Long tied to the fortunes (and misfortunes) of information technology executives and traditional hardware and ERP goliaths, Gartner Group seems to finally be embracing Software as as Service (SaaS) — albeit somewhat reluctantly. In its latest report, On Premise Software Will Be Challenged By SaaS Software Delivery (membership required), the old-school analyst firm predicts that SaaS will account for 25% of all new business software sales within the next five years.

That prediction is well below SaaS market projections from others like IDC and Triple-Tree, but it does indicate a self-admitted shift in Gartner’s original thinking that SaaS was a passing fad. Report author Robert DeSisto, research vice president for Gartner, straight talks IT execs: “SaaS solutions are here to stay and [IT] must look to leverage the upside potential of these approaches rather than see them as a threat to their existing modus operandi.”

It’s nice to see arguably the leading advisor to CIOs announcing the arrival of SaaS. But the declaration may be a case of too little, too late. The admission comes months (and in some cases years) after the world’s largest traditional installed ERP and business software providers publicly declared that market dynamics required them to embrace SaaS. (Evidence a previous post on Microsoft President and CEO Steve Ballmer views on the future of enterprise applications: “If you want to be a leading software company, you’ve got to be a leading Software as a Service company.”)

And, despite the research data showing how enterprises are embracing SaaS, DeSisto and his fellow authors still seem intent on minimizing its impact and applicability. In one sentence, DeSisto touts that “SaaS providers are enhancing their software functionality and improving the ease with which companies can customize and more uniquely configure SaaS software to meet business requirements…and we are beginning to see [SaaS] vendors provide capabilities, such as opportunity to order and in integration as a service.” In the next, he states that “no [SaaS] provider offers the functionality capability or process management capabilities on par with on premise software to support end-to-end cross departmental business flows.”

Try telling that to Salesforce.com. (Or the CRM or ERP giants that bought, begged, and stole to try to emulate Salesforce’s SaaS approach.) Or any host of end-to-end supply management or Procure-to-Pay vendors that have embraced SaaS and that lead the market in terms of application functionality.

Interestingly, the report doesn’t break out SaaS revenue projections for the supply (or spend) management solution segment. Instead, Gartner lumps these into the overall supply chain management, which is unduly weighted by applications for planning and managing internal inventories and demand plans and that have long been extensions of ERP. As other analysts have speculated — and Salesforce.com has proven — SaaS adoption will grow fastest in supporting inter-enterprise business processes, such as customer or supplier management, where traditional ERP and installed software models lack advanced functionality and are costly to extend to external trading partners. (Read EDI all over again.)

DeSisto and his co-authors offer no justification for their disparaging commentary on the end-to-end business process capabilities of SaaS solutions. But Gartner’s historical research and the market segmentations noted above seem to suggest that the comments were made based on the fact that most SaaS solution providers have elected not to recreate the financial and backoffice capabilities that have long been the domain of ERP systems.

This myopic view misses a key benefit of SaaS, which is streamline and improve end-to-end business processes in part by extending the capabilities (and sunk costs) of an enterprise’s existing IT infrastructure. Not to mention that it flies in the face of common knowledge that very few, if any, analysts, consultants, or enterprises would say that ERP providers offer market-leading functionality for critical partner, customer, or supply management processes. (Hence the moves by ERP vendors to buy up independent ISVs that offer better functionality and, in some cases, that have embraced SaaS.)

Gartner’s decisions to research SaaS should be a welcomed event by vendor and enterprise alike. They have deep research capabilities to delve into all aspects of SaaS — from selection to integration as a service. However, its early publications in this area suggest that Gartner’s allegience to an IT-centric world view may be clouding its analysis and recommendations. This stance doesn’t jibe with the power shift for enterprise application decisions that has occurred in recent years, moving decision-making power away from the once high and mighty CIO to the business line executives. 

These new IT decision makers select technology based on which solution can provide functionality to best improve and streamline a business process — such as strategic sourcing or end-to-end supply management — in the shortest amount of time. (They are less interested in whether a solution comes equipped with redundant financials or back office functionality.) Business line execs are also looking for solutions that enable them to move quickly to adapt business processes and corresponding solution functionality to meet changing market requirements. It is for these reasons that SaaS adoption is growing rapidly. And it is these dynamics that Gartner will eventually need to embrace.