This week, the world's biggest software company announced it would begin offering online software services to "businesses of all sizes".

The "software plus services" strategy, as Microsoft execs have called it, has been a long time coming, and it appears that it will be many months before the much-hyped vision becomes everyday reality for all corporate IT departments.

Still, however you look at it, the fact is that Microsoft is adding a cheaper software-as-a-service option that could cannibalise its on-premise software cash cow. Analysts such as Matthew Cain, a research VP at Gartner, say that this shift in strategy is "titanic". He declares, "There really isn't much bigger news than this."

Back in September 2007, Microsoft announced the "roadmap" for its software services strategy and introduced its Online Services offering for businesses with more than 5000 users. Cain notes in a recent Gartner report that while the SaaS model is in its infancy, it holds considerable appeal, particularly for SMEs.

"This is because it offers fixed monthly fees, freedom from most operational management, elimination of upgrade responsibilities and, in some cases, lower costs," he said.

Jeff Raikes, president of Microsoft's Business Division, kicked off the festivities in September by proclaiming that the "new era of connected computing is about empowering people and businesses to balance the power of the internet with the rich interactivity and high performance of client and server software".

This was a new and different Microsoft. This was also a scared Microsoft.

The Cloud Hanging Over Redmond

Amid all of Microsoft’s recent rhetoric about giving enterprise customers more choice, it's critical to note the practical motives behind Microsoft's moves: responding to rising competitors.

"If Google didn't exist, Microsoft wouldn't be doing this," Cain says. "Why would Microsoft want to change a great thing? They would rather prefer to get revenues from their on-premise [software] model."

Ravi Agarwal, CEO of GroupSpark, a provider of hosted applications including Exchange, SharePoint and others, told Computerworld’s sister US publication that "it appears that this entire initiative...is driven largely in response to competitive threats from Google's Gmail and Yahoo's Zimbra".

Clearly, Google and its new set of web-based applications have tapped into the controversial new world order in corporate computing. IT can't control everything on its systems anymore, and users have become resourceful and powerful.

Google's foray into applications is a "destabilising force" in corporate IT environments, Cain notes. "To Microsoft's credit, before Google has gotten a substantial market share, this was a way to respond."

So those in Redmond have had to hop on board the software-as-a-service train, before it left the station. Microsoft must realise its newly announced SaaS offering needs about 18 months to mature, Cain says. "Well, where is Google going to be in 18 months? Google has shown that it can innovate at a furious pace."

And Microsoft, seeing the long-term picture and the hefty stakes, realised that if Google had an offering that undercut the Microsoft on-premise solution, then where would that leave Microsoft? "In this, Microsoft is banking on the worst-case scenario and that's why they're reacting this way," notes Cain.

Google's ascendance also has something to do with another piece of the new Microsoft – its $44 billion (£22 billion) bid for Yahoo. While Yahoo's board and management have rejected Microsoft's advances so far, it's clear that Microsoft executives realise that they can't sit back and feast on their on-premise software margins for much longer.

At the annual SharePoint conference this week, Microsoft Chairman Bill Gates dismissed Google's competitive threat. "They really don't have the richness and responsiveness," Gates noted." He went on to suggest that Google usually creates a "big buzz" when it introduces a new service but fails to maintain that buzz. "To be frank," he quipped, "the day they announce them [services] is their best day."

What It Means for Corporate IT

Gartner's Cain calls Microsoft's new strategy a "wakeup call for CIOs". CIOs and their IT staffs "need to become aware of Google's presence" and figure out how and where Google's applications and other online applications like it may fit inside their organisations. "This challenges the fundamental assertion that running software on-premise and having large staffs to operate the software is the only way to go," Cain says.

Before anyone, whether it be Microsoft, Google or someone else, changes the face of corporate computing, however, web-based products need to mature, Cain points out.

For Microsoft, the challenges in providing large-scale SaaS services for business "requires significant expertise in high availability, security, multi-tenant architectures, network topologies and problem resolution", Cain writes in the Gartner report.

Furthermore, Microsoft is retrofitting its existing software to the multi-tenant server model. So, says Cain, it won't be until the next version of Exchange (due in 2011) that its core products will be better designed to run in a multi-tenant SaaS model.

Google's number-one priority is to overcome the perception that its suite of applications isn't secure or robust enough for the corporate environment.

But just how would Microsoft's new offering and the presence of a viable Google apps offering affect internal IT operations? Cain says that there are going to be some dramatic workforce changes as a result of the shift. For example, running corporate email systems is "drudgery," Cain says, even though you need talented people to manage the system.

If a company uses Microsoft to host its Exchange Server 2007, for example, then "one could contend that those staffers could focus on things that add much more value to their companies," Cain says.

In the final analysis, though, if the market-leading Microsoft is able to eventually add applications such as Office to its SaaS suite, its endeavour will probably prove the sports truism that "the best offence is a good defence".

"Microsoft's SaaS investment is both an offensive move to capture operational revenue in addition to the licence fees it now collects," Cain writes, "and a defensive measure to combat potential incursions from suppliers such as Google."