Software Delivered On Demand Gaining On Conventional Types

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Call it what you will. Hosted software. On-demand software. Software as a service. Subscription-based software. Or application service provider.

No matter the name for this method of supplying software to companies, it is a trend - and it's having a huge impact on the world of business software. Global sales of hosted software will grow at a 26% annual rate, from $2.1 billion in 2002 to $8.1 billion by 2007, says Amy Mizoras Konary of International Data Corp. That, she says, is vs. a low-single-digit growth rate for the corresponding unhosted software.

"The hosted market has really picked up in the last year" she said. "We're reaching critical mass. There's a lot of word-of-mouth going on out there".

No Upfront Fee

Traditional packaged software is sold for a one-time, upfront license fee. But with the hosted model, software is leased on a monthly subscription basis, and users get the software over the Web as needed.

This approach can appeal to small and midsize companies, since they usually don't have the money or expertise to buy, run and manage complex network software systems.

Medium-sized businesses or even departments within large organizations are "the sweet spot" for hosted software, says Konary.

"They can offload technology tasks that otherwise would take up a lot of their time," she said.

Some hosted software firms recently have touted customer wins. Last month, RightNow Technologies Inc. said it had landed the industry's largest contract to date for hosted customer relationship management software - though it held the record alone for just one week.

RightNow Chief Executive Greg Gianforte says the contract has 2,000 call center agents at Convergys Corp. signed up to use his company's online software service.

The hosted model is taking off because it can slash software costs by 85%, says Gianforte. He says hosted software can be deployed in 45 days vs. nine months or more for some packaged products.

"Customers are searching for new solutions," Gianforte said.

RightNow also offers a non-hosted product, but Gianforte says 90% of clients choose the hosted version.

A week later, Salesforce.com said it, too, had bagged a contract for 2,000 CRM users. Its deal is with SunTrust Banks Inc.

Five-year-old Salesforce, which like RightNow is privately held, claims 9,000 customers and 130,000 users. It has filed to do an initial public stock offering, probably this spring.

But large software companies such as Oracle Corp., Siebel Systems Inc. and Computer Associates International Inc. are adding hosted services to their mix.

Oracle Chief Executive Larry Ellison is the majority owner of NetSuite Inc. This hosting firm partners with Oracle to sell its low-end service as the Oracle Small Business Suite.

Late last year, IBM Corp. said it would host and sell Siebel's OnDemand software. In November, Siebel bought hosting firm Upshot Corp. to jump-start this new hybrid approach.

By blending a hosted model with on-site software, Siebel can offer clients more options for how they buy and use software, says Keith Raffel, vice president of Siebel CRM OnDemand.

Whatever The Customer Wants

A company might run its core sales efforts on licensed Siebel software. But now it also can subscribe to the Siebel OnDemand service for sales agents at remote sites, says Raffel.

"We differentiate ourselves by providing whatever approach the customer wants," he said.

In just five months, Siebel has fielded 25,000 requests from firms that want to learn more about its OnDemand service. By year's end, Raffel says he expects Siebel CRM OnDemand to outpace Salesforce.com, which has been averaging 4,000 new users per month.

ACCPAC, a unit of Computer Associates, released a version of its hosted CRM service last month. The upgrade includes tighter integration with Microsoft's Outlook e-mail program. It also has a new user interface and reporting functions.

A shift toward hosted software could greatly affect the financial results of software makers, says Jason Maynard, a Merrill Lynch analyst. With the hosted model, more revenue will be recognized in small monthly chunks, rather than in large, upfront sales. This, he says, could make investors have to work harder to gauge how software companies are truly performing.

"For the investor," Maynard wrote in a report last month, "the changes to the software business model have deep consequences."

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