From Innovations, a website published by Ziff-Davis Enterprise from mid-2006 to mid-2009. Reprinted by permission.

When Salesforce.com launched its hosted software service in 1999, few people gave it much chance of success. The class of companies then known as application service providers (ASP) was collapsing, taking with it hundreds of millions of dollars of investor dreams. Salesforce.com’s customer relationship management was dominated by Siebel systems, a multi-billion dollar juggernaut that showed no signs of slowing down. The whole idea of selling software as a service over the internet seemed crazy In light of the carnage that was occurring.

Now it appears that Salesforce.com has the last laugh. And the company’s eye-popping growth – revenue was up 64% in the second quarter – is only one indication of how right its timing was. Software as a service (SaaS), as the on-demand market has come to be known, may actually be the future of enterprise software. “SaaS will continue to pull the (overall) customer management market along with a 24% compounded annual growth rate,” said AMR Research in a recent report.

Few people saw in 1999 the factors that would lead SaaS to roil the software industry. Human nature is to look at failed ideas and assume they will always fail.  But history has taught us that innovative ideas often don’t succeed the first time around. The on-demand software model is fundamentally a sound notion. It’s just that a decade ago the technical infrastructure was not there to deliver it and users were not ready to accept it. All that has changed.

Users love this idea. Why should their companies have go through multi-year and multi-million dollar installation cycles to implement software that may be irrelevant by the time it’s in service? The SaaS proposition is simple: get started quickly with a reasonably robust set of features and then customize as you need. The ROI is fast and the setup costs are next to nothing. And SaaS companies, unlike packaged software firms, have a vested interest in keeping their customers happy and because it’s so easy for customers to walk away.

IT thought leaders were quick to shoot holes in the early SaaS proposition. Security was a problem, they said. You couldn’t customize the software. And what about reliability? I fell prey to this mindset myself. In a column back in 2000 I dismissed SaaS as nothing more than the second coming of time-sharing.

Most of the skeptics’ arguments were rubbish. Successful SaaS vendors are building world-class technology infrastructures that are as secure and reliable as any Fortune 500 data center. Customization is still limited, but I think a lot of technology people over-estimate users’ interest in that feature. Most of them simply want to make their lives easier, cut out the grunt work and focus on doing business. The fact that SaaS delivers benefits so quickly overwhelms the negatives.

Many people now believe that SaaS is the future of enterprise software. “ThinkStrategies believes that SaaS deserves to be viewed as a mainstream alternative to traditional on-premise packaged applications,” says Jeff Kaplan, Managing Director of THINKstrategies.

Adds Bill McNee, president of  Saugatuck Technology, “At the end of the day, the business users are focused around business value and that’s what this is all about.”

In the last year, we’ve watched the software industry begin to completely reshape itself around on-demand delivery. It’s the foundation of Google’s application strategy, while Microsoft, which is quickly reshaping its business around “Microsoft Live,” which is essentially its own version of SaaS.

This is not to say that packaged software is dead. Some applications don’t lend themselves to the online model and some users will always prefer the control that packaged software gives them. But there is no doubt where the trend is headed. The vast majority of new entrants into the software market today are delivering their products online. That trend is not going to change.

This blog is about innovation, so let’s see what lessons we can learn from this. SaaS innovators refused to kowtow to the skeptics in the IT world. They were talking to the business users, who were telling them a very different story. They learned from the mistakes of their predecessors and focused on getting the model right, rather than changing it

It’s difficult to tell how all this will play out. We’ve talked earlier about disruptive technologies, those that force dramatic and often unpredictable change on institutions. There’s no doubt in my mind that SaaS is a disruptive technology. It could completely upend the power structure of the software industry.  More importantly, it could give users important new options for deploying software quickly and effectively. IT organizations should get involved in this sea change. If they don’t, it will swamp them.