Software as a service is a key driver behind the IT industry's belief that technology innovation is on an upswing, consulting firm McKinsey & Co. said Tuesday.

Abhijit Dubey, associate principal for McKinsey, told attendees at the Interop conference in Las Vegas that a survey of IT buyers found that 62% believed the industry was at the beginning of the innovation cycle. Driving that upbeat observation was the development of SaaS, which IT managers ranked as the most important item for their businesses this year.

As a result, SaaS is becoming mainstream within the IT industry, particularly among small and midsize companies, which are the biggest adopters of using software over the Web, rather than deploying it in-house. "In the enterprise, (adoption) has been slow, but it's starting to gain traction," Dubey said in his keynote.

In describing the value of the SaaS model, Dubey said companies deploying traditional software spend 60 to 70 cents of every dollar invested on software over a five-year period on the underlying platform driving the applications. For users of SaaS, that amount drops to 20 to 30 cents on the dollar.

As a result, a SaaS deployment holds the potential of significantly higher platform productivity and faster time from creation of a service to actual consumption by the end user. "This is why everyone in this room should take notice, whether you are a customer or a provider," Dubey said. "The stakes are very high."

Among technology vendors, two sides in the battle for customers are emerging. One comprises the mega-vendors, such as IBM, SAP, Oracle, and others; the others are pure-play SaaS vendors, such as Salesforce.com, Amazon.com, and more. The prize is a share of a market expected to reach from $5 billion to $10 billion by 2012, Dubey said.

Over time the SaaS industry is likely to experience considerable consolidation, as companies combine development platforms, delivery systems, and application services. "There will be lots of alliances and lots of acquisitions," Dubey said. "And for the IT buyer, there will be lots of uncertainty."

In a panel discussion that followed Dubey's speech, David Knight, a VP at online collaboration service WebEx Communications, a division of Cisco Systems, said the SaaS market is likely to consolidate to two or three dominant platforms and hundreds of niche players.

In choosing the right vendor today, companies need to clearly define the problems they are trying to solve, then evaluate vendors on the time it would take to deliver the value of the service to customers.

"The opportunity behind the SaaS platform is to get the innovation cycle of the Web," Knight said. Where innovation in the traditional software industry can run one to three years, innovation on the Web is measured in six-month cycles.