Boom time coming for SaaS vendors

The market for software as a service is set to boom over the next five years – which is great news for companies such as Salesforce.com and others but could spell worse times ahead for traditional software vendors.

According to Gartner the software as a service (SaaS) market will grow from five per cent last year to accounting for 25 per cent of new business software revenues by 2011.

Robert DeSisto, research VP at Gartner, said trends in enterprise software have certainly begun to change.

However, DeSisto added SaaS is still well short of maturity and said many deployments are still focused on either individual departments or within the small to medium-sized enterprise sector.

DeSisto said: "No provider offers the functionality capability or process management capabilities on par with on-premise software to support end-to-end cross departmental business flows."

But the balance of power is unquestionably shifting according to Gartner and for a company such as Salesforce.com, whose outspoken CEO Marc Benioff has been the most vocal evangelist for the 'death of software', it is a strong endorsement of the model.

Lindsey Armstrong, EMEA co-president of Salesforce.com, told silicon.com she believes a "tipping point" is just around the corner as more companies realise they don't want the hassle of installing and managing software in-house.

Philippe Courtot, CEO of on-demand vulnerability management vendor Qualys, said the software as a service boom has caught many traditional on-premise vendors "with their pants down". Many large software vendors, such as Microsoft, are now playing catch-up in an attempt to protect revenues against the attrition of SaaS switchers.

Courtot said of companies such as his own and Salesforce.com: "The marketplace is absolutely coming our way. Companies simply cannot afford or justify the cost of replacing enterprise software."

He said many companies have been loathe to admit they 'backed the wrong horse' when investing in on-premise solutions but he said future replacement cycles will see many opt for a SaaS offering.

Courtot said IT departments have also been holding on to old ways of working, not wanting to hand over hosting or management to third parties. However, he said they must now give in - a point supported by Gartner's DeSisto.

DeSisto said: "The limited central IT involvement is changing as the IT organisation realises SaaS solutions are here to stay and that they must look to leverage the upside potential of these approaches, rather than see them as a threat to their existing modus operandi."

Marc Benioff, CEO of Salesforce.com, ranked number 30 on silicon.com's 2006 Agenda Setters list. The judges singled him out because of the way software as a service is reshaping the enterprise software market.