/>
X
Business

SaaS invades enterprise software markets

New research from Gartner finds SaaS has achieved as much as 70 percent market share in some enterprise software categories, but is stuck below 2 percent in others. What are the factors driving growth (or decline) for SaaS in the enterprise software sector?
Written by Phil Wainewright, Contributor on

New research from Gartner sees SaaS taking a growing slice of the enterprise software market, rising from $4.2 billion last year to $11.5 billion in 2011. That's an average annual growth rate of around 22.3%.

But of course this is just an analyst projection. Who knows what will really happen? One thing's for sure, the growth rate probably won't be even over the next five years. What are the factors that will make it accelerate, pause or even go into decline from one year to the next?

Virtual working. One of the most striking findings from Gartner is that adoption of SaaS varies widely from one application category to another. In some categories, Gartner finds take-up of SaaS is as low as 1 to 2 percent of total software spending (more on that in a moment). But it's up as high as 60% in e-learning and 70% in Web conferencing. Gartner research director Sharon Mertz comments:

"SaaS adoption is highest in applications that support simplified, common business processes or large, distributed virtual workforce teams."

Of course, it figures that where people need to collaborate across distance, the Web is likely to play a big part in the solution. When applications are already having to operate beyond the firewall (often across multiple different firewalls) then there's little advantage to staying on-premise. SaaS providers have a clear edge because by definition they have a core competence in serving customers across the firewall, whereas on-premise IT teams specialize in operating behind the firewall.

Influence of Web 2.0. The Gartner release doesn't mention this specifically, but I was intrigued to see that its research found enterprise content management and search were the application categories where SaaS adoption is lowest, at less than 2% of spending. Obviously the big factor here is sensitivity to exposing corporate information to outsiders, plus the sheer volume of material that's currently held on internal servers. Appliance based solutions of course don't figure as SaaS, even if they're remotely managed by an external provider. The other unmeasured area is usage of tools like Google that don't involve any spend. There are a lot more Web 2.0 tools that are currently either free of charge or else being tested out in low-budget pilots. If enterprises decide to move ahead with adoption, that could increase penetration of SaaS in this application area. On the other hand, concerns about losing control and oversight over what's happening to the content and who's seeing it may remain a brake on adoption.

Failure 2.0. Following on from the last point, I couldn't move on without making reference to fellow ZDNet and Enterprise Irregulars blogger Michael Krigsman's recent provocatively-titled post. I agree with Michael: SaaS providers have got to get serious about reliability and availability, and they've got to give their service level agreements some teeth. Enterprises won't entrust their operations to external providers that can't be relied on. The standards they expect are often higher than those they demand from their internal IT teams. And why shouldn't they? If you're paying an outside specialist, you have every right to rely on them knowing what they're doing. Otherwise, what's the point?

SOA takeup. Gartner believes adoption of service-oriented architectures by both vendors and customers will open up additional opportunities for SaaS vendors. Says Mertz:

"Major on-premises software vendors are re-architecting their application stacks to service-oriented architectures. Their customers will invest in migration for those processes that are complex or proprietary, but they also have an opportunity at this juncture to evaluate whether SaaS is an appropriate alternative for other aspects of their business. Small and midsize businesses that have insufficient resources to convert their applications will also find SaaS an attractive 21st-century solution to their legacy systems."

New application categories. Gartner notes that SaaS offerings are making headway in emerging enterprise software categories such as compliance and risk management, office administration, sales and service automation, procurement optimization and integrated business systems for smaller businesses. These greenfield areas of opportunity offer more of a level playing field for SaaS vendors because there's usually no incumbent already in place. Established vendors still have the advantage of having better market visibility and perhaps a prior relationship with the customer in other application areas, but that advantage is offset by the higher cost and risk of implementing an on-premise solution.

Budget pressures and business uncertainty. I'll lump these together because I think both work in favor of SaaS offerings. As Gartner's Mertz explains:

"Ease of use, rapid deployment, limited upfront investment in capital and staffing, plus a reduction in software management responsibility all make SaaS a desirable alternative to many on-premises solutions, and they will continue to act as drivers of growth."

Even though the SaaS model still has to build the confidence and trust of enterprise software buyers, the risk mitigation of its high-speed, low-outlay deployment profile makes it look a lot more attractive than on-premises software when the purse strings are tightening and the outlook is uncertain. I'd be happy to bet that SaaS growth will continue to substantially outperform conventional on-premises software. Whether it will keep pace with Gartner's numbers though depends on the wider business climate.

Editorial standards