If there's an IT recovery in store for this year, the top software companies haven't felt it yet. Nearly every major vendor ended its last quarter with a warning that sales were slow. Analysts say the slump signifies a combination of spending jitters and of deeper issues: Fundamental changes are under way in how customers buy software, and the shift could be a rough one for the industry's traditional leaders.

The biggest challenge the applications titans face is fierce competition, both from each other and from the rising pack of ASPs (application service providers). Siebel Systems Inc. used to sit comfortably at the vanguard of the CRM (customer relationship management) market; now, its potential customers are also being wooed by the Big Three ERP (enterprise resource planning) makers -- SAP AG, PeopleSoft Inc. and Oracle Corp. -- and by a host of fledging companies.

"There's a tremendous variety of products in every category," said Josh Greenbaum, principal of Enterprise Applications Consulting Inc., in Berkeley, California. "Customers are buying from the enterprise companies, but they're also buying from some start-ups."

This year, the ASPs went mainstream, with Salesforce.com Inc. cannonballing onto the New York Stock Exchange and reporting close to US$100 million [m] in annual revenue. Some of that total comes from tapping a new market -- the small companies with a few dozen employees willing to pay the $65 monthly per-user fees Salesforce.com and its rivals charge for their basic sales-automation products. Those tiny organizations were never going to be customers for traditional CRM vendors, where even a small deployment can carry a six-figure price tag.

But the ASPs are looking to swim upstream, and they're starting to win the enterprise deals that companies like Siebel compete for. Salesforce.com signed contracts this year with Automatic Data Processing Inc. and SunTrust Banks Inc. for more than 2,000-seat licenses each. Both companies run Siebel in parts of their business, yet both said they didn't consider Siebel in evaluating vendors for their sales-force automation projects.

DecisionOne Vice President of Marketing Frank Tait spoke with Siebel and SAP two years ago when he evaluated CRM options for his IT services firm. In the midst of a business-model overhaul, DecisionOne, based in Frazer, Pennsylvania, needed a system it could implement quickly, with a clear ROI (return on investment).

"From the date of the contract signing, Salesforce.com took 45 days to get our data converted and our system live. The others were in the six-month timeframe," he said. "My customization cost for Salesforce.com was under $50,000. The custom cost for the traditional vendors was 10 times that."

DecisionOne now has 150 employees using Salesforce.com, and Tait plans to remain a customer for the foreseeable future. "From an analysis perspective, it's been a gold mine. It's done exactly what we needed," he said.

AMR Research Inc. estimates that hosted services account for just 2 percent of the application market revenue today -- but forecasts they'll be the fastest-growing segment of the market over the next five years.

Independent analyst Amy Wohl said she thinks

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