To SaaS or not to SaaS, that is the question.

At least, that was the question on the minds of many of the more than 550 attendees at a software-as-a-service conference in San Francisco, Feb. 27 through Feb. 29.

Attended mostly by representatives of various software companies and other IT vendors according to a show of hands (fewer than a dozen SaaS customers were in attendance), the presentations at the SaaS Summit were aimed unabashedly at independent software vendors ( ISV) looking to start offering their software as an on-demand service.  

The overall SaaS business is poised for blistering growth, based on analysts’ predictions. According to projections by International Data Corp., the SaaS industry will grow at a 32 percent compounded annual growth rate over the five years from 2006 to 2011, from $3.6 billion to $15 billion. Over the same time, packaged applications are expected to continue to dominate the market, expanding from $110 billion in 2006 to $160 billion in 2011.

Even Microsoft is catching the wave.

“We view SaaS as the revolutionary way to deliver these services,” says Greg Urquhart, general manager of the U.S. ISV and SI partner business at Microsoft Corp. He defines software and services as “the combination of Web 2.0, SaaS delivery, service oriented architecture, and all these applications together.”

But if SaaS is being proclaimed as the greatest thing since the microchip, why is it that most large and many medium-size enterprises continue to run the vast majority of their mission-critical systems using in-house package software?

Are they missing something? Or are they just too-sober latecomers to a wild party that’s already been under way for several years?

At least one analyst believes their time to embrace SaaS more fully will come soon enough.

“Acceptance of Saas for mission-critical computing is clearly on the rise,” claims analyst William McNee, founder and CEO of Saugatuck Research. He pointed out that adoption of Saas in Europe taking place faster than in the U.S. “Many of the key technological barriers to using SaaS are falling, and SaaS will continue to evolve to address a greater number of customer requirements.”

Based on Saugatuck’s market research, McNee forecasts that by 2012, 70 percent or more of all businesses with more than 100 employees will have deployed at least one SaaS application, while only four percent of large enterprises are planning not to use SaaS. “By 2010, SaaS will be interwoven into the enterprise architecture,” McNee added. “In fact, I think the term, “software as a service,” will go away in five years, as we move to a new era of cloud computing.”

Maybe, but even the bullish McNee cited several areas where today’s SaaS offerings often fall short of meeting customer expectations. These include:

• Ability to be personalized;
• Workflow capabilities;
• Customizability; and
• Difficulty of integration.

These are some of the reasons that few large companies plan to use SaaS as a delivery mode for their enterprise resource planning (ERP) systems. Among Saugatuck’s survey respondents, ERP ranked eighth in demand for various enterprise applications to be tapped via SaaS.

“So far we have not seen software suites succeed in SaaS,” McNee pointed out. “SaaS will probably continue to be a best-of-breed world.”

In other words, most companies will continue to use single SaaS applications that offer particular functionality that they don’t already have or can’t easily add so economically.