SaaS is surging in the downturn, says IDC

SaaS is surging in the downturn, says IDC

Summary: Market researcher IDC has revised upwards its market size projections for SaaS in 2009, at a time when most industries and economies around the world are slashing growth forecasts to single digits or even negative.

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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."

Topics: CXO, Cloud, Data Centers, Emerging Tech, Software, IT Employment

Phil Wainewright

About Phil Wainewright

Since 1998, Phil Wainewright has been a thought leader in cloud computing as a blogger, analyst and consultant.

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12 comments
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  • IDC Validating Clear SaaS Growth Trend

    It's great to see IDC and the other major analyst firms finally recognizing the market realities which we have seen for a while. THINKstrategies' latest SaaS survey findings, in conjunction w/Cutter Consortium, clearly show accelerating adoption along with extraordinary renewal, expansion and referral rates which are adding to the momentum, http://www.cutter.com/offers/saassurge.html. However, the SaaS industry is also going to suffer a shakeout as the down economy pushes aside weaker players who aren't strong enough to survive.
    jkaplan@...
    • Coming Shakeout in SaaS?

      from Jkaplan:
      "
      However, the SaaS industry is also going to suffer a shakeout as the down economy pushes aside weaker players who aren't strong enough to survive."

      I agree. Our perspective is that the pre-cash flow postiive VC backed SaaS group is getting very short term focused and this creates risks to the healthy players. We are increasingly seeing short term thinking prevail which could hurt us all. This short term thinking causes absurd ideas like this to get consideration:

      - Don't invest in a backup data center
      - Go ahead and offer customization to get short term cash
      - Go ahead and take the big up front license revenue and offer it hosted or in the cloud (this creates huge loss of leverage downstream)
      - Force the market to sign long term contracts rather than build the service and delivery model to ensure long term renewals. In the South, we wonder, "If you have to chain your dog to your porch, is it really your dog?"

      Will be fun to see what happens.

      Lee

      lprevost
  • 2009 will be the year that will see the most aggressive growth in SaaS

    There is no doubt a land grab opportunity for SaaS moving forward in 2009. All mid-large size enterprises will be focused on reducing IT cost to align with overhead. We believe there is also a huge opportunity for VARs and solution providers to grow in the hosted services space with many reseller programs offering private label SaaS solutions (http://www.deliveritsmarter.com)

    Today?s businesses are willingly to try out the pay-as-you-go model more than ever in this economy and the price continues to drop as more companies transition IT needs to total outsource from the tranditional in-house model. 2009 should be the turning point for mass adoption of SaaS.
    elitetuner@...
  • It's a three part story

    I agree with both Phil and Jeff - one one hand, economics, and particularly the desire to preserve cash will drive more businesses to adopt SaaS.

    On the other, venture funding has dried up so smaller and weaker SaaS companies will struggle to get access to capital and we will see a major shakeout and consolidation over the next twelve months.

    The third leg of this story is that the downturn will make it impossible for the legacy on-premises vendors to invest in new organically developed SaaS offerings - they won't be able to afford it as the cut staff and retrench around their core offerings.

    See my <a href="http://intacct.blogspot.com"> SaaS 2.0 blog </a> for more on what Intacct is seeing.
    ddruker@...
  • RE: SaaS is surging in the downturn, says IDC

    I agree. At ExpenseWire we have also seen an upward trend as people are looking to cut back on their operating expenses and to get a better grip on large controllable cost centers like T&E.
    sdittmann
  • RE: SaaS is surging in the downturn, says IDC

    Cleartext.com is seeing continued customer acquisition, mainly from in house solution users converting, however we are also seeing client renewals downsizing or postponing the purchase of extra services such as SaaS archiving.
    dmbanes
  • RE: SaaS is surging in the downturn, says IDC

    This is absolutely true. I share a little bit of our success
    numbers at:
    http://tmccune.blogspot.com/2009/02/micro-saas-success.html
    Chalkboy
  • Good to know

    Interesting article! I'm reading this from Australia which has yet to see the worst of the recession - I expect the same trend will occur here with companies using SAAS to cut costs.
    The point about not reverting to the old systems is interesting - I agree that the difficulty is shifting peoples perception of SAAS - once they embrace the technology there is little reason for them to go back.

    Fergal Coleman
    www.buaconsulting.com
    fcoleman@...
  • Healthcare in the internet

    Hi Phil,

    You mention SaaS growth. SaaS is also a
    significant
    make up of CIO Zone's 60 fastest growing
    companies.
    Check out our healthcare post on this:

    http://tinyurl.com/czwf2t

    Cheers,
    Tom
    thudock-22783839461224701164414683917580
  • Why would SaaS adoption raise in an economic downturn?

    SaaS is already an important part of mainstream IT in companies both large and small. Its basic value propositions are now widely established and accepted, including low upfront costs, simplified software management (for both maintenance and upgrades), effective security, high reliability, and increasingly, integrative capabilities to bridge data and functional gaps that exist as a result of existing systems and processes. It is therefore becoming obvious that SaaS solutions will gain significant share during and immediately following the current economic turmoil, since offering customers the ability to continue to innovate at a substantially lower absolute cost of entry and ongoing TCO, during a period of intense capital spending constraint.
    For further insight on this topic, please visit: http://www.saastream.com/my_weblog/2009/02/why-would-saas-adoption-raise-in-an-economic-downturn.html

    Christian Smagg
    SaaStream
    http://www.saastream.com
    csmagg
  • Education Vertical Surging

    We serve the K-12/Higher Education vertical. My company (SchoolDude.com) has seen the following:

    - More than 50% of K-12 organizations have now adopted some form of SaaS solutions (eSchoolNews).
    - SaaS enables the small(er) organizations to adopt technology and this market expansion greatly outweighs the "economy issues."
    - The economy is forcing adjustments to school budgets. This generally means staff reductions putting more demand on existing staff to adopt technology to meet the needs of the organization.
    - I agree with Phil and Xactly -- once you go SaaS, you never go back! We are seeing very high retention and do not expect a dip this year. And, very high net promoter scores, much higher than the general software industry.

    We are enjoying a record January and February. And the stimulus bill is removing the budget uncertainty that was creating some drag.

    Phil - we love your work. I'm glad you and others like Kaplan are covering this phenom.

    Lee Prevost
    President and Co-founder
    SchoolDude.com/FacilityDude.com

    lprevost
  • RE: SaaS is surging in the downturn, says IDC

    check out billAnywhere.com - a new SaaS billing and inventory management software just launched by Phenomena Technologies www.phenomenatech.com
    billAnywhere.com