SaaS is the abreviation for Software as a Service and is usually pronounced as Sass.
Simply stated, SaaS works like this. You rent the software instead of buying. You run the software on the provider's server not your own. The use of the hardware is included in the monthly or annual fee. You access the software over the internet or by way of a virtual private network.
Saas has been around since the late 90's but has really just started to gain popularity over the last few years. SalesForce.com, SageCRM.com, NetSuite.com, and Google Docs are some of the more widely known SaaS applications. There are many many more.
Here is a video from InfoWorld:
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