Hosted enterprise applications are nothing new. They first emerged as time-sharing apps in the 1960s, when companies rented hardware and software computing resources because they lacked the money and expertise to run applications internally. Among those to first offer such services were IBM and General Electric. The strategy eventually morphed into the application-service-provider model in the late 1990s. The business model for both approaches failed, giving rise to the next iteration of hosted applications.

"The hosted, on-demand model is the third wave," says Jim Shepherd, a senior VP at AMR Research. "The difference is this time, heavy hitters like IBM and Oracle are pushing the concept, so there's no question as to whether it will survive. ... The question now is, how big will it become?"

The hosted-application model today extends beyond enterprise applications. Intuit Inc. two years ago introduced QuickBase, a project-manager application, as a hosted service for companies to collaborate on documents and share data with remote workers. The service, which focuses on easy customization and point-and-click navigation for specific business tasks and shared formats, has since expanded to include sales and customer-support tools.

But analysts say some of the most successful hosted applications to spring onto the market in recent years are those offered by customer-relationship-management software vendors NetSuite, RightNow Technologies, Salesforce.com, and SalesNet. The reason is the software was written specifically to function as hosted applications. Research firm Gartner suggests these types of applications are easier to deploy as hosted solutions, which is attractive for many small and midsize businesses looking for a quick fix. Gartner warns, however, that as businesses evaluate these deals, they should keep from being blinded by low per-month user fees and explore the financial implications of setup costs, hidden license metrics, and early-termination fees.

Some vendors charge a fee equal to two months of service to terminate a contract within the first year, while others charge nothing. Gartner cautions that many agreements state either party can cancel the agreement by giving 60 days' notice, but finding a replacement product within 60 days is difficult. It's more realistic to give 120 days' notice for critical enterprise systems. One more tip: Negotiate license rights with the software vendor if a third party is hosting the application.

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