Last month's column discussed the growing gap between the handful of companies that have continued to deploy innovative technologies despite the current weak economy and the majority that have focused primarily on cost reduction. (See (www.dmreview.com/master.cfm?NavID=193&EdID=7360.) This month, let's turn to a related but happier topic: the ability of very small companies to use hosted services to benefit from innovation.

Hosted services ­– in which a vendor runs software for its clients, typically in return for a monthly fee –­ are indeed hot. Compared with traditional run-it-yourself software, hosted services allow quicker deployment with less risk of failure and a much lower initial cost. The long-term cost is not necessarily cheaper than in-house systems; however, in a period of budget constraint, this is less important than avoiding high capital outlays and deployment expenses. In fact, hosted systems can sometimes even be funded out of operating budgets that are directly controlled by business departments, bypassing the capital appropriation process entirely. The corresponding ability to do at least a partial end run around the corporate IT group may also be a significant advantage in some situations, at least from the business department's standpoint.

Marketing has been one of the areas most receptive to hosted systems. Popular applications include lead distribution, sales force management, content distribution, collaboration with ad agencies and other business partners, and outbound e-mail campaigns. What these all have in common is limited interaction with corporate operational systems, making them relatively easy to deploy as a hosted system without worrying about integration. This isolation also makes corporate IT groups relatively open to accepting externally hosted versions of these applications. In fact, corporate IT groups are often not even involved with the hosted system –­ and may not have been involved with previous efforts by the marketing department to support the same functions. Indeed, the hosting vendors' ability to bear nearly all of the technical burden is particularly attractive to many marketing departments, which get little support from corporate IT and have very few technical resources of their own.

The firms most likely to benefit from a reduced need for internal technical resources are those with the fewest resources to begin with. This is why hosted systems have had their greatest success among smaller companies. Nor does it hurt that small companies are the least likely to have large capital budgets available to buy conventional systems or that small firms are more likely to accept a standardized system without massive customization.

There is an irony within the original observation: it is small firms' very lack of technical resources that makes them most able to benefit from the technical innovation of hosted systems. While larger firms struggle to sustain their existing infrastructures and make incremental improvements at best, hosting makes it easier for smaller firms to take advantage of new capabilities.

In some ways, this represents the fulfillment of prophecies made at the dawn of the personal computer (PC) age twenty years ago. At that time, PCs were expected to enable smaller companies to compete on more equal terms with larger firms by making computer power easily accessible. The reality turned out to be quite the opposite: only large firms could build the complex, integrated systems required to truly take advantage of the power that PCs delivered to individual desktops. If anything, the difference between the systems of the largest "haves" and the smaller have- nots grew rather than shrank during most of this period. True, PCs and packaged software delivered meaningful productivity gains to small and mid- size companies. However, the greatest cumulative competitive advantage accrued to innovators such as Wal- Mart, Federal Express, United Parcel Service and Dell who had the scale and resources to use technology to restructure their industries.

Hosted solutions will not suddenly enable "Mom's Hardware Store" to compete on even terms with Home Depot. The non-technology differences continue to be too great. Even in terms of systems, hosted products are necessarily less sophisticated than the most advanced systems deployed by industry leaders. This is simply because the hosted products must wait until new applications are understood well enough to create standardized versions that will appeal to a large number of customers. For this reason, hosted systems can never be totally cutting-edge.

Within their boundaries, hosted systems do allow small firms to be early adopters of new techniques ­ particularly if the firms are willing to push the hosted system to its limits. The real advantage of hosted systems is that they remove the practical barriers that prevent small firms from adopting any new system: lack of technical staff, management attention, training time and capital funding. They let small firms upgrade their technology on a fairly regular basis, rather than sticking with old systems until they become so thoroughly obsolete that the pain of keeping them finally outweighs the pain of making a change.

What all this ultimately implies is a change in the innovation profile suggested in last month's column. In addition to the small group of innovators (mostly large) steadily increasing their lead over the mass of technically stagnant competitors, we see a third category: a gaggle of firms (mostly small) who consistently trail the innovators but still manage to adopt new technology faster than the rest. This is certainly a more cheerful picture from the viewpoint of customers, vendors and the small companies themselves. Of course, if you're stuck in the stagnant mass, it's still no fun at all.

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