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Outsourcing eyes the middle market

For mid-sized companies that want out of the driver's seat, a growing number of small vendors are gearing up to offer application rental services.

For mid-sized companies that want out of the driver's seat, a growing number of small vendors are gearing up to offer application rental services.

One of the main players in this embryonic market, USinternetworking, filed to go public last week. The Annapolis, Maryland-based company collected $62 million in its second round of financing, and is backed by such heavyweights as US West and Siebel Systems.

The company's rivals, Corio, ServiceNet, and World Technology Services, are among an emerging group of so called Application Service Providers (ASPs) partnering with business software companies to stake a claim in the growing market.

Cambridge, Massachusetts-based Forrester Research estimates the market for packaged applications rental will hit $6 billion by 2001.

To date, Santa Clara, California-based Corio and Annapolis, Maryland-based USi have become certified providers of PeopleSoft'sapplications, so their customers can access the software across the Internet.

USi last year raised more than $95 million in two rounds of financing. The company used its first $33 million round of financing to build a network of data centers, hire 250 employees, and acquire two consulting and implementation companies.

Other players are busy making their own moves. Andersen Consulting has invested in Herndon, Virginia-based ServiceNet, which is focused on managing Lotus Notes applications, while World Technology Services has partnered with J.D. Edwards to outsource the company's accounting and financial software. J.D. Edwards has also teamed up with IBM Global Services to outsource its own applications.

Through outsourcing, service companies offer alternatives to middle-market customers who often lack client-server based systems--or the cash to pay a big, up-front license fee for business software applications. Through outsourcing deals, corporate customers pay a flat monthly fee for access to hosted applications. Employees typically use a browser to access information stored at the ASP's data center.

While the market is expected to pick up this year, analysts say there may be roadblocks to growth.

"One of the key challenges the whole market faces is customer acceptance of this whole concept," said Meredith McCarty, analyst at International Data Corporation. Future market success will depend on whether customers take to the services, she said, and tout the services to other companies. Any news of access problems or security glitches could be damaging, she added.

Yet Justin Behar, analyst at G2R, said security and performance concerns are minor when compared to the overall value of outsourcing.

For companies that can't afford to buy and maintain business applications in-house, outsourcing offers a viable alternative.

"The opportunity is there to get a sales force automation system from Siebel that I normally might not be able to get otherwise," he said. "There are some concerns, but the opportunity there I think will win people over."