Conventional wisdom holds that small companies, not big ones, are embracing software-as-a-service technologies. And until now, Microsoft’s forays into the SaaS arena via its Live services have reinforced that view by focusing on home users and small and mid-sized businesses.

But the software vendor is aiming directly at enterprise users with its Online family of hosted services, which it has begun offering.

Only customers that are buying licences for 5,000 seats or more will be eligible to use the SaaS versions of Exchange, SharePoint and the soon-to-be-released Office Communications Server 2007, said Eron Kelly, director of product management in Microsoft's business online services group.

Kelly said that in an attempt to reassure corporate users about application performance, Microsoft will offer rebates ranging from 25% to 100% of its SaaS subscription fees if service-level agreements are not met.

Barry Libenson, CIO at Ingersoll-Rand, said he has not looked closely at SaaS yet, but he agreed that systems such as email servers might be ripe for a conversion to hosted services.

"With the backups, the legal requirements, and the privacy and security issues, there is a lot of stuff to manage correctly," Libenson said. "It is a challenge."

Hosted software makes the most economic sense for companies with fewer than 1,500 users, said Michael Osterman, an analyst at Osterman Research. But, he added, there are scenarios where SaaS can work for some companies with tens of thousands of users.