward the new ASP model. Economic realities are playing a part, according to Forrester analyst Stacie McCullough.

"Small companies just can't pay for the implementation of the services yet," she said. McCullough said hosting companies and software makers are "still trying to figure out the right model" to meet the needs of a smaller business. The problem, she said, is that ASPs haven't tailored their offerings to the needs of smaller businesses and are offering the same applications they have always offered at the same price--except that the cost is spread out over a long-term contract, similar to an auto leasing arrangement.

The market for software rental is expected to explode. The ASP market, which now comprises just 2 percent of all software application sales, is expected to grow to $11 billion by 2003. Of all the companies Forrester surveyed--large and small--57 percent said they would consider hosting software through an ASP.

Some of the early movers in the ASP market have been business management software makers such as PeopleSoft, Oracle and SAP--all eager to sell their applications to smaller corporations as the market for their software among larger businesses weakens, said Meredith Whalen, an analyst with International Data Corp. While Oracle is hosting its own software, SAP has partnered with systems integrator EDS and PeopleSoft is partnering with ASPs Corio and USinternetworking.

"They saw it as a way to repackage their existing products to sell to small and medium-sized businesses," Whalen said.

Despite the rush by some software makers to provide rental options, many offerings have met a tepid welcome by smaller firms seeking a better fit for their needs--including more flexible leasing arrangements, scaled down applications and a broader array of offerings from their ASP.

"Companies should be able to rent for a limited time period then stop when they're done," said McCullough. "The whole point is not to have what you have in house and to get access to applications you otherwise wouldn't have access to."