IT DECISIONS - APPLICATION RENTAL - IT that will never need an

Nothing ages like computers. No sooner have you got the latest model than it is not the latest model anymore, and a new, faster, better, stronger, fitter version has jostled it aside. This rapid obsolescence of software and hardware lands companies with enormous bills if they are to keep on the leading edge of the technological revolution – or even just keep up with industry standards. At the same time, the value of old systems declines as quickly as new versions are rushed out of the factory gates, and their owners are left with an asset that has no resale value and has been superseded by a better tool. So why buy the stuff at all? Clearly, you have to because your competitors will take a lead if they can squeeze an ounce more efficiency out of their high-tech corporate machinery than you. But why buy it? Why not rent? Instead of the expense of buying and installing new applications, you just license them out and give them back when you have finished with them. More and more large companies are looking at this option as a way of controlling software costs. The renting model is not yet mature enough to be entrusted with the entire mission-critical software infrastructure, but it is proving useful to run small projects, and selected parts of the IT system. Essentially, renting software is a form of partial outsourcing. Whereas when a company outsources its IT it hands over the whole operation to a third party, in this scenario you take a specific project and hand it, or parts of it, over to the supplier. Say, for example, you have a team working on a new product. You want to provide a forum for them to share ideas. Instead of getting the IT department to buy in software to set up such an electronic forum, a server to host that software on, and using internal IT staff to implement the software and hardware, you contact an IT supplier such as Netscape or Lotus, and ask them to set up the forum. They supply the software and keep it on servers at their site, which the employees in your team plug into over your network and the Internet. When the project is over, the whole thing disappears in a puff of smoke. This is enabled by better, faster, cheaper communications technology. Because Internet communications are so fast these days, you can communicate with a computer system far away from your own site as fast as if it was in your building. You can get the same performance from a remotely situated software application as one on your desktop. “Our expertise is in running big systems – we are a big software company,” explains Jeremy Burton, vice president of database software giant Oracle. “So why shouldn’t we run your database or your applications on our servers at our sites, and you can just plug into them over the Internet whenever you need to? That way, we do what we do well, and you can get on with your business.” Oracle is currently piloting several application rental schemes in the US. Such services are often called “hosting”, as they involve a remote site looking after your software while you act as a guest, visiting the host via the Web. And the market for rented applications accessed over the Internet is set to reach $6bn by 2002, predicts US market analysis firm Forrester Research. As the rise of Internet technology made such systems possible, it is not surprising that Internet software vendors were the first to see the benefits of the hosting model. Netscape was the first company to tout the idea of an intranet, an internal corporate network that mimics the Internet. It quickly realised that it could encourage customers to set up such systems by allowing them to rent the software resources to do so, rather than by forcing them to make a large upfront investment. “Our getting into this area has been borne out by the response we’ve had,” comments Kevin Mannion, commercial director at Netscape. “Lots of very large companies – telcos, banks and the like – have been talking to us about it in the UK. We’ve had tremendous interest.” The attraction, Mannion says, is that Netscape supplies all the software to set up hosted intranet systems, so firms don’t have to do much development themselves. The flexibility hosting offers is also a huge draw. “After all, you can stop using it in a year if you want to build your own,” says Mannion. Firms that have their intranets hosted have to make a smaller investment in technology, and they can throw it away afterwards. “It’s cheaper and more effective to rent than to build your own,” he adds. Many other large software firms are now getting in on the act. Microsoft has denied that it plans to follow the hosting model, or allow rental of its software, but seems to be moving towards it with recent initiatives on electronic commerce. One of the first announcements Hewlett-Packard made when it split into two separate companies, in March, was that it would explore software rental. HP CEO Lewis Platt cited renting storage or server capacity as an example of the e-services his company will implement over the coming year. German software firm SAP teamed up with computer services specialist EDS in the US, earlier this year, to offer enterprise resource planning software to small and medium businesses as part of its bid to attract more mid-market customers. But it was quite late to this market, as most of its rivals, such as Oracle, Peoplesoft, IBM and JD Edwards, had already instituted similar schemes. Another approach, related to application hosting, is for software companies to put a time limit on the licences they sell. Companies do not sell software as such: they sell a licence to use that software. At present, most software licences are limited only by the number of users – so, for example, Microsoft now sells a five-, ten- or five hundred-user licence to use NT. But it would be possible for IT companies to shift their licensing arrangements. For example, they could extend the licence only for a certain length of time – so Microsoft might sell a one-year licence to a company to use NT for five hundred people. Clearly, this would be software rental under another name. The flexibility of such a system has certain obvious advantages, given the dynamic nature of technology. Software is updated so fast that current versions of products never stay current long. So if you have a time-limited licence, you can have the software upgraded as part of the licence renewal. Or, if the software has been completely superseded by another product, you can switch. The disadvantage is that such a scheme is likely to prove expensive for companies in the long term. Upgrading is a costly business – unless you have the right technology, you have to manually go round all the users’ machines and put new software on them. And bringing in new software means that you have to retrain the staff who use it. The situation is also like renting a TV. If you keep it for a long time, you end up paying much more than if you had bought it. However, the software industry’s need to fuel demand by creating new versions of its products is likely to mean that companies such as Microsoft will push time-limited licences as a way of selling their wares. The virgin areas of its market are now few and far between, and the rapid growth that has sent share prices in technology companies soaring, is slowing. This means software vendors must explore new options in order to reach more of the market. Software rental or application hosting is not the next big thing in the computer industry. It will not revolutionise business. What it will do is provide another method for companies to cope with the ever more urgent demand to get the tools they need to do business efficiently. But firms considering such a scheme should consider the risks involved in having a key part of their IT infrastructure in the hands of a third party, and whether the costs may be too high in the long term. Fiona Harvey is the editor of PC Week magazine. ?: