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Hosted applications delivered over the Internet, commonly called "software-as-a-service," are rapidly gaining popularity with customers in small and large businesses, as well as with consumers. By 2010, this form of delivery is estimated to comprise 23 percent of the $120 billion U.S. software market, according to a recent report by RBC Capital Markets.

What accounts for this growth? Software-as-a-service (SaaS) offers several advantages compared with buying traditional software licenses. Here are some of the most compelling:

  1. Lower TCO: SaaS is usually paid for on a monthly subscription basis. That can make payments more manageable for customers, spreading them out over time rather than paying a lump sum.

    More importantly, this model helps lower total cost of ownership by eliminating some of the non-licensing costs associated with using an application. When running an application in house, you need hardware to run it on, and IT staff to provide ongoing maintenance. With SaaS, however, the provider is responsible for both. Your servers and your IT staff are freed up for other tasks.
  2. Never Out of Date: How many times have you wished you could take advantage of the newest release of an application without the effort and expense of an upgrade?

    SaaS eliminates this frustration because it is constantly upgraded on the fly, with little or no software to install at the customer's site. Whatever the latest software version is, that's what you'll have.
  3. No Compatibility Issues: Most companies these days have multiple brands of desktops and servers, running multiple platforms, some more recent than others. This can be a nightmare when you set out to deploy a new or upgraded application: will it work on everything you've got?

    SaaS solves this problem by delivering applications via Web browser. Since the software is hosted on the provider's servers instead of the customer's, it makes no difference what server platforms the customer is running.
  4. Greater Reliability: Some customers hesitate to try hosted software because they worry about reliability. Can they really trust someone else to make sure critical applications will stay up and running? It's a legitimate concern—if you're working with a small provider that has only been in business for a short time.

    On the other hand, if you choose a stable company with a proven track record, the software will likely be more reliable than if you ran it in-house. For most companies offering SaaS, hosting applications is a core competency, and their business depends on providing uninterrupted service. Thus, they are likely to have robust data centers, with redundancies and solid disaster recovery plans—keeping hosted applications available, as near as possible, to 100 percent of the time.
  5. More Accountability: If an application in your data center goes down, it can be hard to know who to blame. The failure may come from the hardware, the software, the operating system, or even from another incompatible application. It can take hours, or sometimes days, just to identify the culprit.

    If hosted software goes down, you know exactly who to blame. With a detailed service level agreement (SLA) in place, you can actually have more accountability than you would hosting the application in house, including financial or other compensation in case of an outage.

With all these advantages, it's easy to see why software-as-a-service is growing so quickly. These days, most IT departments face constant demands to provide more functionality without increasing infrastructure or staff. When IT management and staff feel squeezed—using hosted software is one way to ease the pressure.