Recently I attended a conference where I met an IT executive from a large manufacturing company who told me, “We are only looking at SaaS-based applications now.”

This executive, who requested anonymity, explained that his company had determined that using enterprise applications delivered as services over the Internet would enable quicker deployments, lower IT costs, and more seamless collaboration both inside and outside the enterprise. While this company didn’t plan to scrap existing applications in favor of SaaS-based systems, it planned to consider only SaaS for net new applications, he said.

Soon Managing Automation will publish the results of our annual Outlook poll, which, among other things, asks manufacturers which emerging technologies — including SaaS — they plan to investigate in 2009. But even before those poll results are in, it seems clear that the notion of SaaS, or cloud computing, has reached a tipping point. I hear from more and more manufacturing executives who have put away whatever security, reliability, and other questions they may once have had about SaaS and now seem ready to embrace the model more than ever. They see SaaS as a way not just to save money on IT infrastructure and speed deployments but also to deliver a richer Web-based user experience and enhance collaboration.

And even big enterprise software vendors that have tended to take a wait-and-see approach to SaaS are beginning to move more aggressively in this direction. SAP says it will accelerate the roll-out of its Business ByDesign SaaS platform for small and medium-size businesses next year. And, at Open World recently, Oracle said its promised Fusion Applications will be deployable via SaaS as well as on-premise and as a hosted product.

But, before getting on the SaaS train, manufacturers need to understand that selecting, buying, deploying, and operating software as a service is different from working with the on-premise applications with which they are more familiar. Manufacturers should understand those differences and plan for them. In some cases, that will mean making sure the contracts they sign with SaaS vendors adequately protect users of cloud-based systems.

Last month, Altimeter Group analyst Ray Wang posted what he calls a “Customer Bill of Rights” for companies considering SaaS products. All manufacturers contemplating SaaS — and even those with some SaaS experience already under their belts — should review this report and factor its recommendations into their SaaS procurement and management processes.

Among other things, Wang suggests that SaaS customers consider:

• How to protect themselves against the possibility of their SaaS vendor going out of business. Already some SaaS vendors have started to turn off the lights. In June, for example, SaaS business intelligence provider LucidEra pulled the plug. First, Wang says, contracts must clearly state that customers own all data, and vendors should provide tools for accessing data. Although SaaS customers usually rent access to the software and don’t purchase a license, they should seek access to the application’s data model and logical model in case they need to reproduce them at a later date. And, he says, SaaS vendors should give customers the option to identify an alternative vendor to act as a custodian for application source code, user data, application executables, and documentation, in case a SaaS vendor goes under.
• Holding SaaS vendors accountable for online performance. Vendors should contractually agree to notify customers of known or potential defects or quality problems, and agree to specific service levels. Contracts should include service interruption penalties that reflect the impact of the failure on the customer’s business.
• Monitoring your SaaS vendor’s financial health. Customers of critical SaaS applications should receive regular reports on the vendor’s long-term financial viability.
• Insisting on clear storage cost policy information. Often, Wang notes, initial storage requirement estimates prove inadequate, and additional storage ends up costing much more than expected.
• Obtaining indemnification against intellectual property liability. If SaaS vendors are successfully sued, customers should not be liable and should have subscription costs refunded.
• Obtaining up-front information on how vendors would support customers that want to transition from, say, SaaS to on-premise deployment. At no time, Wang says, should customers be locked into a single deployment mode by vendors offering more than one option.