As the economy continues to struggle, it also presents some interesting opportunities for stronger SaaS companies to pick up marketshare and eliminate competitors.

In a deal announced last Friday, Xactly - the leading SaaS company in the Sales Performance Management (SPM) market, acquired Centive in an all stock deal.  Centive is a long time player in the SPM market with many large customers and a gradually improving subscription revenue stream.  The company has been on a slow transition to an on-demand model for the past few years.  When I heard about the deal I thought about the old addage, ‘If you can’t beat ‘em, join ‘em’.  By combining the two firms, Xactly now increases their overall size and revenue footprint, adds new clients and gains a substantial East Coast presence, since Centive is based in Boston.  What was also announced is that Xactly will support the Centive platform for 18 months but will migrate all of the existing Centive customers to the new combined Xactly platform, which is a very smart move.  Don’t support two or more platforms, ever!  Consolidate the technologies now, you will save money and it is the only way the acqusition will make financial sense over time.

What is really happening in the background is the stage is being set for the main event, which is the battle for the control of the SPM space between Xactly and Callidus (NASDAQ: CALD) some time over the next 12 -18 months.  Callidus has been in the market for many years and in fact, Chris Cabrera, Xactly’s CEO is a Callidus alumni, so it will be interesting to see how this plays out.

Callidus has been diligently trying to move to an on-demand model for many years but their legacy of highly customized, on-premise deployments will be difficult (ie. impossible) to convert to a real on-demand solution.  Or put another way, I doubt their customers will want to re-buy their on-demand system from Callidus, because once it is installed and working, you really don’t want to touch it again.

Smartly, Xactly has used the recession to their advantage.  This is just the first of many deals as the Software market will begin a period of very active consolidation during 2009.