While Salesforce.com was unveiling the first iteration of its new generation of on-demand vertical market software services aimed at the financial services sector this past week, Google was flexing its muscles as a viable Software-as-a-Service (SaaS) vendor with its first round of fee-based, packaged online desktop solutions aimed at enterprise customers.

Google’s new Google Apps includes integrated word processing and spreadsheet applications, as well as BlackBerry support for Gmail for $50/user, a fraction of the price of Microsoft’s Office suite. In order to overcome corporate apprehension about the quality of its new services, Google is offering guaranteed uptime, IT management tools, technical support, and increased e-mail storage. Yet, to show how far Google must go to fulfill its promise as a viable provider of on-demand enterprise apps, Google Gmail users suffered from a series of service failures during the first week of the company’s expanded offerings.

Nonetheless, Google put its service guarantees to good use and reacted quickly by offering service credits to its customers and should be able to restore its credibility just as Salesforce.com did a year ago when it also experienced service outages. And, with Google’s vast war-chest of cash, growing installed base of corporate customers, popularity among consumer users, and rapidly growing hosting and service delivery infrastructure, it is in an enviable position to become a potent player in the SaaS business.

Google has become a popular target of entrepreneurial software developers who have created new online solutions, or ‘mash-ups’, by tying their on-demand functionality to Google’s search and other online applications. Whether it is the widespread Google Map oriented solutions or Salesforce.com for Google Adwords type of mash-up solutions, the Google API has become an increasingly common component for many new on-demand solutions.

Now, a new round of software enterpreneurs are capitalizing on the Google platform to generate a set of Google-centric enterprise applications which could compete with the incumbent software vendors (ISVs) such as Microsoft, Oracle and SAP, and even Salesforce.com. For instance, Etelos is a software start-up that recently unveiled a CRM for Google on-demand application and is promoting the Etelos Ecosystem for developing and deploying other on-demand applications.

IBM is also capitalizing on the SaaS movement as an opportunity to cut into Microsoft’s dominance of the technology marketplace by teaming with both Google and Salesforce.com. Although IBM announced a strategic alliance with Salesforce.com in 2000, it has only begun to put real muscle behind its relationship more recently. This is in response to Salesforce.com’s growing acceptance among large-scale enterprises, IBM’s primary stronghold, and rapidly expanding alliances with competitors of IBM’s Global Services division, including Accenture, Deloitte and various offshore outsourcers.

This past week, IBM used the occasion of Google’s rollout of its new on-demand, enterprise application suite as a convenient time to announce that it would be the first major vendor to bring Google Gadgets™ — an assortment of previously consumer-oriented web utilities — into IBM’s WebSphere Portal. This is the latest in a series of moves as a part of a low-profile alliance between IBM and Google which could have far-reaching implications for the software industry as well as corporate customers and consumers.

As a result of this new integration, users can leverage any of the approximately 4,000 Google Gadgets into their corporate environments. The Gadgets include language translators, package delivery tracking, Podcast searches, Wikipedia information, and YouTube postings .

On first glance, many of these tools may seem irrelevant to a corporate environment. However, just as Instant Messaging (IM) has become a common corporate communications and productivity tool over the past year, many of the Web 2.0 Google Gadgets are being tested to determine how they can enable increasingly dispersed workers or complex supply-chain partners to work better together.

The past week has clearly demonstrated that the SaaS movement is gaining acceptance within the corporate world, and Google is positioning itself to be a major player in the next chapter of this rapidly evolving story.