The Maturation of Software as a Service

When companies like Salesforce.com and NetSuite began selling their applications as software subscriptions, software as a service (SaaS) was considered useful only as a point product for smaller companies that couldn't afford CRM (customer relationship management) solutions from the likes of Oracle and SAP. In less than 10 years, SaaS has evolved into a mainstream software delivery model for a range of enterprise applications. Huge corporations, start up companies, hospitals, universities, and financial institutions all have deployed SaaS applications, using it to address myriad business needs.
SaaS has arrived.

"More than 95 percent of organizations expect to maintain or grow their use of software as a service," reported Gartner in an April 2010 survey of 270 IT professionals from around the world. Survey respondents, almost half of whom have been using SaaS apps for more than three years, cited "significant integration requirements and a change in sourcing strategy" as their two primary reasons for adopting SaaS.

Gartner expects that spending on SaaS will continue to grow consistently through 2013, when worldwide SaaS spending on enterprise software is expected to total more than $14 billion.

SaaS has gained such traction for two major reasons. The functionality of SaaS apps is now on par with premise-based solutions. And SaaS helps companies tighten their belts without giving up enterprise features. SaaS applications are also generally simple to deploy over the Internet, easy for employees to learn, offer the latest functionality and painless upgrades, and require zero capital expenditures.

Sophisticated SaaS Apps for the Enterprise

As the SaaS market has matured, subscription-based software has become more robust with better features and broader functionality. It's now used for many more technologies than CRM and appeals to companies across all industries.

CRM apps were among the first to gain traction with SaaS, and they're still one of the largest and most mature segments of the SaaS market. The CRM SaaS market generated $2.3 billion in 2009, up from $1.9 billion in 2008, according to Gartner. In fact, the growth of the CRM market as a whole can be largely attributed to SaaS.

Perhaps due in part to the success of SaaS CRM, adoption of a variety of subscription-based software is growing by leaps in other areas of the enterprise. Gartner's recent "User Survey Analysis: Software as a Service, Enterprise Application Markets, Worldwide, 2010," report showed that companies are widely using SaaS for all manner of applications important to the business. More than 30 percent of survey respondents said they're using SaaS for their accounting, sales force automation and customer service, and expense management applications.

Even complex enterprise software like ERP (enterprise resource planning) is now being consumed as a service. Stalwart ERP vendors, including Epicor, SAP, Infor, and QAD, offer SaaS-based versions of their products. SAP also offers SaaS business intelligence, a small segment of the SaaS market that IDC expects to grow quickly over the next three years.

New Apps Driving SaaS Adoption

Many companies first test-drive SaaS with an application that won't bring down the business if it fails, such as Web conferencing, collaboration, or e-mail. SaaS e-mail has grown in popularity surprisingly quickly; according to Gartner, SaaS email solutions will account for 20 percent of the commercial e-mail market by the end of 2012, up from one percent in 2007.

SaaS is making inroads in other technologies as well. Forrester believes that the enterprise market will soon start spending more software dollars on SaaS human capital management solutions, IT service management apps, and online backup.

A Mature Market

With the maturation of SaaS and the increasingly robust functionality of SaaS apps, users may need to adjust some of their expectations. Some SaaS apps, like Web conferencing, are still faster to implement than premise-based solutions, but that's not probably not going to be true for a complex enterprise solution that needs to be customized, integrated, and configured based on the customer's needs. Also, SaaS can be less expensive than premise-based software that would require serious outlay on hardware, but customers should look at the long-term TCO of annual software subscription rates.

Few companies consider SaaS a new and unproven way to get their software anymore, as evidenced by Forrester's count of enterprise users; more than one third of all IT departments have subscribed or soon will subscribe to SaaS apps. Most users appear to be satisfied with SaaS. More than 70 percent of respondents to Gartner's recent survey expect to increase their SaaS spending, while only 45 percent think the same about their premise-based installations.

Gartner's recent user survey notes another trend that points to the maturation of SaaS: customer savviness. "More enterprises are renegotiating contracts for greater functionality, additional users and improved financial terms."

SaaS has proven itself to be an efficient, cost-effective way for most organizations to consume a growing range of software. Most companies will find that a combination of subscription-based and on-premise software will provide the functionality, security, and budget controls they need.