This is currently not working in Minecraft Multiplayer (but works in single-player). See Minecraft SMP bugs for this and more bugs in Survival Multiplayer.
As a work-around, most players find a natural source of water/lava and craft around it to get it to flow wherever they want it to flow.
[Edit] I've noticed that water and lava work on some unmodded servers, but not others. On the ones that lava does work, it seems like it flows down but rarely outwards (water flows outwards though). Try placing your lava on a wall rather than the ground.