Hosted Models Face HurdlesHosted Models Face Hurdles

As Oracle, Microsoft, and other software vendors push customers to hand over the housing, management, and maintenance of their business applications and access them over the Web, they're likely to run into many of the problems that application hosting companies have struggled to overcome, and more. Most companies are just too attached to their business apps to relinquish control and aren't convinced of the cost savings in such a model.

Ben Holder, CIO of Unifi Inc. in Greensboro, N.C., is an Oracle applications customer and isn't even considering letting Oracle host the company's move to the latest version of the suite, Oracle 11i. He has doubts about the security and reliable of delivering via the Web the mission-critical systems that run the $1.28 billion textile manufacturer's operations. "There's a comfort level with having my production system managed internally," Holder says. "I know the names of the people that run it and I know where they live."

Holder is also unsure of the cost savings of a hosted model. On top of software licensing costs, Oracle charges a monthly fee of 3% to 5% of the total license costs for the hosting service. While Oracle CEO Larry Ellison insists that delivering software over the Web changes the economics of software, making it cheaper for customers to deploy and maintain, analysts say vendors clearly stand to benefit. By hosting its own apps, it should become cheaper for Oracle to manage the quality of the software and release new versions, says Jon Derome, an analyst at the Yankee Group. It would let Oracle apply patches and upgrades--something it's had to do often with the release of the buggy 11i suite--without shipping a multitude of CDs to customers.

Derome also says the single-vendor hosting model overlooks some of the costliest parts of software deployments--integration with other systems, business-process reengineering, and change management. "Hosting doesn't eliminate those challenges or address those external complexities," he says.

Ingersoll-Rand Co., an $8.8 billion diversified manufacturer, prefers to work with third-party application service providers, such as Corio Inc., rather than having software vendors host their own apps. Corio, which hosts Oracle, PeopleSoft, and other business software, provides integration among different vendors' apps, something Oracle doesn't offer. "Larry Ellison has a wonderful strategy that Oracle will solve anyone's problems. That's a wonderful world if we lived in his world, but we're not there," says Robert Orshaw, VP of E-biz technologies at the Woodcliff Lake, N.J., company. "We need to integrate with all sorts of systems--Siebel, Oracle, Tevant. If every supplier hosted their own apps, I'd be working with dozens if not 100 vendors."