On demand software is set to become a force to be reckoned with as it matures in line with increased small-to-medium sized business (SMB) IT spending.

Gartner research vice president of SMB applications Bob Anderson said 7% growth in the IT expenditure of some 80 million SMBs worldwide during 2006 was outpacing that of large enterprises, and is set to continue on an upward trend.

But he added: “A lot of IT vendors are blindly running after this SMB money thinking that, by virtue of their large enterprise success, selling to this space can’t help but be a slam dunk.”

He said larger IT vendors face a difficult challenge in adapting their traditional software delivery and licensing models to SMB needs, where he predicts 25% of all business applications will be delivered through the software as a service (Saas) model by 2010.

Anderson told delegates at a partner conference of Saas vendor, Netsuite last Friday that SMBs need rich vertical functionality, but have avoided major IT spending until now because, “they can’t stand the upgrade pain, which only takes them away from running the business”.

The evolution of on demand software, delivered over the internet as a service is changing this, he said, as larger business application vendors with client-server, licence-based portfolios including SAP, Microsoft and Oracle struggle against web and subscription-based competitors like Netsuite and Salesforce.com.

“The dotcom era saw the ‘one size fits all’ business application,” added Anderson, “where there was no opportunity for competitive differentiation. But in 2007, with Saas verticalisation growing along with the ability to embed key performance indicators, business intelligence and growing domain expertise, SMBs will see it as much easier to do business with web-based software.”

Netsuite, for example, is encouraging its partners to customise its enterprise resource planning (ERP) based software platform to more specific vertical SMB needs using last week’s release of its SuiteFlex application development platform for automating complex business-specific processes.