RSM Resources

In the late 1990s, Internet application hosting (or Web hosting) wast outed as the next great thing in the world of software asset management. The primary sales pitch went something like this: Why buy enterprise resource planning (ERP) software when you can lease it and let someone else deal with the constant headaches?

With Web hosting, you don’t need to purchase the software — or the expensive hardware you’d need to run it and adequately store and protect your data. Nor do you need to hire any IT staff capable of installing, managing and maintaining those systems. Despite these benefits,c oncerns about basic Internet security and reliability kept businesses from jumping on the Web-hosting bandwagon as quickly as the market pundits projected.

Not so today. The risks associated with working through the Internet have been brought under control, and vendors have greatly increased the flexibility and functionality of their services. The greatest risk you face from Web hosting may be ignoring what it might offer your company. According to a recent survey by IT market-research firm THINKstrategies, one-third of all respondents use some form of Web hosting, and one-third planned to begin doing so within 12 months. Other surveys suggest those percentages may be even higher.

The move to software-as-a-service — as Web hosting is sometimes known — has gained tremendous momentum during the past year or two, according to M. S.Krishnan, the Michael R. and Mary Kay Hallman fellow and professor of business information technology at the University of Michigan Business School.

"It’s proving especially attractive to small and midsized businesses because it offers access to state-of-the-art ERP applications without all the upfront costs and many of the installation and maintenance headaches that go along with purchasing them outright,"he says.

But the benefits don’t stop there, Krishnan says. He has researched software use and management in a corporate environment for more than a decade and is convinced that Web hosting can be a powerful business ally.

"Web hosting offers midsized companies more flexibility than purchasing and maintaining applications in house," he says. "Many vendors offer a high level of customization. And, with recent advances in available bandwidth and Internet security, Web hosting is only going to become more popular as we move forward."

Web hosting may soon replace the old business model for software sales and distribution. The old model has inherent inefficiencies, not the least of which is the concept of perpetual hardware and software obsolescence. As the old saying goes, by the time you install your new software and set up your hardware, they’re obsolete.

With Web hosting, however, businesses may make their hardware last longer. Since the service providers own, operate and maintain state-of-the-art software and the requisite hardware, very basic personal computers and laptops can serve as fully functioning workstations. But eliminating the need to constantly upgrade your software and hardware is just one of many good reasons to look into Web hosting. In fact, if any of the following situations apply to your company, you might want to take a closer look at Web hosting:

You want to amortize the typical upfront costs of purchasing the ERP applications you need to remain competitive. Web hosting, typically paid for with a flat monthly fee, lets businesses budget for a predictable level of IT expenses. The company still has to pay the piper, so to speak, but the costs generally are spread over two to three years. Furthermore, Web hosting often enables companies to eliminate or greatly reduce internal IT personnel costs. A 2003 study of 52 companies that used Web hosting showed that it yielded a 404 percent return on investment over five years.

You operate in more than one location, or your employees frequently travel or telecommute. Whether your employees are kept from spending time in the office by snow days, hurricanes or weekly sales trips across the country, Web hosting gives them full access to all the capabilities of your ERP software — from anywhere in the world where they can find reliable Internet access.

You have trouble hiring and retaining adequate IT personnel — or they are constantly buried beneath a backlog of projects. In essence, Web hosting gives midsized companies access to the same level of expertise as large corporations enjoy. By working with the right vendor, you can access IT personnel with a much greater level of expertise than you could otherwise afford. What’s more, you can eliminate losses associated with slow application implementation. On average, service providers can help you roll out new systems much more quickly.

You are concerned about data security and system reliability for your ERP applications. In addition to improving Internet access, speed, reliability and security, Web hosting often leads to improvements in other areas. Most service providers can offer more redundancy (including battery- and diesel-generator-powered backup systems) and better security (including the latest in firewalls and encryption capabilities).

Of course, there are still risks and drawbacks to consider. If your applications require a high level of customization, the service provider will want to be compensated accordingly — and the costs can be substantial. Also, if your database is in one location and your e-mail in another, you’re going to have to pay more.

The biggest challenge, however, is really no greater than performing the same sort of due diligence you would in selecting a reliable vendor for any product or service. And there has been much improvement here, too, as service providers have recognized the need for reliability and flexibility.

Even if you have been using Web-hosting services, you may want to revisit your options, because much has changed in recent years. With an economic climate that often favors outsourcing, innovative companies are regularly developing new vendor agreements, pricing options and application tools.

As you would with any new vendor, check references and other credentials. Find out how the service providers you're considering do business, with whom they do business, and what they can deliver in terms of service and support.

Although there are many variations on the theme, most service packages fall into two categories:

• You buy the software, and the vendor provides everything else.
• You lease the software and the services for one flat rate.

With some applications, you may be required to pay only for the modules of the ERP suite that you actually need. You may also have to secure an agreement in which licensing fees are more directly tied to actual usage. Both options can add to your overall savings.

Some industry experts recommend working only with vendors who have received an SAS 70. SAS 70 (Statement on Auditing Standards No. 70) is an internationally recognized auditing standard developed by the American Institute of Certified Public Accountants. SAS 70 is required only of vendors who want to do business with publicly owned companies, but privately held companies can also gain peace of mind by working with certified vendors.

"Taking a few simple steps upfront can ensure that you end up with a vendor that can meet your needs," Krishnan says.

First, he recommends clearly identifying the level of service you need, noting that some vendors may provide only one standard product for all clients, while others will tailor their products to meet a company’s needs. Next, establish the level of performance you expect from the vendor. Finally, make sure your service contract clearly defines any other stipulations you might have.

The bottom line, Krishnansays, is to "get it right and get it in writing." Then you can rest assured that your company can take full advantage of all that Web hosting has to offer.