Rise from the ashes

SINCE THE TERM ASP (application service provider) went out of style a couple years ago, a lot of HSVs (hosted software vendors) have washed up on the rocks. Some found that large enterprises didn't want to give up control over their software or take security risks with their data. Others lacked the financial strength to support a slow-build subscription revenue model.

But a phoenix seems to be rising from the ashes of this early wave of hosted software innovation. HSVs appear to be getting traction in categories as diverse as content management (Atomz), CRM (Salesforce.com, Upshot, Salesnet, RightNow), analytics (Digimine, Whitecross, Eloqua), collaboration (Webex, Placeware), and accounting and expense management (NetLedger, Intacct, Outtask, Concur). It's hard to tell just how healthy these vendors are because so few are public companies, but it's clear that the hosted software model is picking up steam.

Vertically focused vendors are also emerging, such as OpenAir (professional services), Realpage (property management), Dorado (mortgages), Instill (food service), and Demandtec (retail). In the human resources category, new entrants such as Employease are building on a longtime tradition of outsourced solutions from companies such as ADP, Paychex, and Hewitt Associates. And in security, offerings range from almost completely hosted (McAfee.com) to hybrids of hosted, packaged software and managed services (Guardent).

What's driving this rebirth? For one thing, big companies such as IBM, Oracle, and SAP are getting behind the hosted model and helping legitimize it. IBM recently announced plans to resell the hosted subscription-based services of a bevy of HSVs. Furthermore, the hosted model offers lower upfront and management costs, frequent upgrades, and a tighter feedback loop with customers.

At a time when enterprises are putting off large purchasing decisions, hosted applications may be cheap, low-risk, and simple enough to deploy that managers will give them a shot as a stopgap while they wait for budgets to loosen. "It's fast, cheap, and easy," says Laurie McCabe, an analyst at Boston-based Summit Strategies. "I think that value proposition has just struck a chord with a lot of customers."

The hosted model also fits well with the increasingly distributed nature of enterprises and the growth of extended enterprise applications (such as e-commerce and procurement). Furthermore, enterprises' disappointments with packaged software deployment costs and delays are helping them overlook the deficiencies of the emerging hosted model, such as the difficulty of customizing hosted software and integrating it behind firewall systems.

HSVs must justify their ROI constantly (typically via monthly subscription renewals), leading at least in theory to greater responsiveness to customer needs, and more incentives to make sure customers are trained and supported to get the software's full value. "It brings them closer to their customers," explains Amy Mizoras, senior analyst at Framingham, Mass.-based IDC. "They maintain daily contact. ... There's a relationship-building aspect."