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As e-mail grows in importance, managing it places an increasing burden on smaller businesses that, in many cases, grew up on free e-mail or bundled services from their internet service provider.

For companies that want to move beyond basic e-mail, Microsoft’s Exchange is the obvious choice. Rival applications, such as Lotus Notes from IBM and Novell’s Groupwise, are often too resource-hungry for smaller companies.

But even the cost of running and maintaining an in-house Exchange system is “disproportionately high” for many small and medium-sized enterprises (SMEs), according to Ferris Research, the San Francisco-based analysts. The Exchange licence might not be that expensive, but in-house support can be. There is also anti-spam and anti-virus software, archiving and back-up to consider.

As a result, some SMEs are looking at hosted e-mail services and in particular, hosted Exchange.

Hosted Exchange is attractive to IT managers for its familiarity and the fact that a switchover to a hosted environment will be largely transparent to end users.

Microsoft’s growing support for hosted Exchange, coupled with co-marketing agreements with service providers, are also giving the hosted option added credibility in the marketplace.

When most staff worked in an office, a local messaging server made sense, especially if companies wanted to use e-mail internally and make the most of a low-bandwidth connection to the internet. In fact, Exchange and other corporate e-mail programs started life as workgroup messaging applications rather than as internet e-mail servers.

But if more than a couple of staff work remotely, or need to connect to their e-mail from a mobile device, the advantages of running a local server diminish.

Hosted applications can even save bandwidth: remote users will connect directly to the service provider’s system, rather than connecting first to a service provider and from there to the office-based server.

These advantages have made hosted Exchange an attractive proposition for mobile operators: Microsoft has recently signed deals with T-Mobile in the Netherlands and Vodafone in Germany. Fixed-line telecoms operators and independent internet service providers, are also finding hosted Exchange to be an attractive business proposition.

According to Michael O’Hara, general manager for the communications division at Microsoft, this is in part because of the business model the company has adopted for hosted Exchange. Licence fees are kept to a minimum and service providers enter into a per-user revenue sharing arrangement with Microsoft.

This, O’Hara says, enables service providers to launch hosted Exchange quickly and gives Microsoft an incentive to promote it.

Service providers, for their part, say that interest in hosted Exchange comes from a number of quarters.

Some small businesses are moving from either free or ISP-based e-mail services, and are considering hosted Exchange as an alternative to running their own infrastructure. Microsoft claims 60 per cent of hosted Exchange customers are moving from webmail or other free or low-cost services.

But some service providers are reporting that a significant number of hosted Exchange users are small and mid-sized companies moving from earlier versions of the messaging application.

At Verizon Business, the US service provider, as many as half of new users are upgrading from an earlier version of Exchange, according to Rick Dyer, director of product management for IT at the company.

Dyer has also found that the profile of his customers differs from his initial expectations: businesses taking up hosted Exchange are larger. The environment appeals particularly to businesses in the retail sector, who like the way it allows store managers to manage staff e-mail and messaging accounts.

Verizon is seeing businesses with as many as 3,000 users take up hosted Exchange.

But Dyer admits the service provider is not yet fully geared up to sell the service to companies with 25 or fewer employees.

Other providers also report that although hosted Exchange works well for small companies, it is mid-sized companies that are finding the greatest benefits.

“On a three-year basis, we are finding that the total cost of ownership for hosted Exchange gives an average saving of 20 per cent,” says Mick Hegarty, general manager for broadband and VoIP for BT Business, which runs hosted Exchange for its customers. “But if you have 100 users, the savings can be as high as 40 per cent.”

Again, Hegarty reports significant interest from companies running Exchange 5.5: these account for a third of BT’s hosted Exchange customers.

Given the potential cost advantages, it might seem surprising that it is migration issues rather than financial considerations that are prompting SMEs to move to hosted e-mail. But, as David Ferris notes, IT managers often fear losing control more than they worry about costs.

“It is a poor business case for running e-mail in-house,” he says. “But there is the perception that you will save money by doing so, because companies do not tally everything up. They do not fully consider cost and reliability issues.”

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