According to McKinsey’s latest annual survey of enterprise software buyers, Software as a Service (SaaS) has become the growth engine of the software business. They recited numbers, such as that SaaS has already penetrated to some extent 46% of midsize enterprises. Over the past few years, SaaS has been the leading targets of VCs, with over $4 billion in venture money flowing to on demand providers. The survey was presented during the opening keynotes of the Software 2008 conference in Las Vegas.

The study drew a wall chart delineating roughly 20 permutations of SaaS providers. The major categories are:

• Delivery platforms that provide base infrastructure like computing and storage. There are a couple flavors here: some are more like traditional outsource providers, except that they have engineered they platforms for multi-tenancy (unlike the single tenant models, where outsourcers customized each instance for individual clients). The other extreme is so-called ‘cloud computing,” such as Amazon EC2, which provides on access that is provisioned almost in real-time to meet immediate needs – much as a peak load power plant comes on line during periods when electricity demand spikes.
• Development platforms, which provide on demand environments for developing applications that are hosted on demand, like Bungee Networks, Coghead, or the hosted enterprise mashup sandboxes hosted by folks like Serena. The flavors here -- which include traditional IDEs, cloud-based offerings like Bungee, or mashups – are likely to converge in the long run.
• Application platforms, like Salesforce.com, NetSuite, and eventually, SAP’s BusinessByDesign and Microsoft Live Dynamics. The flavors here were end-to-end, which has also gotten the label of Platform-as-a-Service (which Salesforce is trying to add to the lexicon), where the SaaS platform is not only your application, but your enterprise computing environment (e.g., an alternative to Windows, Java, .NET or whatever). The other type is strictly the application without the delivery (e.g., the vendor contracts with a third party hosting facility) like NetSuite or Workday.
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Of course, the obvious question is who’s going to benefit from this transition. The McKinsey survey showed that for now, SMBs tended to prefer pure play SaaS upstarts while larger enterprises are hoping that their existing suppliers (e.g., SAP, oracle, IBM) will become their preferred on demand provider.

But in another survey commissioned by Business Week that was conducted by Saugatuck Technology, roughly half of some 400 respondents said that they had no idea or would look to alternative providers as the SaaS market unfolds.

Bill McNee, a former Gartner analyst who heads Saugatuck, described three “waves” or generations of SaaS offerings. The first wave, which began 2001, established multi-tenancy as the key differentiator, featured applications with relatively limited configurability, and an appeal based on rapid deployment. This first wave currently consists of at least 80% of the market today.

The second wave, which began phasing in a couple years ago, saw emergence of more integrated SaaS platforms and the beginnings of SaaS marketplaces, such as Salesforce’s AppExchange. But he emphasized that this was just beginning, as he pointed out that the long tail that you see on AppExchange has not yet amounted to a statistically significant market. The second wave has added more UI customization, and some modest customization of the data model.

The third wave, which McNee expects to emerge over the next year, will feature more emphasis on collaboration and workflow. This would lead to a future wave of offerings that would pinpoint measured and monitored business processes.

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