For growing businesses, I know of no better way to purchase software than as a hosted service, paid for on a per-user/per-month basis. While the equation may not work for the smallest companies, and some IT departments avoid it in order to build an ever-larger empire for themselves, Software-as-a-Service (SaaS) is the up-and-coming thing. And it's a perfect solution expand or contract in a roller-coaster economy.

With SaaS, your company's applications are hosted by the vendors and accessed over the Internet. All sorts of applications are offered this way, from desktop productivity to industry-specific applications, accounting, databases, e-mail archiving, content management and most everything else.

Usually, SaaS saves large upfront costs and allows the customer to benefit from economies of scale and making the vendor responsible for the care and feeding of the application. Throw in cheap bandwidth, necessary to access the hosted SaaS application, and you have a trifecta of reasons for SaaS's increasing popularity.

I am writing about this today not because of any news story, but following a conversation I had with a friend whose company is considering Salesforce.com's customer relationship management application. Salesforce is the poster child for SaaS, though many more companies have adopted the model. 

And it's the model that makes SaaS work. With a good SaaS provider:

1.   Customers don't have to invest in servers or staff to maintain them.

2.   Software updates, maintenance, and fixes are included in the price.

3.   Payment is on a per-user, per-month basis. Ideally, this is highly flexible and can be changed as often as needed.

4.   There is no long-term commitment, so customers can fire their SaaS providers if they don't measure up.

Ideally, there is also no large upfront configuration cost with SaaS, though this can vary with the amount of configuration actually required.

What I like about SaaS is that it puts the customer in charge of the relationship. The vendor has to prove its value every time the customer uses the application, or the customer can flee.

That is very different from the way most enterprise software companies do business. With big upfront costs for software, installation, and hardware--usually coupled with a multi-year contract--businesses have traditionally found themselves at a huge disadvantage relative to software vendors. That unbalanced relationship is responsible, I think, for the rise of big, nasty enterprise software companies that enforce Draconian policies on the companies that depend on them.

If I were founding a new business today--something large enough to have maybe a dozen employees at the start--I'd try to run everything that isn't a desktop productivity app (such as Office) as a SasS application. That would also allow me to be platform-independent on the desktop, so using a mix of Macs and PCs wouldn't be an issue. This would allow my company the freedom to adopt whichever hardware platform best suited my needs--whether based on price or user preference--at any given time.

Moving a company from traditional apps to SaaS is more difficult than starting fresh, but SaaS vendors offer migration strategies and support to smooth the transition.

My friend is still weighing the benefits of Salesforce versus purchasing a CRM product on a per-user basis and installing a local server. He says he has a spare server and that his time is free. If he has a small enough installation, maybe that course makes sense for him, though the upfront cost will exceed what it takes to get started with Salesforce or any other SaasS provider.

But, for many other companies, where growth or downsizing may be an issue and the IT staff is already overworked, SaaS can be the answer and is certainly worth considering.