SaaS to Get a Bump Up from the Down Economy?

February 16, 2009 Timothy Prickett Morgan

Different waves of computing have been fostered as much by economic hard times as they have been by technological gadgetry and buzz. Some technological transitions start out as good ideas, but bad economies turn them from interesting ideas for some future time to products that must be tried out right now in an effort to cut costs or improve the running of the company in some way. So it might be in 2009 with software as a service, or SaaS.

According to a report just released by IDC entitled Economic Crisis Response: Worldwide Software as a Service Forecast Update, the desire by companies to avoid capital expenses is going to make many of them think twice, and then maybe a third and fourth time, about setting up certain applications in-house. And because SaaS-style offerings end up on the operational side of the budget, without capital outlay and the consequent depreciation, SaaS applications fit in with the current economic climate.

“With a broad slowdown across IT sectors, businesses are increasingly bearish about their short-term ability to invest, whether for stability, growth, or cost savings down the road,” explained Robert Mahowald, director of On-Demand and SaaS research at IDC in a statement accompanying the report. “But SaaS services have benefited by the perception that they are tactical fixes which allow for relatively easy expansion during hard times, and several key vendors finished the year very strong, reporting stable financials and inroads into new customer-sets.”

IDC has revised upward its projection for SaaS revenue projections for 2009, and now estimates that SaaS-style software delivery will see sales grow by 40.5 percent over 2008’s levels instead of the 36 percent growth IDC was projecting only a few months ago. That higher growth means SaaS will hit $12.4 billion in aggregate revenues across all suppliers, which include SaaS-only offerings like Salesforce.com and myriad SaaS alternatives to perpetually licensed software offered by thousands of ISVs globally.

IDC did a bunch of interviews with IT shops as well as SaaS providers, and dribbled out some data to try to encourage people to buy the report, as it always does. Demand SaaS-style software is strongest in North America right now, which is also where the global economy is weakest (I am not sure there is a causal link there, but definitely a correlation). However, by the end of the year, SaaS sales in Europe, the Middle East, and Africa are expected to pick up, and ditto for the Asia/Pacific region (excepting Japan) are also expected to rise. So by the end of 2009, about 35 percent of global SaaS sales will come from outside of the United States. IDC adds that by the end of this year, 76 percent of organizations it polled said they were going to have at least one SaaS-delivered application for business use.

Here’s another tidbit: In 2008, about 23 percent of customers polled said that at least a quarter of their IT budgets would be spent on SaaS applications, and now people are telling IDC that by 2010, about 45 percent of companies will dedicate at least a quarter of the budget to SaaS products. At that rate of growth, it doesn’t take long before SaaS represents a quarter of all IT spending. I am not saying this will happen, and neither is IDC. But that is a pretty steep hockey-stick ramp.

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