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But providers need to tackle integration, customization and brokerage issues before SaaS can reach its full potential.

By Christine Bums.

Software as a service has some wildly successful poster boys such as Salesforce.com, Google Apps, NetSuite, Workday, ADP and Concur. Every new independent software vendor is developing for the SaaS market. And for the established software companies, it's a case of articulate and deliver on a cloud strategy or die.

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On the enterprise customer side, there is an increasing familiarity with the SaaS delivery model; continued pressure on IT budgets; and a growing comfort level with the security and performance parameters of cloud computing.

So, why isn't the SaaS market bigger? What's holding it back?

Gartner pegs total worldwide software revenue at $267 billion in 2011 and expects it to hit $288 billion this year. But Gartner puts worldwide SaaS revenue at only $12.3 billion and $14.5 billion, respectively, which comes out to less than 5% of annual software sales.

According to Gartner research director Sharon Mertz, the two key factors inhibiting widespread SaaS deployments in North America are the lack of customization available in large, multi-tenant cloud applications, and the dearth of real integration between SaaS applications and existing on-premise systems."At 10 years old, or 10 years young -- however you want to specify its age -- SaaS has the power to change everything. It should be viral, like a really hilarious YouTube video. And it just isn't. Why not?" asks Jason Currill. He is CEO of Ospero, a U.K. startup looking to use its VMware cloud running on an infrastructure-as-a-service (IaaS) platform to build a better SaaS delivery channel across Europe.

That's not to say that SaaS isn't growing. By IDC's accounting of worldwide SaaS market revenue -- which includes cloud applications, application development and deployment, and system infrastructure software -- sales will balloon to $53.6 billion by 2015 at a compound annual growth rate of about 26%. At that point, IDC expects that SaaS will represent 73% of public cloud services revenue.

IDC also asserts that SaaS will grow faster than traditional software and will comprise 80% of the software delivered by new ISVs. By 2015, nearly $1 of every $6 spent on packaged software, and $1 of every $5 spent on applications, will be consumed via the SaaS model, according to a recent IDC report.

So, even though SaaS is growing at a healthy clip, these projections say that three years from now SaaS will still be below 20% of the total software market.

The good news is that existing SaaS vendors are teaming up to address the issues identified by Mertz and others. And cloud service brokerages are emerging to help enterprises manage multiple SaaS deployments.

Robert Mahowald, research vice president of SaaS and cloud services at IDC, sees back-end data integration between SaaS vendors as a significant step toward ubiquitous SaaS adoption. He pointed to the recently announced partnership between CRM giant Salesforce and business expense management vendor Concur as an example. This partnership -- dubbed Concurforce -- links the data collected and managed within the two SaaS systems, so that customers can make choices on which business to pursue based on how much they have to spend on each sales effort.

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