Mike LaRocco, the CFO of ISO Healthcare Consulting, nearly gushes about the money he has saved by adopting a hosted customer relationship management (CRM) application last year. ISO, a division of The Interpublic Group of Companies, had wanted to automate its 12-person sales force. But the prospect of paying around $250,000 for a basic software package didn’t make sense.

So LaRocco opted for an application service provider (ASP) instead. His choice: Salesforce.com, which charges only $5,000 a month for ISO’s Web-hosted CRM. “It’s flexible, saves me lots of money and is at our fingertips,” he says.

The prospect of shaving off hefty software installation costs has companies like ISO Health jumping onto the ASP bandwagon. “There’s a lower total cost of ownership with ASPs,” explains Sheryl Kingstone, an analyst at Yankee Group. “This is more of a shared risk model so CFOs can justify their expenses.”

Once relegated mainly to the small and mid-sized, ASPs are now drawing bigger companies. Given such momentum, Aberdeen Group expects the hosted CRM market to soar from $100 million in 2001 to around $2 billion by 2006. “We’ve reached the tipping point,” says Denis Pombriant, a research director at Aberdeen. “The model has been proven by early adopters.”

The ASP lure? Fast hook-ups that typically take less than three months. By contrast, full-blown software installations–and their lengthy implementation, integration and training–can take anywhere from 12 months to 18 months. “ASPs are up and running faster,” says Kingstone. “So you can have faster return on investment.”

So far, Salesforce.com dominates the niche, but lately California-based upstart ASPs like UpShot and NetLedger have also jumped in. Kingstone notes that they’ve solved many knotty problems, such as security, since hosted CRM uses the Web as a spine. Now, she says, security is as good as any in-house option. Another past problem–customization–has also been addressed. “You can customize an ASP to be multi-currency or multilingual,” she says. “These are features that larger enterprises need.”

The biggest sinkhole may be the siren call of cheap price tags, cautions Aberdeen Group’s Pombriant. “You aren’t excused from thoroughly evaluating your needs,” he says. Pombriant suggests asking questions. What will the solution be used for? How complete is it? For example, ASP players don’t excel at advanced business intelligence tools like analytics and data mining. “Availability of advanced applications is still better in the conventional software world,” he says.

Chris Ambrose, a research director at Gartner Group, wisely suggests planning strategically. “Enterprises should have an overall sourcing strategy that ties back to the business vision,” suggests Ambrose. “What’s the right mix of internal and external delivery?” Also, he adds, ongoing management costs for ASPs may not be cheaper in the long run–sometimes ranging from 4% to 12% of the cost of the deal. “If an enterprise is currently running part of its IT very efficiently, going outside can’t make it more effective,” he says.

What’s more, ASP’s speed and ease can be quite intoxicating when applied to mundane but vital tasks. “Once addicted to a hosted model, always addicted to a hosted model,” counters Kingstone. “You have fewer headaches.” Just consider ISO Health’s new schedule: It’s now drawing up sales reports in 15 minutes that used to take a week.