The SaaS undercurrent is growing at a rapid pace and looks on course to confirm its place as the true future of enterprise software delivery. The worldwide market for virtual IT delivery is forecast by Gartner to reach $9.6 billion this year and grow to $16 billion by 2003. The tide is clearly turning for IT and companies are investing more and more in virtual IT delivery. But what are the options in SaaS and how is it changing the delivery of outsourced IT?

Rob Lovell, CEO at Think Grid, commented, “Whilst these new models transform the way that business purchase and manage IT, the point is that there should be no need to change actual working practices. Employees must be able to continue to work in exactly the same they gotten used to and remain completely ignorant of the fact that behind the scenes, virtualisation and SaaS is making their company that much more efficient.”

But SaaS is definitely changing the way companies think about implementing new IT. The possibility of cutting infrastructure investments, accessing constantly up-to-date systems and taking the weight of maintenance off an organisation’s shoulders is a highly attractive prospect for end users.

Gartner’s research into SaaS found the market for SaaS in ‘communications and collaboration’ to be approximately $2.5 billion with CRM close behind at $2.1 billion. Applications like Salesforce.com and Sugar CRM are of course at the forefront of driving adoption of SaaS in this area. However, the adoption of ‘core IT’, those systems that pertain directly to the central operation of the business, is proving a harder nut to crack. The predicted market for ERP, though a seemingly large figure at $1.4 billion, only represents a $100 million growth on 2008. Likewise, Springboard Research expects the Asia Pacific SaaS ERP market to reach just $193 million by 2012. Either of these figures would quickly be overshadowed by some of the IT infrastructure outsourcing deals that are still being signed on a daily basis.

Though the Asia Pacific region is clearly looking at SaaS, it appears that it is mainly smaller companies and smaller deals. And the fact ERP is not leading the total market value in Gartner’s index suggests a similar trend worldwide. News of large core IT SaaS deals are still hard to come by and the market is still dominated by Salesforce.com’s CRM system as the shining example of SaaS success.

So what is putting the larger companies off looking at more integral IT through SaaS? A lot of the reticence seems to come from current perceptions of SaaS IT.

Sharon Mertz, research director at Gartner, commented “Certain factors can work to impede adoption of SaaS including: concerns about data security, a perceived lack of competitive differentiation, increasing concerns about scalability, questions about vendor longevity, and the fact that existing investments in applications capital and organisational expertise limit SaaS growth.”

However, industry feeling indicates that many of these concerns are becoming less valid as the industry evolves. “The Impact of virtualisation on outsourcing IT services in general and alternative delivery models actually causes an increase of offerings created by different providers,” said Claudio Da Rold, Vice President of Gartner.

The security question is also put down by vendors on the reasoning that they can be more foolproof in an outsourced capacity. They evidence the fact that through economies of scale, their back-up, physical security and business continuity offerings are much comprehensive that can be maintained in-house. Indeed, SaaS could ultimately prove more secure than maintaining an in-house datacentre.

However, due to differing revenue models, cost bases and development priorities it seems unlikely that SaaS vendors will be able to match their offerings to a company’s needs as effectively as a custom-developed IT project would.

Mikhail Bykov, Managing Director of Manufacturing and Enterprise solutions at Luxoft, a large Russian ITO player, commented “SaaS may not support unique business process of an organisation that may be achieved with custom solutions. This needs to be considered if your core IT supports critical and unique business processes.”

So for some end users, trying to implement core IT over SaaS, may simply be unfeasible due to lack of customisation.

The fact that many larger companies are tied into long-term, high-expense outsourcing deals is another factor hindering SaaS adoption identified by Gartner. A certain amount of the growth over the next few years then is likely to come from outsourcing deals ending and companies looking at new delivery and billing models.

Rob Lovell, CEO at ThinkGrid, commented, “In essence, gone are the days where IT needs to be a heavy, upfront Capex investment.”

The attractiveness of SaaS to larger companies is also likely to increase as the big IT players get in on the act. Springboard Research’s report on the Asia Pacific market found that: “Growth in SaaS ERP market is also constrained by the limited presence of large, well-established SaaS ERP vendors in Asia and the lack of robust and mature solutions that cater to the specific needs of the market.”

This is still largely true for the Western world too. The SaaS market is currently dominated by best-in-class, single-function products where many large companies will be looking for a more complete enterprise product. When the larger players manage to modify their offerings to the on-demand world, there is likely to be a big leap in the takeup of such services. SAP, as one example, is still struggling with the concept as it attempts to get its Business ‘ByDesign’ SaaS suite ready. The company is also struggling to make money from SaaS as it has been built on the ‘large upfront cost, implement, leave and update’ model of software management.

Also, in a recent interview with Information Week Bill McDermott, SAP CEO and president of global field operations, said that large organisations would ‘never’ be able to run their core business IT using SaaS. This kind of comment from one of the biggest IT vendors in the world has to affect the way larger companies look at SaaS.

If the larger players like SAP take longer to develop SaaS than expected, the profusion of high quality specialist SaaS packages is likely to continue and this could lead to different management models for SaaS products.

Martin Banks from Bloor Research recently described his vision of ‘reintermediation’, where end-users will purchase an end-to-end service from a single service provider with the different components delivered by a number of companies. This new SaaS intermediary will manage the relationships necessary to deliver the end-to-end service that a business signs up for. This model certainly seems plausible if larger vendors do not make the grade. It also negates worries over integration over various important business SaaS IT services. Any intermediary would naturally want to work with its preferred SaaS vendors to make sure their products worked seamlessly together. For example if a CRM system cannot integrate with financial IT to feed projected sales into financials data, its utility is much reduced.

The third possibility is of course that of a mega vendor rising from the younger 21st century IT companies. Google, for example, is always a threat to the bigger, less agile players. Salesforce.com’s ‘Force.com’ cloud computing platform also has much potential for delivering a wider reaching service. CODA, a UK based financial software specialist has developed CODA 2go, which offers full SaaS accounting capability represents the first cloud accounting application built Salesforce.com’s cloud computing platform. The likelihood of end-to-end ERP offerings being built through such platforms is high and could prove an attractive option for many companies in the future.

Maria Cappella, CEO of Vialtus Solutions, commented, “With the rise of new uses of technologies like cloud computing, virtualisation and SaaS, procurement professionals will increasingly look for a single provider to provide an end-to-end service, rather than using one provider for their hosting, another providing security (as a service), a third for the connectivity and network provision, and fourth that provides applications like CRM, e-financials/payroll, ERP and e-HR etc.”

Amid the bustle of what is still a very nascent market, It seems the SaaS world is ripe for experimentation by end users. However, it is still geared largely for the smaller IT user. Indeed, the SME market can take advantage of various benefits by implementing SaaS such as: subscription based pricing taking the initial financial liability away and the ability to access world-class software at a relatively ‘young business stage’, enhancing growth as a result.

However, due to the fact the market still has a lot of growing to do and maturity is low, many signal a word of caution.

Andrew Heather, General Manager EMEA from Tripwire, commented “We must remember that management will always be responsible for protecting company and customer data. It is therefore essential, when moving towards cloud computing that businesses consistently ensure the health of the cloud-provided services. This includes gaining complete confidence that the cloud provider is a viable, stable business with assurances and protections, such as comprehensive risk and security defences in place, to safeguard business data.”

It is clear that, as with anything new, companies must conduct appropriate research and due diligence into the problem, concept and provider before diving in. The movement towards SaaS however, seems set only to increase. But Gartner predicts that “through 2011, fewer than one-third of investments that vendors are making in the cloud will pay off, causing further market consolidation and forcing some providers to go out of business”.

The message is coming across loud and clear. Until the market matures to a greater extent, end-users should keep their wits about them when entering the world of SaaS.