The cost benefits of on-demand software models--which let businesses buy software on a subscription basis--continue to chip away at the traditional software licensing model. Three small vendors show the software-as-a-service model evolving and expanding, while two of the industry's largest suppliers, SAP and Oracle, could be among the new entrants.

Brightidea Inc., which makes software that helps companies track ideas and projects, last week launched an on-demand version of its innovation-management suite. Market newcomer Mitrix Inc., a subsidiary of Mitsui & Co. USA, this week will introduce an on-demand supply-chain-management application. And SmartCompany Inc. this summer plans to launch on-demand customer-relationship-management software that features a Windows-style interface, letting users work offline and exchange data with Microsoft Office apps.

Pacific Instruments Inc., which makes testing equipment and pays $4,000 a year for 10 user seats, sees value in the SmartCompany upgrade. "We'll get to generate quotes directly from the SmartCompany Turbo app into Excel and Word," sales manager Chris Lloyd says.

The growing success of CRM vendor Salesforce.com Inc., which last month signed Merrill Lynch to a 5,000-seat subscription, is one force driving the flurry of activity. In a March report, research firm IDC predicted the software-as-a-service market will hit $10.7 billion in 2009; IDC pegged the market at $4.2 billion in 2004.

But market success isn't guaranteed. Mitrix is entering a market potentially more difficult than CRM, and it will compete against existing on-demand vendors One Network Enterprises Inc. and RiverOne Inc. "No two companies have the same supply chain," says Bruce Richardson, chief research officer for AMR Research. "It's not like a CRM application."

Mitrix provides its SCM Live service to Mitsui's parent company, Japanese trading company Mitsui & Co. Ltd., and says it has proved its model works. "The growth will come from companies that couldn't afford these supply-chain tools in the past," says Ed Lewis, Mitrix's president and CEO.

CRM isn't a sure thing, either. It's an increasingly competitive market, and SmartCompany's hybrid desktop/on- demand approach may not be enough to give it an edge, says Joshua Greenbaum, an analyst with Enterprise Applications Consulting. "Good technology doesn't always win," he says.

Conversely, Greenbaum believes smaller on-demand players such as SmartCompany can make their mark by providing niche capabilities. "If you're a startup with an exciting new function, you'd be crazy not to offer it in an on-demand model," Greenbaum says. "You'll be there ahead of the game when some big apps vendor tries to home in on your territory."

Sources close to SAP have said an on-demand CRM offering will debut in about a month, according to CMP Media LLC's CRN. An SAP spokeswoman acknowledges the company demonstrated a "slim" sales-force-automation app at its Sapphire conference in Copenhagen in April to get customer feedback, but she wouldn't say whether it was technically an on-demand app. The company won't comment on whether it has plans for the model.

An Oracle spokeswoman says it's possible that Oracle would consider adapting the CRM technology it gained in the PeopleSoft acquisition to bring a Salesforce-style offering to market, although the company hasn't announced any specific plans.

Greenbaum believes that such moves are inevitable and predicts that a majority of software sales over the next 10 years will be paid for on a subscription basis.