Use of software as a service (SaaS) has more than doubled since the beginning of 2006 and will double again by the end of the decade, creating challenges for customers and vendors.

The industry must face up to these challenges as they attempt to integrate hosted offerings with on-premise software, according to research released this week by Saugatuck Technology, a business and market strategy consulting firm focused on emerging IT markets.

As companies increasingly use SaaS products for mission critical applications, integration with in-house software will likely require service oriented architectures (SOA), the report said.

It said SaaS is going to complicate and make more hybrid user IT and business operational environments faster and, to a greater degree, than most user and vendor executives understand at this point. "The vast majority of user IT departments will simply not have the resources to handle the influx of enterprise-level SaaS" expected to occur over the next seven years, added Saugatuck.

Saugatuck's research paper, titled Three Waves of Change: SaaS Beyond the Tipping-Point is based on surveys of 250 business and IT users, briefings with more than 30 SaaS vendors and extensive interviews with senior executives at 15 companies that use SaaS.

Saugatuck divides the SaaS adoption trend into three "waves." The first wave of early adoption was characterised by cost-effective software delivery involving standalone applications. The current phase of mainstream adoption is characterised by growth of business solutions increasingly integrated with on-premise applications.

Saugatuck predicts there will be a third wave of ubiquitous adoption that will begin next year and involve "workflow-enabled business transformation, optimised business and IT ecosystems, inter-enterprise collaboration, maturation of the IT utility and of SaaS infrastructure providers."

More than a quarter of companies are using at least one SaaS application, up from 11% at the beginning of 2006, the report said. By the end of this year Saugatuck predicts adoption will grow to 47% and that by 2010 it will reach at least 65% worldwide. "Much of this growth is coming without any sort of plan or management structure," said, lead author of the report, Mark Koenig.

The average number of SaaS applications used by midsize and large enterprises will reach seven per company by 2010, more than double the current amount, the research firm also predicts.

"Everyone thinks SaaS is an [small to midsize business] phenomenon," says William McNee, report co-author and president and chief executive of Saugatuck Technology. "While that is true, it is crossing all kinds of customers."

The trend of SaaS applications being tightly integrated with business services behind the firewall will necessitate a change in how IT departments view application security, and will lead them to consider "security-as-a-service" vendors, McNee said.

"This is where the security perimeter needs to be extended beyond what is currently managed today, to incorporate new types of applications and services and solutions," he said.