LucidEra’s decision to close its doors this past Friday will spark a new round of debate regarding the viability of the Software-as-a-Service (SaaS) and cloud computing business models.

Some established vendors will use this event as further proof that the SaaS and cloud computing models are not sustainable. Conservative IT and business decision-makers within ‘user’ organizations will use it to justify their decisions to stay away from these ‘on-demand’ solutions.

Ironically, the Wall Street Journal published an article today highlighting the growing efforts of many of the largest software and systems vendors to get onboard the on-demand services bandwagon. The article points out that these vendors have been reluctant to adopt SaaS and cloud computing strategies and offer on-demand alternatives because they undercut the value and profit margins of their legacy products. But, their customers are moving in this direction and they must respond or continue to lose business to companies like Salesforce.com and SuccessFactors.

I’m saddened to see LucidEra fail because I’ve liked the company’s principals and value propositions since their inception. The company’s founder, Ken Rudin, has been an important evangelist for SaaS. And, the company had developed some interesting ways to demonstrate the value of its offerings beyond simple ‘try and buy’ promotions.

But, I’ve been predicting for months that today’s tough economic climate is going to claim many SaaS and cloud computing companies who don’t have sufficient resources, compelling value propositions or clear differentiating qualities to sustain themselves.

The proliferation of players, combined with incentives within companies of all sizes to delay purchase decisions, has extended the salescycles for almost every SaaS company.

This is hurting many of the SaaS 1.0 vendors in particular who had to make significant investments in their SaaS architectures and delivery capabilities before less expensive platforms and computing resources became available from companies like Salesforce.com and Amazon, for example.

Venture firms, who are facing severe pressures from their limited partners, have put much higher hurdles in place when considering new rounds of funding for their current portfolio companies, as well as prospective start-ups.

LucidEra found itself in this bind and wasn’t able to find a buyer to rescue it from an untimely death. Larger SaaS companies, as well as many legacy vendors, are also facing financial constraints which are precluding them from making acquisitions. Other prospective buyers are willing to cherry-pick the assets or personnel rather than purchase the entire enterprise.

Just as the demise of individual car companies or banks doesn’t spell the end of the automotive or financial services industries, the failure of LucidEra doesn’t represent the end of the SaaS era. It also doesn’t mean that SaaS-based business intelligence and analytics can’t succeed. Customer interest and adoption of SaaS-based BI/analytic solutions is growing. But, there isn’t enough demand to support the myriad of SaaS vendors competing in the market.

The demise of start-ups, like LucidEra, is a natural part of the evolution of any new marketplace. It should not be viewed as the beginning of the end of the SaaS or cloud computing industry.

But, it will make it more difficult for other small SaaS companies to convince IT/business decision-makers that they can survive in an increasingly tough economic and competitive environment.

The key will be for SaaS and cloud computing companies to clearly demonstrate the measurable business benefits they can generate to offset these concerns.

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