It is important to heed the growth of software as a service or SaaS since it is having an effect on how customers buy software. It is not directly a route to market. The customer doesn’t necessarily purchase the service through the web without the involvement of a direct sales person. Indeed in enterprise SaaS sales, especially in the credit crunch, special deals cut through major account people are the rule not the exception. But in SMB where web purchases are routine, it is both a delivery and purchase route.
It is not a new phenomenon. Throughout the 1970’s service bureaus were the norm for many organizations that needed specialist applications, leaving the internal computing function to concentrate on accounting and payroll. It suffered when time to productivity, accessibility and cost swung in the favour of the PC. In the mid 90’s the model reared its head, as application service providers (ASP’s) started grabbing the spotlight – if not any significant software share. Most went out of business. They lacked a sufficiently compelling proposition. Now that businesses look for new ways to drive out IT costs, coupled with the drive of salesforce.com to create a something out of market that had been tainted, SaaS is once again a force to pay attention to for its influence on how people buy technology.
There are dissenters. In August 2008, ERP vendor Lawson’s CEO, Harry Debes said “SaaS is not God’s gift to the software industry or customer community. The hype is based on one company in the software industry having modest success. Salesforce.com just has average to below-average profitability.”
In the coming weeks I will write in more detail on SaaS, but first let me define it and try to back up the assertion that it is a growing phenomenon. Gartner characterizes it as:
- Delivery of multi-tenant service (i.e. though a customer only sees their data, that data lives on the same machines as other customers’ data)
- From a remote location
- Over an internet protocol (IP) network
- Via a subscription-based outsourcing contract
The delivery of a multi-tenant service is how it is done, arguably not part of a customer proposition only to the extent that it keeps costs low. Perhaps a simpler definition might be a remotely provided application sold via a subscription.
I have never been a big fan of large analyst firms and when employed in Big Blue (and Little Yellow), I had a mean habit of keeping old analysts’ predictions then comparing them with actual results. Often that was made impossible since market definitions would change en route and I suspect there was a degree of covering one’s tracks at play. Take this statement from two years ago, “The worldwide SaaS market reached $6.3 billion in 2006 and is forecast to grow to $19.3 billion by year-end 2011, according to Gartner, Inc.” Then this from October 2008, “Gartner predicts it (the worldwide SaaS market) will surpass US$ 6.4 billion in 2008, a 27% increase from 2007 revenue. Moreover, the market is expected to more than double with SaaS revenue reaching US$ 14.8 billion in 2012.”
Notwithstanding the difficult tasks of quantifying revenues and selling headline grabbing reports, there are indications that SaaS is taking hold. IDC predicts that SaaS revenues will grow by 40% this year over 2008. They claim that next year, 45% of US firms will spend at least a quarter of their IT budget on SaaS. Takeup is considerably behind outside N America. Within the IT Management software segment, Forrester estimates the SaaS delivery was 1% in 2008 and will reach 10% in 2013 with HP, CA, BMC, IBM and Symantec as the main players. A recent Gartner survey of enterprises found that the major purchase drivers are cost effectiveness, ease of deployment, followed by underperforming on-premises solutions and changes in sourcing strategy. They also found that in the US, a fifth of enterprises had been using SaaS for over 5 years and 60% had adopted it in the last 3 years.
SaaS is a significant delivery route in the US and is growing rapidly though from a much smaller base outside the US. And that delivery does change the way consumers and businesses make brand decisions, purchase and upgrade, something I will expand upon soon.