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In the last couple of years, more software developers have entered the market because of its growing appeal to customers. Talisma Corp., a Web-based customer-support and contact-center software vendor, began offering a hosted option about 18 months ago. Last year, 20% of Talisma's business was hosted. So far this year, that percentage has grown to between 30% and 40%. Talisma CEO Dan Vetras says flexibility gives his company a leg up over competitors. "We can go in at the 11th hour and turn it from a license deal to a hosting deal," Vetras says.

With software vendors aggressively marketing hosted versions of their applications, is there room left in the market for conventional ASPs that offer a range of third-party products? There seems to be. Corio Inc., for instance, claims more than 150,000 subscribers to its Applications on Demand service, and its first-quarter sales rose 66% from a year ago to $16.7 million. (It still lost $2.8 million, down from $8.0 million last year.) Executives at USinternetworking Inc. say that a few years ago, the market was oversaturated with providers that expected there would always be a plentiful supply of dot-com companies to service, and a shakeout was inevitable--and now it's time for the survivors to benefit from the consolidation. USi last year emerged from bankruptcy and merged with Interpath, another troubled ASP. Backed by $81 million in private equity from Bain Capital, the company is proving that the classic ASP model isn't dead, USi officials contend. "This is still a business model that creates real value," USi senior VP Mike Harper says. In recent months, the company has signed contracts with customers including United Parcel Service, ING Direct, and Sterling Commerce.

USi, which serves up apps from Ariba, BroadVision, Siebel, and others, claims customers can achieve an average of 20% savings by moving to an ASP for enterprise software. ASPs are also in a position to extend the hosting model to encompass business-process outsourcing, in which customers trust not just the apps but their data to their partners for certain processes, Harper says. "Customers may access PeopleSoft through the ASP model and then recognize the value of running payroll through that same system," he says. USi is beginning to run payroll for large customers.

Surebridge Inc. stands to benefit from the same trend, says Peter Boni, the ASP's CEO. The company offers supply-chain, CRM, financial-management, and human-resources management software from Microsoft, PeopleSoft, Siebel, and Vignette for the midmarket. Surebridge plans to offer business-process outsourcing services by partnering with established business-process outsourcing companies, including some with facilities offshore.

Overall, a large number of subscribers to hosted offerings continue to be the small and midsize companies that want a fast, economical way to gain access to sophisticated enterprise applications. "It helps smaller businesses play on a more even footing," says Humberto Andrade, a Technology Business Research analyst. Creek and River America, the U.S. subsidiary of a Japanese media talent agency, tapped Bullhorn Inc., an ASP that serves the media industries with software for maintaining talent rosters, controlling project status, and managing freelancer contracts. The software is critical to the company, but "there's no way we could have implemented this ourselves," says Christopher Bristow, Creek and River's CEO.

Some CIOs still can't get past age-old concerns about hosting. According to a March Information Technology Association of America survey, respondents asked why the model wasn't achieving faster adoption cited internal hurdles such as loss of control and the need to reassign, retrain, or lay off workers if they used an ASP. While respondents acknowledged that outsourcing to an ASP would likely save money in the long term, the in-house IT investment already made would be lost in the first year of such an arrangement.

When you host, "you can't go down the hall and ask someone to do something for you," admits Al-Khazraji at Utility Service. But that may be as much a blessing as a challenge, says Cabot's DeHoniesto, because it can enforce organizational discipline. "When software is on-site, it's very convenient to make changes, but you often wind up making changes you shouldn't because it's so easy to do," he says.