What You Don't Know About SaaS

Therein lies the controversy swirling around SaaS. The Internet delivery model -- in which companies rent rather than own their software -- has many guns leveled at it; they're loaded with reliability issues, customization barriers, management headaches and security quandaries. Yet the concerns seem unlikely to derail the gathering momentum of SaaS vendors as they compete with and win against traditional software vendors.

Saddled with budget and resource constraints, many midmarket companies are turning to SaaS for critical business applications. Unlike packaged or premise-based software that comes with hefty up-front licensing fees, ongoing maintenance costs, and outlays for hardware and internal staff, the subscription-based pricing of SaaS applications offers a compelling alternative for price-conscious CIOs.

Even after its well-publicized growing pains, Salesforce.com continues to attract plenty of customers. During the first quarter of 2006, the company added 2,200 customer accounts and 44,000 subscribers for year-over-year gains of 46% and 66%, respectively. In August the company reported record quarterly revenues of $118 million, a year-over-year gain of 64%. Based on its second-quarter results, Salesforce.com increased its revenue projections for 2007, estimating the tally to come in at about $490 million, up from the nearly $310 million in revenue for 2006.

And this growth comes even as rival Netsuite Inc., whose largest shareholder (at 60%) happens to be Oracle CEO Larry Ellison, boasts thousands of Salesforce.com defectors among its customers. Meanwhile, major traditional software licensing vendors, most notably Microsoft, have a SaaS strategy in the works.

As the flag bearer of SaaS vendors, Salesforce.com's growth spells good news for the space overall. Since Salesforce.com launched in 1999, hundreds of vendors have jumped into the market. IT research firm AMI Partners forecasts total SaaS spending among small and medium-sized businesses at more than $1 billion in 2006. By 2010, New York-based AMI predicts sales topping $1.9 billion. There are already some 500 vendors -- both SaaS-only and traditional providers -- that offer on-demand business applications, according to AMI.

This was first published in October 2006

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