SaaS is surging in the downturn, says IDC

Market researcher IDC has published an upward revision to its market size projections for SaaS in 2009. At a time when most industries and economies around the world are slashing their growth forecasts into single digits or even negative territory, IDC now expects SaaS growth to surge by more than 40 percent in the current year. That's a significant move up from its previous forecast of 36% growth, published back in July when most economists were still trying to deny the onset of recession.

SaaS's counter-cyclical boom is entirely due to the enhanced attractions of the model when times are bad, says IDC:

"... the harsh economic climate will actually accelerate the growth prospects for the software as a service (SaaS) model as vendors position offerings as right-sized, zero-CAPEX alternatives to on-premise applications. Buyers will opt for easy-to-use subscription services which meter current use, not future capacity, and vendors and partners will look for new products and recurring revenue streams."

Don't you just love that definition of SaaS? "Right-sized, zero-CAPEX alternatives to on-premise." The report's author, director of on-demand and SaaS research Robert Mahowald, adds an interesting observation that bears out the uprating:

"... several key vendors finished the year very strong, reporting stable financials and inroads into new customer-sets."

From my own conversations with privately held SaaS players, I can certainly confirm that business seems to be expanding with continued momentum. Yesterday I was on a call with Phil Fernandez, CEO of marketing automation vendor Marketo, when I heard a bell ring and some cheering in the background. "We ring that bell whenever someone closes a deal in the sales team," he explained. "Someone's had a good start to their day," I commented, noting it was 10am in his timezone. "That's the third time so far this morning," he replied. Marketo, which launched its offering just ten months ago, has already signed up its first hundred customers, at subscription levels that start from $1,500 per company per month.

Yesterday, collaboration vendor Central Desktop reported that in 2008 it had seen a 150% increase in user count and revenue over 2007, bringing its user base to the quarter-million mark. Growth continued througout Q4 and the company signed ten new customers in December alone, including urban planning consulting firm IBI Group and on-demand ERP vendor Workday. In a counterpoint to this week's bleak employment news, Central Desktop says it tripled its workforce last year.

Chris Cabrera, CEO of sales performance management vendor Xactly, which last week acquired its largest rival, blogged about the IDC finding yesterday and picked up on Mahowald's contention that many of these SaaS purchases are seen as "tactical fixes which allow for relatively easy expansion during hard times." Cabrera counters:

"I will be surprised, very surprised, if an appreciable number of SaaS customers dump their on-demand applications in favor of on-premise solutions when the economy eventually rights itself. The excellent renewal rates enjoyed by SaaS leaders show that, once bitten by the SaaS bug, there's little impetus to go back to on-premise solutions."

I side with that analysis, and it's interesting that a mainstream market researcher like IDC, even when it can't deny the success that SaaS is experiencing, still feels it has to qualify it as some kind of blip in the normal scheme of things. I think Cabrera is spot on when he concludes that IDC's findings show that the tipping-point from conventional software to SaaS "is now a lot closer than anticipated. And once tipped, no matter what brought you to that point, it will be counter-intuitive to go back."