Customers Aren't Sold on Rentable Office Suites

FRAMINGHAM (06/30/2000) - While makers of enterprise desktop applications have begun adding their wares to the growing menu of rentable software, IT executives appear reluctant to place orders.

This month, Lotus Development Corp., Microsoft Corp. and Sun Microsystems Inc. have pushed plans to offer productivity applications, such as word processing and spreadsheet programs, through application service providers (ASP).

But many IT executives are still riding the life cycle of their installed productivity applications. Others have built applications around the desktop versions of their office suites, complicating any switch to rentable applications. And others say productivity applications aren't enough of a burden to make outsourcing urgent.

Nevertheless, Lotus this week announced that its SmartSuite productivity applications would be available for rent from ASP partner Into Networks. In addition, over the past two weeks, Microsoft and Sun have announced hosted application models, Office.Net and StarPortal, respectively.

Lotus actually says it isn't targeting IT executives.

"It's largely for consumers, but our enterprise customers are asking us to get into hosting so their employees can use these products outside the workplace," says Ken Bisconti, a Lotus vice president.

The SmartSuite applications Into Networks will offer are 1-2-3, Organizer, WordPro, SmartCenter, Freelance Graphics, ScreenCam, FastSite and Approach.

Users can rent the software by the day or month.

The promises from ASPs such as Into are lower costs, higher reliability, faster upgrades and easier administration. The targets are the small to midsize businesses that are experiencing unchecked growth and companies with no technology infrastructure in place.

"The idea may look good on paper, but those vendors may find it's not where small businesses want to be," says Jason Kasiorek, MIS director for Siegel Jewelers in Grand Rapids, Michigan. "We are very interested in keeping applications in-house where we have control over the software."

Kasiorek, whose company falls within the target market, says security is another issue. "Our fears may be rooted in paranoia, but the jewelry business is very secretive."

Those who have bought into the rentable software idea, however, say their peers will eventually come around.

"They have to get rid of their sunk-cost mentality and start looking at how they can grow without the baggage of an IT department," says Ron Hozjan, chief financial officer of Enerline Restoration in Calgary, Alberta. Hozjan uses the ASP FutureLink to maintain about 40 desktops, but he says he'd use the service even if he had 4,000. "We tripled revenue last year and will double or triple that this year without having to grow any IT staff." Hozjan's hosting contract includes Microsoft Office and his inventory and accounting systems.

Analysts, however, say widespread outsourcing of productivity applications appears to be three or four years away, and ASPs are now scrambling for customers.

The total revenue for the ASP market was only $300 million last year, according to International Data Corp. (IDC), a market research firm in Framingham, Massachusetts. But the market is expected to grow to $7.8 billion by 2004, for an annual compounded growth rate of 92%.

Despite those projections, analysts say the market is immature and has a lot to prove.

"We need to see how well ASPs can scale, how users can integrate or customize applications, and there are cultural issues also," says Clare Gillan, an IDC analyst.

Gillan says a recent IDC survey showed that less than 10% of IT and corporate executives know any details about the ASP market. "The awareness level is low because the vendors are talking among themselves and not to users," she says.

But some feel vendors are starting to put the squeeze on enterprise customers.

"Eventually, the industry may force us to go this way," says Nicholas Linenberger, LAN manager for the South Carolina Retirement Systems in Columbia, South Carolina. "But in the short term, we are not interested."

Linenberger has built an application around Microsoft Office applications that passes data from a Unix-based system to Word and populates documents.

"Every time we upgrade the applications, we have to do extensive testing," he says. For that reason, Linenberger still runs Office 95. "We would have the same testing issues if we outsourced, but we wouldn't have control over the productivity applications."

But some say that control would not be lost.

"We just replace the infrastructure, not the applications," says Roger Galego, a senior vice president at FutureLink in Irvine, California. "You can pick your version of the application."

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