It is not often that you get a second chance in IT: a failed technology is about as enticing as fish that has passed its sell-by date.
But software as a service (SaaS) seems to be the exception that proves the rule. This year, the business of providing hosted applications delivered via a web browser to users paying a monthly subscription has begun to take off.
Some experts claim SaaS, also known as on-demand or cloud computing (after the representation of networks as clouds in system diagrams) is the future of software.
Other commentators argue that SaaS has its limitations: it is for companies without IT departments, or it is only useful in application areas such as human resources or CRM.
One thing is sure: the technology has a long pedigree. Timesharing and bureaux services were around at the start of computing, but when easy, cheap internet communications arrived in the 1990s, dot com entrepreneurs saw an opportunity to revive the idea and set up application service provider (ASP) companies.
But their ventures mostly flopped. Products were not scalable, service levels were low and they did not shape their offerings well enough for the web. For instance, some companies tried offering standard PC productivity software as a downloadable service. Bandwidth was expensive and the applications were unsuitable for downloading on-demand.
Now the software industry is having a second go and customers seem to like it better this time around, in particular IT departments which previously tended to dismiss SaaS on reliability and security grounds.
Google, Amazon and established enterprise software companies including Microsoft, Oracle and SAP, have joined specialist pioneers such as RightNow, NetSuite, Salesforce.com and SuccessFactors in the marketplace.
Some users are evangelical. "IT departments can get bogged down in building specifications," says Lucy Mills, business excellence manager at Nimbus Partners. "With SaaS the systems are owned by the business areas. Salesforce never says no, but talking to an IT department they do."
Analyst firm Gartner is bullish. It has predicted there will have been a 20% increase in the use of SaaS between 2006 and 2007, with continuing growth over the next three years. By 2011, Gartner forecasts that SaaS will account for 35 per cent of software deployments.
Databases are most suited to SaaS according to a survey of IT managers commissioned by telecoms firm Colt and published in June. Customer relationship management (CRM), human resources (HR) and enterprise resource planning (ERP) are the next most popular.
In terms of benefits, respondents put cost savings on top, followed by the belief that SaaS will make applications easier to manage and provide an improved service to end users. Managers cited security concerns as the biggest potential barrier to adopting SaaS.
User-friendly interfaces, rapid deployment, limited upfront investment in capital and staffing, plus a reduction in software management responsibility all make SaaS a desirable alternative to software on a user's premises.
Architectural approaches to SaaS vary from those in which every user has a dedicated database to ones in which information is held in common. However, SaaS is not a delivery mechanism best suited to every circumstance. For example, applications with a high volume of data transfer such as data warehousing put a big strain on networking bandwidth.
SAP also sees smaller enterprises as natural customers for SaaS. The ERP company launched its Business by Design service in December last year for businesses with up to 300 employees. And although there are projects in SAP to develop SaaS for larger enterprises, there are no plans to move customers off existing in-house platforms.
Service levels have to be high. For example, SAP makes concerted efforts to record errors that occur in Business by Design, because it cannot rely on non-technical end users to describe problems accurately.
"On-demand computing has provided a compelling case for providing technology to smaller businesses," adds Gareth Davies, a manager in Deloitte's consulting practice.
Pure SaaS companies are adamant that they are now part of enterprise computing. "We are dealing increasingly with IT directors," says Laef Olson, chief information officer of CRM provider RightNow Technologies.
"When you think about all the services a CIO supplies to an organisation, you have not abdicated your responsibility just because you buy SaaS. "I don't think it is revolutionary because the first thing a CIO asks is, 'What business issue do I need to solve?' If you are a good CIO you are going to be looking at it in terms of enterprise strategy."
However, "There is a grey scale between pure on-demand and pure on-premise, with few applications being black or white," says Clive Longbottom of analyst Quocirca.
Microsoft has christened its hybrid approach to SaaS as "software plus service". "Software and existing assets have survived the test of time," explains Matt Deacon, chief architectural advisor in Microsoft's developer and platform group. "People just cannot afford to rip out and replace existing systems. There are also concerns over sharing data outside the firewall."
Nonetheless, the company has already introduced SaaS for the Exchange mail program, Dynamic CRM and its SharePoint collaboration product. Commentators are disappointed Microsoft did not go further by delivering Microsoft Office as a SaaS. But that is not on the cards for now, says Deacon.
Some players predict hard times for package software companies. "Of some concern is the long-term viability of the big guys like Oracle and SAP who are starting to see customers wonder why they would want to continue paying for software and functionality they do not use," says Colm Mulcahy, managing director of SaaS consultancy Saaspoint.
One thing is clear, companies which began as one-trick ponies have now got many more cards up their sleeve. They have increased the range of their portfolios and begun to encourage users to develop their own applications on so-called platform as a service offerings.
And they are trying to allay the concerns many enterprises have about letting their data leave the safety of the company firewall. "Vendors can also apply for industry certifications, which involve an in-depth audit on security and internal controls. For example, MessageLabs has the ISO 27001 certification, which shows that it has met the industry recognised criteria for security," says Mark Sunner, chief security analyst at MessageLabs
SaaS is undoubtedly going to play a big part in IT over the next few years. However, software will continue to run on users' own systems.
Prudent IT departments will hone their contract management skills, keep their hype antennae well tuned and have a clothes peg close at hand.
This was first published in August 2008