Service, Not Servers

When your computer servers go down, so does your business. So why not toss your servers and keep your applications on the Web instead?

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Don't tell Joe Walker that lightning doesn't strike the same place twice. The headquarters of his company, Elcometer, a manufacturer of testing equipment for paints and coatings based in Rochester Hills, Michigan, was hit by lightning three consecutive years starting in 2001. In the first two cases, the resulting electrical surges knocked out the building's power and completely fried every electronic device--including the company's computer servers, which stored critical information such as inventory numbers and customer contacts. Both times, business ground to a halt for 10 days as the company's tech team scrambled to restore the systems.

In August 2003, yet another fierce electrical storm roared through southeastern Michigan. Once again, Elcometer's electricity was out for days. But this time, commerce continued without a hitch. What was different? Six months earlier, Elcometer had gotten rid of its computer servers and instead began accessing all of its sales, inventory, and accounting data online. As a result, employees were able to work from home or from terminals at a nearby Kinko's. "It was a huge difference," says Walker. "All I had to do was get my Internet connection back up and running to get back in business."

Walker is on the leading edge of one of today's most important technology trends--the transformation of software from a product to a service. While computer software has been growing faster and smarter, the industry's business model has been pretty much stuck in about 1990. Developers ship out disks and CDs encoded with their latest release or upgrade, often charging hefty licensing fees. Customers install the software on their local servers, which must be constantly maintained and upgraded to run this ever more sophisticated software--a vexing game of catch-up that usually means keeping a team of tech pros on staff. And when the server goes down so does business. 

But that process is becoming as outmoded as VHS recorders. Instead, software makers are making their tools available on the Internet on a pay-as-you-go basis for a monthly subscription fee. Known as on demand, or software as a service, this model has long been familiar to customers of companies such as NetSuite and Salesforce.com. But now nearly all software makers are offering on-demand versions, making it possible for businesses to abandon their servers and instead keep all of their data--from e-mail to e-commerce to human resources--on the Web.

In 2005, companies spent more than $4 billion on hosted software, a number that is expected to grow to more than $10 billion a year over the next two years. While those numbers represent a small portion of the $190 billion global software market, the Yankee Group, a research firm in Boston, forecasts that more than 50 percent of the software purchased by small to midsize companies in 2008 will be from software-as-a-service providers. "This is an evolution in how companies use software, especially small and midsize companies that finally have access to applications they couldn't afford before," says Sanjeev Aggarwal, a senior analyst with Yankee.

The key benefits of working with these on-demand providers are high speed and low cost. To buy and install a traditional accounting or customer-relationship-management system often means waiting months and spending hundreds of thousands of dollars. With software as a service, you can be up and running within days, or even hours, of signing a contract. Since the vendor is hosting both the application and the data, getting started can be as simple as typing in a username and password. What's more, on-demand customers generally pay monthly subscription fees, rather than large, one-time licensing fees. A Yankee Group study found that the total cost of operating an on-demand software package is less than half that for an equivalent traditional system.

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