Big businesses may have reached the tipping point in their acceptance of software as a service. Flextronics, the $28 billion-a-year contract manufacturer, said last week that upstart SaaS provider Workday will supply it with human capital management software for 200,000 employees worldwide. That's nearly 10 times the size of Workday's previous largest end-user license deal.

If it seems as if Flextronics CIO David Smoley is going out on a limb by licensing SaaS rather than on-premises software, he's not alone. Coca-Cola Enterprises CIO Esat Sezer recently signed up for 35,000 seats of Microsoft-hosted Exchange and SharePoint, and that number could double. Salesforce.com, which blazed the SaaS trail with a few hundred marketing execs here and a few thousand sales pros there, has a growing list of mega-accounts, too, including Japan Post with 40,000 users and Citibank with 30,000.

The numbers are impressive, but keep them in context. A self-service HR application like the one Flextronics will use doesn't have the same level of complexity as, say, SAP's manufacturing suite. That said, SaaS adoption is ramping up, and the appeal is obvious: By plugging into the applications "cloud," IT departments are freed up to work on more strategic projects. Human capital management, or HCM, "isn't considered an area of innovation and growth for companies," says Manjit Singh, CIO of Chiquita Brands, which, with 26,000 employees, represents Workday's second-largest customer. "Besides the need for simplicity, there's also the question of where companies want to invest time and resources."

At a scale of hundreds of thousands of users, SaaS isn't a no-brainer. Workday and other newcomers still must prove they can support workloads an order of magnitude greater than before. Just seven months ago, Workday CEO Dave Duffield and president Aneel Bhusri said the vendor had work to do to scale its architecture for companies with tens of thousands of employees. They now say they've made it over that hump.

And CIOs need to check their assumptions about how much they stand to save. Microsoft senior VP Chris Capossela calls expectations of automatic cost savings from SaaS "overblown." Because SaaS is offered as a subscription, he says, "you're going to pay forever." In March, Microsoft revealed deals to provide "single-tenant" SaaS to a half-dozen large companies, including Blockbuster and Ingersoll Rand. Microsoft's multitenant SaaS is in beta testing now.

Flextronics CIO Smoley is counting on Workday to support employees in 30 countries, taking into account idiosyncrasies from Chinese law to German labor unions. Flextronics will share Workday apps with other companies, all relying on Workday to provide software that's fundamentally the same for everyone yet unique where necessary. Looking to replace some 80 disparate HR systems, Smoley compared Workday feature by feature with "all the traditional" providers of HR software, including Oracle and SAP.

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Niche SaaS vendors are landing major deals as well. SuccessFactors, which makes employee performance management software, in April said it will provide software to a company with 300,000 employees, though it didn't identify the customer. Authoria, which specializes in personnel management, and Concur, in expense management, also have reported SaaS deals that exceed 100,000 users.

Coca-Cola Enterprises, Coke's largest bottler, is looking to Microsoft's Exchange Online and SharePoint Online services to hasten application deployment, cut costs, and let IT pros turn to more important things. "This is not a head-count reduction for us," CIO Sezer says. "Services are complementary to our IT strategy."

Microsoft's single-tenant services (CRM, Exchange, Office Communications, and SharePoint) are aimed at companies with more than 5,000 end users. Its forthcoming multitenant services, in which application servers are shared by multiple customers, are geared toward companies with fewer users. Capossela says customers can use a combination of hosted and on-premises software.

What about the other big enterprise software vendors? Oracle says 3.6 million users tap into its Oracle On Demand applications. SAP's initial thrust into SaaS was its small-company Business ByDesign ERP software. Citing unexpectedly high development costs, however, SAP recently scaled back its investment in Business ByDesign while it tries to get it right for early customers. Its new twist is to offer on-demand "components"--a supplier management applet, for example--that large companies can download to use with their on-premises SAP software.

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Not all hosted apps fit the definition of a "true" SaaS offering, one in which the software is designed to run in a multitenant environment where customers are kept on the same up-to-date version. That's important because many of the benefits associated with SaaS are a function of a multitenant design, says Workday president Bhusri. "If you talk to the customers that are hosted on Oracle or PeopleSoft, you'll find they are not on all the same versions," he says.

And, despite Capossela's contention that SaaS isn't necessarily cheaper than on-premises software (Microsoft hasn't announced pricing), Bhusri estimates that, over five years, Workday's HCM costs only 20% of on-premises software. Both Flextronics' Smoley and Chiquita's Singh say total cost of ownership was a significant factor in their choice of Workday, though they declined to discuss the size of their contracts.

In addition to scaling up, Workday is expanding its feature set. This week, Workday rolls out an upgrade to its platform with new capabilities for procurement (requisition, approvals, invoices) and managing expenses. Its HCM app now supports "matrix" org charts and manages employee time off. Workday is establishing connections to benefits service providers--nine so far and 17 in the works--and integration with third-party recruiting, workforce management, and CRM apps. A Workday payroll application, being tested by McKee Foods, is due later this year.

Not all enterprise apps are suited for SaaS. Some entrenched vendors suggest that financial apps are best kept in-house. But Singh sees things differently. "A lot of companies have outsourced their data centers," he says. "So let's look at the definition of 'four walls.' There is no such thing as a corporate, four-wall environment."

There used to be. But as more vendors offer apps as a service, and as big-company CIOs become converts, those walls are beginning to crumble.