4. What kinds of services do SAAS vendors provide, and how do they deliver those services?

Companies such as Salesforce.com (CRM), Concur Technologies Inc. (expense management), Taleo (human resources), NetSuite (SMB Suite), SAP AG's Business ByDesign (a comprehensive suite of IT business services for small and midsize businesses) and RightNow Technologies (CRM) provide a wide variety of services spanning both end-user functionality and IT infrastructure, such as network security, e-mail and collaboration. The latest trend in service development is for SAAS vendors to provide entire sets of IT services -- "everything a business could need" -- on a unified platform, West says.

These services are delivered across the network and are usually accessed via a browser. This makes them ideal for supporting populations of mobile users, including field sales and support as well as consumers. "There are actually different interfaces for mobile workers," West says. "For instance, Salesforce addresses the sales community, and they are, of course, mobile. They have very good support for mobile PCs, handheld devices, BlackBerries, iPhones -- whatever you want to point to, they can definitely support those devices."

Because they are delivered over the Internet, this also makes them ideal for federated, geographically distributed and virtual organizations that reach beyond corporate boundaries to knit business partners together, and for delivering advanced services, such as financial analysis, to customers.

5. Is SAAS mostly for SMBs, or does it have things to offer to large enterprises?

Recently, SAAS penetration in the small-to-midsize business (SMB) market has been growing quickly, but penetration is happening in waves, West says. He estimates that the SAAS market may actually have greater penetration in large companies today, if one includes 2007 plans to implement SAAS solutions.

6. How mature are SAAS services?

Saugatuck Technology identifies three waves of market development. In the first, stand-alone SAAS services penetrated organizations mostly by selling directly to business units, with little IT involvement or, in many cases, knowledge.

In the second stage, which the industry is presently in, IT is either contracting for services directly or working with business units to ensure that the services meet corporate standards for security, integration with internal systems and other issues. SAAS services support increasing levels of integration both with other SAAS services running on a common system and with internal IT.

SAAS vendors typically provide standard service-level agreements (SLA) and in general provide a high level of service. West says that "99.5 percent is the lowest standard in SAAS, and it sometimes goes higher, to three 9s or four. Very few data centers can really claim that. They may say they are going to go to five 9s, but that doesn't really happen."

On another level, SAAS vendors are aggressively adopting new technology, so their services are evolving rapidly. "We are on the outskirts of Wave 3, which is kind of 'It's everywhere, it's everywhere,'" West says. This third stage in Saugatuck's model includes full functional integration between the SAAS services and the customer's infrastructure to the point of moving the focus to workflow. "It will be another form of business functionality rather than some renegade thing that has come in. So it is rapidly becoming a norm, if it is not already a norm, in many large enterprises."

And marketplace vendors are unifying their own services and in some cases combining services from several providers into comprehensive suites on a single underlying system. These typically have a large anchor service analogous to the anchor store in a mall, with a long tail of more specialized services focused on a market.