For small and mid-sized companies outside the IT industry, running IT infrastructure is rarely a core competence. All too often it is an area – and a cost – that senior management feels it cannot control.

One group of technology companies believes it has the answer. Just as few businesses run their own power generators, water plants or telephone exchanges, these companies argue that software should also be a service.

The appeal of this to mid-sized companies is clear. Rather than develop the IT infrastructure and expertise to run business applications, companies go to a service provider to hire the application.

There is no need to pay in advance for software licences or for hardware; a web browser and broadband connection is all the IT infrastructure most companies need. This leads to low initial costs and quick payback periods.

“We have seen a return on investment within 16 months,” says Jim Benson, chief technology officer at KP Corporation, a California-based direct mail and printing company.

Such advantages have made software as a service one of the fastest growing segments of the IT market.

Selling software-as-a-service (Saas) are companies such as and Netsuite. SAP has a Saas offering and the IT vendors HP and IBM also have significant interests.

But software as a service does not provide all the answers to management teams who want to regain control of IT spending – not yet, at least.

Although some multinational companies are using Saas, smaller businesses are more cautious. According to Forrester Research, 59 per cent of US businesses with between 500 and 999 employees would consider Saas. But for companies with fewer than 100 staff, that falls to 44 per cent.

One reason could be that it is still a fairly young market. The choice of applications is more limited than for inhouse software, and there are concerns about customisation, integration and security.

The entry of large companies such as SAP, as well as blue-chip customers buying from the newer providers, will give directors of smaller companies more confidence. “Small companies have been told to use small company products. But we are running Cisco and Merrill Lynch and ABN Amro on the same server as thousands of SMEs,” says Marc Benioff, chief executive of service-based CRM vendor

Access to large company software at an affordable price is a persuasive argument in favour of Saas for SMEs. But Mr Benioff notes that the technology is about more than price. It is also about removing risk. “It is common to hear of failures in large software implementations,” he says. “Customers don’t fail with us.”

Saas has so far focused on a handful of applications, mostly sales and marketing and CRM. A mid-sized company wishing to move most, if not all, software to a service-based model will find it hard.

That could change, and the market could extend well beyond back office applications. Even Microsoft, with its Office Live and Windows Live launches, is testing the waters for Saas.

“The next generation of software applications will look like the internet,” says Zach Nelson, chief executive of Netsuite. “One by one, the objections to using net-based software are falling away.”

Many mid-sized businesses already use net-based applications, from hosted e-mail to search services such as Google. Salesforce is also, through its AppExchange platform, promoting other Saas products.

But there are vital practical considerations when moving to Saas. Businesses need to consider the robustness of the service, and how easy it would be to extract their data, should they part company with the service provider.

Here, software vendors with both service and conventional offerings score, because there is the option to run the application inhouse.

Businesses might also be happy to run CRM as a service because it is relatively easy to set up, and there is a choice of vendors.

But other applications, such as enterprise resource planning may be more difficult to buy as a service because of the need for tight integration with internal business processes, cautions Liz Herbert, an expert on Saas at industry analysts Forrester Research.

She adds: “Because software as a service has made it so easy to buy [technology], companies might not be thinking about security, long-term integration or other practicalities. The buyers are not IT people and have never written a contract for IT services,” says Ms Herbert.

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