Ravi Agarwal, CEO of GroupSpark, a provider of hosted applications including Exchange, SharePoint and others, told Computerworld 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 spirit of the new world order in corporate computing: Namely, that IT can't control everything on its systems anymore, and users have become resourceful and powerful.

Google's foray into applications is a "destabilizing 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."

That logical conclusion forced those in Redmond to hop on board the software-as-a-service train—and before that express engine had left the station for good. "Microsoft has to be thinking that with the newly announced SaaS offering, it will take 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, realized that if Google had an offering that undercut the Microsoft on-premise solution, then where would that leave Microsoft? "In this," Cain notes, "Microsoft is banking on the worst-case scenario and that's why they're reacting this way."

Google's ascendance also has something to do with another desired piece of the new Microsoft: Its current $42 billion bid for Yahoo. While Yahoo's board and management have stated that the offer (roughly $31 per share in stock and cash) undervalues Yahoo and has rejected Microsoft's advances so far, it's clear that Microsoft execs realize that they can't sit back and feast on their fat on-premise software margins for much longer.

At the annual SharePoint conference in Seattle on Monday, Microsoft Chairman Bill Gates dismissed Google's competitive threat. "They really don't have the richness and responsiveness," Gates noted, "and you can see that relative to the success they've had there." 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 is their best day."

What It Means for Corporate IT

Gartner's Cain calls Microsoft's new strategy a "wakeup call for CIOs." By that he means that 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 organizations. "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.