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Software as a Service (SaaS) has represented approximately five percent of business software revenue in 2005 and, by 2011, 25 percent of new business software will be delivered as SaaS, according to Gartner. SaaS is hosted software based on a single set of common code and data definitions that are consumed in a one-to-many model by all contracted customers, at any time, on a pay-for-use basis, or as a subscription based on usage metrics.

"As SaaS became a viable delivery model from 2000 to 2003, most providers supplied ‘good enough’ functionality with core configuration capabilities. SaaS and solving business complexity were two phrases not associated with each other," Robert DeSisto, research vice president for Gartner. "The trend has clearly begun to change. For example, SaaS providers are enhancing their software functionality and improving the ease with which companies can customise and more uniquely configure SaaS software to meet business requirements."

The adoption of the SaaS software delivery model has varied significantly by market segment. SaaS accounted for approximately eight percent of CRM total software revenue in 2005 (Gartner estimates 2006 SaaS revenue to reach 12 percent of total CRM software revenue) and integration as a service had ten percent adoption in its market. But, other markets, such as the ERP and Supply Chain Management (SCM) segments, had less than four percent adoption.

"The majority of SaaS deployments continued to be focused in individual departmental initiatives, such as sales force automation, except in Small and Medium size Businesses (SMBs). In SMBs, we are beginning to see vendors provide capabilities to support more end-to-end processes, such as opportunity to order and in integration as a service where companies are already using SaaS for large projects," Mr. DeSisto said. "However, 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."

As SaaS solutions become more mainstream, and more enterprises adopt them, the dynamic of how they are bought and sold is changing. During the past few years, the primary acquirer of SaaS has been a line of business leader, such as the vice president of sales or the head of human resources, without much involvement of central IT.

"The limited central IT involvement is changing as the IT organisation realises that 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," Mr. DeSisto said. "Line of business leaders and central IT should be involved in the selection process and then in the ongoing management of a SaaS contract. Having both parties represented leads to better initial decisions being made and to more efficient, effective ongoing management."