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Software Vendors Jumping on SaaS Wagon

Pioneering vendors of software-as-a-service (SaaS) have spent the better part of a decade defending their model against purveyors of traditional on-premise software.

They have made their point, perhaps to their own chagrin.

As the market for SaaS has opened up to enterprise-class customers and beyond customer relationship management (CRM) to a fuller array of solutions, traditional software vendors, such as SAP , IBM , Oracle and Microsoft , are beginning to see the wisdom of offering software on demand.

Given their resources, some say, those companies are poised not only to participate, but even dominate the SaaS space.

Joshua Greenbaum, principal analyst at Enterprise Applications Consulting, told internetnews.com that even a market-leading pure-play SaaS vendor like Salesforce.com cannot match the level of systems integration that an SAP or Oracle can provide their customers.

He noted that Siebel founder Tom Siebel had admitted that his company could not match SAP and Oracle in terms of integrating CRM with other back-end enterprise solutions.

"They hit a wall," said Greenbaum. "Both [SAP and Oracle] have this broader depth of functionality and broader view of an integrated enterprise, so without a doubt, Salesforce is very vulnerable," he said.

The market opportunity is there, and traditional vendors are already beginning to take part.

The many flavors of SaaS

More enticing yet for traditional software vendors, SaaS is now gaining acceptance in the enterprise beyond CRM and other partner-related solutions.

Pure-play SaaS vendors like nSite, with a business process management solution, Kana with on-demand knowledge management, and Agile with product lifecycle management tools on demand, are beginning to encroach on the traditional bastions of on-premise enterprise software vendors.

Even such sacrosanct functions as security are being addressed by companies like Qualys and IBM.

This is happening because customers see an opportunity to reduce both cost and risk.

Philippe Courtot, chairman and CEO of Qualys, has seen the evolution first hand. His company boasts 22 of the Fortune 100 as customers.

"IT departments are under huge pressure to do more with less resources," he told internetnews.com.

"Early adopters [of Qualys security solutions] like Apple and Thomson Financial were all under very significant budgetary constraints," he said.

Denis Pombriant, managing principal at Beagle Research, noted that SaaS vendors have not only reduced the cost of these solutions, but also the risk of purchasing and maintaining them.

On-demand software is "a paradigm that reduces cost and risk for any company that depends on software to do its business," he said.

Tom Noonan, CEO of ISS , explained that customers now accept that security, the most private and least likely application to be managed outside the firewall, can be better served in just that way.

"Security features are popping up in every aspect of our infrastructure, from networks to applications to servers and operating systems. They have become a nightmare for CIOs.

"The questions is 'how do I manage it and ensure a consistent level of protection?' On-demand provides that capability."

Software companies have to go against their grain

The opportunities are ripe, but traditional vendors still face significant hurdles.

Everything about the way traditional software vendors do business would have to change, from how they upgrade their solutions to how they compensate sales people and recognize revenue.

"The question becomes are they willing to make that technical and cultural shift," explained Beth Enslow, vice president of consulting firm Aberdeen Group.

The software vendors will also have to be willing to rewrite most if not all of their code.

"You cannot take your old enterprise solution and just deliver it through the browser," noted Courtot. "You don't change an architecture just like that."

That may help explain why Microsoft has delayed bringing its own on-demand CRM solution to market until next year.

Indeed, the major players are already beginning to respond to those challenges.

"The traditional on-premise players see there are advantages to having a multi-tenant model," said Liz Herbert, an analyst who follows SaaS for Forrester Research.

Multi-tenancy is one of the principal architectural attributes of the SaaS model because many customers share the same infrastructure, generating significant economies of scale.

Oracle uses hosted infrastructure provided by IBM to enable multi-tenancy for its on-demand offering.

SAP does as well, but has not committed fully to a multi-tenant approach.

However, SAP is less concerned with economies of scale because it targets primarily large implementations.

It remains to be seen whether on-premise vendors will successfully make the leap to the on-demand paradigm.

But the feeling is that they would be wise to get on board.

"We're seeing the ship sail. People have to think about getting on the boat," noted Pombriant.