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This was the big idea, circa 1999: Corporations would rent their enterprise software from Application Service Providers—either traditional vendors or purpose-built companies—which would charge customers based on their usage of remotely hosted and seamlessly integrated suites of products. The reality, however, has been steady but unspectacular growth for hosted enterprise software, as cautious CIOs continue to work through concerns about underperforming applications and financially shaky service providers, along with larger cultural issues such as the wisdom of parking one's critical data outside of one's immediate control.

"There were all kinds of lofty predictions for the market, but the optimistic feeling didn't take into account the barriers to adoption," says Amy Konary, an analyst with IDC who has followed software-as-a-service for several years. But those barriers have been steadily eroding, and the growth curve is getting steeper. U.S. companies spent $2.3 billion on hosted software in 2003, according to IDC, a 35 percent jump from the previous year. "It's making some waves, and a lot of people are paying attention today," says Konary.

Some of the previous obstacles to CIO acceptance have been overcome, such as performance issues arising when software written for client-server environments was used on the Web. Now more applications are designed with Web delivery in mind, and that trend should continue; as many as 60 independent software vendors signed up in 2004 for an IBM program that helps make their products work better in a hosted context.

Oracle On Demand has been Oracle's fastest-growing business segment for several quarters in a row, Oracle's Rottler maintains. "We are seeing significant demand across our entire customer spectrum," he says, including the middle market, where customers tend to purchase highly standardized, utility-style services for Oracle applications, as well as larger, global enterprises. JDSU remains one of On Demand's flagship customers, even in its atrophied state. "We have maintained a significant level of business with them as their business has changed," Rottler says.

Still, only about 30 percent of IT managers surveyed by IDC are using some sort of software-as-a-service. Among the leading enterprise customers for software services are users of products from Computer Sciences Corp., which are specifically designed for such industries as financial services, says Konary. Another key player is Salesforce.com Inc., the upstart vendor of customer-relationship-management services on the Web, which has started to gain favor within divisions and regional units of large companies.

Even so, the market is not developing quite along the revolutionary lines predicted a few years ago. Most companies of any size, including JDSU, prefer to own their software licenses rather than rent them. "This is still not the pay-by-the-drink model," says Konary. That's true for software hosted by vendors such as Oracle and SAP, and by third parties such as Usinternetworking Inc. and Corio Inc. Salesforce.com also charges a flat rate for its services.

CIOs still have questions about customization and integration in complex enterprise environments, says Konary, often viewing their particular combination of packaged and legacy systems as too complex for anyone else to manage. The question of security still bothers some companies, too. How real are those issues today? "They are real until you sit down and look at what's new out there in terms of security and software maturity," she says.

This article was originally published on 01-05-2005
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