Special Feature
Part of a ZDNet Special Feature: Cloud - How to Do SaaS Right

SaaS in 2016: The key trends

Software-as-a-service (SaaS) is experiencing healthy growth. It's also diversifying and becoming increasingly, widely adopted.

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Image: iStock

Software-as-a-Service (SaaS) is the best-known segment of the cloud computing market, largely because it faces the most users: many people will have first-hand experience with cloud-based apps like Office 365, Salesforce, Box, and Google Apps, for example, but far fewer will have developed apps using PaaS (Platform-as-a-Service) or spun up a datacentre's-worth of VMs using IaaS (infrastructure-as-a-Service).

No surprise, then, that in its 2015 Cloud Computing Hype Cycle, Gartner placed SaaS well on the way toward the 'Plateau of Productivity' (the final stage, where mainstream adoption has been achieved), with 'Sales Force Automation SaaS' having already got there.

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Image: Gartner

Salesforce.com, founded in 1999, was the original 'poster child' for SaaS, which explains the pole position of Sales Force Automation SaaS in Gartner's Hype Cycle. Salesforce is now a $55bn company and remains the enterprise SaaS market leader, despite impressive growth from software giants like Microsoft, Adobe, and SAP.

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Image: Synergy Research Group

According to Gartner, the worldwide market for public cloud services will be worth $204bn in 2016 -- a year-on-year growth rate of 16.5 percent. 'Cloud application services' (SaaS) are forecast to comprise 18.5 percent of this (£37.7bn), representing 20.3 percent year-on-year growth:

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Data: Gartner / Images: ZDNet

In a statement, Gartner noted, "As software vendors shift their business models from on-premises licensed software to public cloud-based offerings, this trend will continue. In addition, the entry of some major software vendors into the public cloud last year will fuel growth of the SaaS market moving forward."

Let's take a look at some key aspects of today's SaaS market.

Horizontal versus vertical SaaS

SaaS applications have traditionally addressed broad business functions such as accounting and finance, analytics and business intelligence, collaboration, customer relationship management (CRM), ecommerce, enterprise resource planning (ERP), human resources (HR), and security. These are 'horizontal' SaaS applications, typified by Salesforce.

However, one size of enterprise software doesn't necessarily fit all potential customers. If you're a healthcare provider, for example, you may want to deploy cloud services tailored for your particular line of business. And when it comes to mission-critical functionality, you're going to require a specialist SaaS vendor with deep expertise in your field.

That's why 'vertical' SaaS applications are increasingly addressing the key business issues for particular markets -- a sector also known as the Industry Cloud.

Venture capital firm Emergence Capital Partners (ECP) specialises in funding vertical SaaS companies and has mapped a burgeoning industry cloud landscape comprised of over 400 firms in a wide range of vertical markets, headed by healthcare and energy/utilities.

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Image: Emergence Capital Partners

ECP identifies two types of industry cloud companies: 'enablers' and 'disrupters'. Enablers act as partners to the industry concerned, focusing on complementary apps, data, and services. Disrupters, by contrast, are feared by industry incumbents since they tend to build their own marketplaces and dismantle historically high margins. Examples of enablers are Athenahealth and Veeva in healthcare, while classic disrupters are Uber in transportation and Airbnb in hospitality.

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Image: Emergence Capital Partners

From SaaS to PaaS

Once a SaaS provider has reached a certain level, the focus tends to move from customer acquisition to customer retention, and one way to do that is to add Platform-as-a-Service (PaaS) capabilities that allow customers to create and distribute add-on apps for the flagship product. The canoncial example, once again, is Salesforce, which launched its Force.com platform in 2007.

Other leading SaaS companies have followed suit, including Box, which has used its Box Platform to create content management and collaboration solutions for vertical industries, and Slack. It offers Slack Platform, which is used to create third-party apps that access external applications from within the flagship messaging/collaboration product.

To fuel its app ecosystem, Slack (along with several VC companies) started the Slack Fund, which supports teams building products on top of Slack. As of June 21 2016, there were over 500 apps in Slack's App Directory.

Mobility and UX

Applications are not only moving to the cloud, but mobility is also becoming increasingly important. Indeed, some SaaS applications -- particularly in emerging markets -- are inherently 'mobile-first'.

Emergence Capital Partners (ECP) has mapped the mobile enterprise app landscape and found over 300 companies (around a third of which target vertical markets, while the remaining two-thirds are horizontal SaaS providers) -- many of them focusing on productivity (content, communication, task management and calendar, mobile forms, and events and contacts).

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Image: Emergence Capital Partners

There is also an ecosystem of what ECP calls 'mobile enterprise enabler' companies that help mobile app developers solve a range of problems. Judging by the number of companies involved, the biggest pain points in the mobile development space are user engagement and development efficiency.

User experience (UX) is an increasingly important topic, not just for mobile apps but for enterprise software generally. For more on this, see ZDNet's recent special report: How UX is Transforming Enterprise Software.

APIs and Micro-SaaS businesses

A new breed of SaaS startup doesn't deliver a fully-featured application, but instead, it provides an API toolset -- usable by non-techies as well as developers -- that allows customers to tailor services to their needs. Clement Vouillon, a research analyst at Berlin-based venture capital firm Point Nine Capital, calls this the 'Unbundling of SaaS' and cites Clearbit as an example in the marketing space.

Clearbit's Enrichment API can augment customer information by taking an email address (harvested from a marketing campaign, for example) and collating both publicly available information and its own web-scraped data to provide rich information about that contact, including name, job title, company, social media accounts, and so on. Other Clearbit APIs allow you to check individuals and organisations against a consolidated global watchlist, create targeted lists of companies using advanced search parameters, and search for contacts at companies using job title and domain.

Another related trend identified by Vouillon is the 'Micro-SaaS' business -- small (two to three-person) teams producing niche products for very specific needs or add-on products that complement existing SaaS applications.

Small businesses and SaaS

SaaS applications are a natural fit for startups and small businesses, which are unlikely to be attracted by the prospect of deploying and managing on-premises infrastructure and applications.

Research published last year by BCSG, which covered 600 European companies ranging from pre-startups to established small businesses, found plenty of opportunities for growth. Nearly two-thirds (64 percent) of the survey population was already using cloud-based software, averaging three applications per company (mostly in well-established areas like email, website creation, and payment acceptance). By 2017, however, 78 percent are expected to have purchased new solutions, moving the average app count to seven.

BCSG's survey identified collaboration, financial management, customer management, marketing, and project management as key areas where SMBs were seeking support from SaaS vendors.

SaaS company performance

How are SaaS companies themselves performing as businesses? That's the focus of the surveys conducted annually since 2011 by customer success software provider Totango. The company's 2016 SaaS Metrics Survey found that: more than two-thirds of the surveyed SaaS companies experienced annual churn rates of five percent or higher; for the large majority of SaaS companies surveyed (81 percent), only 20 percent or less of new revenue came from existing customers in the form of upsell and expansion sales; for the third year in a row, the fastest growing SaaS companies have a significantly better record on churn and upsell; the top new metrics companies plan to track in 2016 are customer retention cost, customer health, and customer lifetime value; and more than half of the companies surveyed increased their spending on customer retention last year.

For more benchmarking and insights into the operations of SaaS companies, check out the 2015 Pacific Crest SaaS Survey -- and look out for the 2016 results.

Outlook

Software-as-a-service continues to diversify into more vertical markets, while the bigger players are increasingly adopting PaaS functionality to boost customer retention via add-on ecosystems. Mobility and user experience are becoming increasingly important, as are cloud-based offerings based on APIs and micro-services. Meanwhile, successful SaaS companies tend to have a good record on customer churn and service upsell.

Issues surrounding 'shadow IT', security and compliance, integration with legacy on-premises software, and more are covered elsewhere in this special report. Suffice to say that SaaS is not necessarily a panacea for every company and that, as ever, due diligence is required when outsourcing any key business process.

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Software as a Service offers irresistible benefits for organizations of all sizes — from cost savings to scalability to mobile accessibility. We offer guidance on avoiding the pitfalls of the cloud and choosing your SaaS partners well.

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