Dec. 13, 2005--Small businesses are spending more for the latest business applications as they strive to cut costs and build a customer base, but many still leave their systems vulnerable to threats, according to a new report.

Analysts at Boston-based Yankee Group surveyed 700 small and midsize businesses, and found that spending on applications and services has surpassed 2004 levels, as companies advertise online and improve their websites. More than 60% said they have saved money and increased productivity by using applications available over the Internet instead of buying desktop software. But many small-businesses computer systems remain vulnerable to hackers and natural disasters that can destroy important data, the analysts found.

So far this year, businesses have spent $4.4 billion on Web hosting services to give their sites e-commerce functions, including taking orders, processing payments, and providing customer service. This was a 6% increase over last year.

By far, the fastest growth in spending was on Internet advertising, which soared almost 50% to $1.3 billion. Sanjeev Aggarwal, senior analyst with the Yankee Group, said small and midsize businesses are using services from Google and Yahoo that allow potetnial customers to search for businesses within specific Zip codes.

"The whole notion of using the Internet for local advertising has become much more common, espcially for small businesses like beauty salons and restaurants that serve a local market, Aggarwal said.

Another growing area is software-as-a-service, whereby companies pay a subscription fee for an application rather than buying a software package and installing it their network.

"This is especially popular with small busiensses because it doesn't require physical infrastructure like servers, which leads to lower upfront costs, Aggarwal said. Subscriptions are common for accounting, human resources, and customer relationship management applications.

But Aggarwal said most computer systems at small and midsize businesses are vulnerable to cyber threats. Survey respondents said they are struggling with the costs and time required to secure their networks and store duplicate data in safe locations. And Aggarwal said IT personnel at small businesses are generalists and cannot fend off today's sophisticated spyware and viruses.

"Maintaining quality data back ups and checking for network security weaknesses is too complex for generalists, said Aggarwal. "Today, you might have less than an hour to respond to a virsus or other threat.