Esker Software develops document and delivery management applications. So two years ago when it was struggling to integrate an unwieldy CRM system with other back-office applications, the suggestion that it didn't need to "own" the software but instead could outsource the functionality seemed like heresy.

"It just stunned me that someone would actually think of putting their data off-site," recalls Mitch Baxter, Esker's executive vice president for business development and a member of the company's board. "I'm a software company guy. It just seemed profane!"

Yet after a pair of short pilots, Esker, a French company with U.S. headquarters in Madison, Wis., scrapped a planned upgrade of its Siebel CRM system and rolled out Salesforce.com to 180 users in 60 days, joining the ranks of thousands of companies procuring enterprise applications as Web-based services for a monthly subscription fee.

Software as a service - which typically eliminates hefty upfront license costs and requires little or no hardware or IT personnel to install, configure or maintain - is growing in popularity among large corporations and small businesses alike. Last year's successful public stock offerings by fast-growing providers Salesforce.com and RightNow Technologies have shined a spotlight on a software delivery model reminiscent of the buzz surrounding application service providers (ASPs) in the late 1990s.

Fallout from the tech stock collapse in 2000 claimed many of the estimated 1,000 to 1,500 ASPs that sprouted in the late 1990s to offer hosted enterprise applications over the Internet. But as the economy has recovered, the surviving ASPs have been joined by a growing cadre of companies delivering software as a service . Hardware vendors such as IBM and Sun Microsystems are preaching the on-demand gospel, along with traditional enterprise software companies such as Siebel, Oracle and SAP, which offer hosted versions of their applications in response to upstart competition and strong user demand.

"Forgotten but not gone," is how Gartner analyst Ben Pring describes the software-as-a-service delivery model promoted by ASPs. "It was gathering steam and momentum all the time, whilst it was out of fashion."

Indeed, the new generation of software providers led by Salesforce.com and RightNow now use terms such as "on-demand" software to describe their offerings. Unlike applications hosted by some ASPs and traditional enterprise software vendors, these have been built from the ground up to be shared by multiple clients and delivered over the Internet.

Market researcher IDC recently dropped the term ASP and uses "hosted application management" to describe companies that provide outsourced hosting of packaged software. Hosted e-mail and security providers and firms such as early ASPs USinternetworking (USi), NaviSite and Corio - acquired in January by IBM - are in this business.

"There's this first generation of Neanderthals [that] didn't really take advantage of the environment or the Internet," says Tien Tzuo, senior vice president of product management at Salesforce.com, about the early ASPs. "Homo sapiens - software as a service - have always been around. We just needed those Neanderthals to die out."

Applications delivered as a service are forecast for rapid growth that could make a more sizable dent in the overall software market. Worldwide spending on software delivered as a service reached $4.2 billion in 2004, up 40% from 2003, and will reach $10.7 billion by 2009, according to IDC. And Gartner predicts that one-third of all new software deployed over the next five years will be delivered as service rather than purchased and installed in-house, Pring says. Subscription-based software accounts for only about 3% to 5% of the total software market today, he says, but will rise to about 10% over the next five years.

Faster, better, cheaper

Proponents of software as a service are quick with automotive metaphors for the traditional way of buying and deploying enterprise software: buying a $500,000 Ferrari while you can rent one just when you need to drive it, or buying a car in pieces - engine, drive train, chassis, steering wheel and so on - then putting it together yourself or paying a mechanic to assemble it for you.

A large corporation pays a six- or seven-figure license for the software - plus the cost of the hardware and network infrastructure to run it - and then the spending really starts as it deploys IT staff or consultants to customize, configure and integrate the software with current applications. Add to that IT staff for ongoing maintenance and the vendor's 18% to 20% annual maintenance fee for upgrades and 24-hour support, and companies pay $6 to $8 in extras for every $1 they spend on the traditionally licensed enterprise software, says Jason Maynard, a senior analyst at Merrill Lynch, which last year launched an on-demand index to track the growth of software by subscription.

Software as a service eliminates much of the upfront cost, can be deployed much faster and heightens the vendor's incentive to provide solid support and a good user experience, since customers can switch vendors with relative ease. Typically, customers pay a monthly fee for each user on the system. Providers host all the software and data on their own servers, giving them economies of scale, as well as allowing them to perform bug fixes or major upgrades for all customers at once.

"If you can provide the service reliably, it keeps my initial costs down, it keeps my recurring costs down and my switching costs down," says Bob Lamoureux, CTO of America's Growth Capital, a Boston investment banking firm that uses a hosted CRM application from Salesnet to track activities, events and communications associated with clients and prospects. "It works really well, it's reliable and it's very flexible. Those are the key ingredients of a successful on-demand player."