Renting Software

Renting Software

The life expectancy of software, especially purchased software, has become shorter and shorter over the years. While in the past an organization could be on the cutting edge of technology for five or six years with the software it had, now some applications become obsolete within two or three years. If you personally want to use the most current application, such as word processors and spreadsheets, you must pay several tens or hundreds of dollars to upgrade your version every two or three years. Now imagine how much money organizations have to pay for the same privilege for hundreds of thousands of employees. Worse, unlike households and small firms, many organizations spend millions of dollars on enterprise-wide applications, such as supply-chain management, ERP, and Web-based transaction systems only to find that two or three years later their version is old and lags behind the newer versions that their competitors use. Also, for small companies, the cost of even a single module of an enterprise-wide system may be too high for purchasing. They prefer a monthly payment to a single, but large allocation of capital for the software.

The answer to these challenges may be a relatively new approach to acquiring applications - renting. There are two approaches to renting: in one, the organization pays for the use of an application over a limited period of time at its site; in the other, the organization pays to use the application through the web.

On-site Renting

Many IS executives would rather rent software for a limited period of time and pay less than own it for a much higher cost. To satisfy this need, many software vendors now offer rental programs. For example, many organizations rent antivirus software rather than purchase it. Network Associates, Inc., the company that owns the popular McAfee antivirus software offers rental contracts for limited periods, as short as one year. The company realized that since thousands of new computer viruses are launched every years, its customers prefer to rent a version of the application for only one year, and when the next version, which takes care of new virus, is available, rent the newer version.

When a company rents software, the rental rate is determined by the number of users and the period for which the software is rented. At the end of that period, the company must delete all copies of the software from its computers, or renew the rental agreement. Thus, the only difference between owning and renting software is the period of use: in the former, it is unlimited; in the latter, it is limited.

The major advantage of renting this way is the flexibility of choice and the lower sums that need to be committed up front. At the end of the rental period, the company can either rent an advanced version of the application from the same vendor, or opt to rent (or purchase) a different application from another vendor. There are no apparent risks in this approach.

An analyst for Forrester Research, Inc. of Cambridge, Massachusetts anticipates that by 2001, 15 to 20 percent of packaged applications in use will be rented.

Renting Through the Web

The ability to rent the use software through the Web was introduced in 1999. Few companies have tried it, and only a small number of vendors offer the service. IBM Global Services, Corio, Inc., Usinernetworking, and Oracle Corp. were the first to offer this option. There companies are called application service providers (ASPs).

An ASP does not install any software on a client's computers. Rather, the application is installed at the ASP's location, along with the databases and other files that the application processes for the client. The clients' employees access the application through the Web. They invoke the application, enter data, process that data, produce reports online and on paper, and use the application the same way they would use it had it been installed at their location. Forrester Research predicted that the market for application rentals over the Web will rise from near zero in 1999 to $6.4 billion within five years.

ASPs do not necessarily rent their own software packages. The often rent software developed by other companies. For example, Usinernetworking rents enterprise packages that were developed and are often installed by PeopleSoft, and IBM rents software developed by J.D. Edwards. Rent is usually several hundred dollars per month per user, depending on the software rented.

For some small companies, renting enterprise applications through the Web in the only option, because they cannot afford to build