SaaS Vendors Bucking IT Spending Trend

By Julie Craig

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The economic downturn has had a significant impact on IT spending, particularly in certain sectors. According to new EMA research, 2009 budgets in the education, retail, manufacturing, and banking/finance sectors are all down between 15% and 35% over Q1 of 2008. January and February 2009 IT dollars show a continuation of this decline in spending, with 46% of companies decreasing spending and only 27% on the increase. Although high-tech and government budgets have actually increased over 2008, the increases are not significant enough to offset overall cuts.

Although there were some bright spots—most notably within software-heavy companies such as BMC and Oracle—hardware vendors felt the impact as many CIOs decided to postpone non-essential technology purchases. In January, Cisco Systems reported that new orders were down 20% over the same quarter last year and Dell reported a dip in revenue of 16%.

Within this somewhat bleak overall picture, one would expect software as a service (SaaS) vendors to feel the pain, as well. SaaS, a subset of the Cloud computing technologies that have succeeded service oriented architecture (SOA) as the “hot topic” of the moment, is still viewed as an unproven technology in many camps. This attitude seems to be driven more by the FUD (fear, uncertainty, and doubt) factor rather than by objective analysis.

Apparently, this view isn’t shared by CIOs. In fact, 2008 saw significant revenue growth for established SaaS vendors, with double-digit growth being the rule rather than the exception. Concurrent with the Cisco/Dell announcements in January, SaaS vendor Keynote Systems reported revenue growth of 16.5% over FY 2008, significantly exceeding estimates. NetSuite, an SaaS-based business software vendor, reported year-over-year growth of more than 40%; with 30% growth in the storm-tossed fourth quarter. And in March, iRise, a systems visualization vendor, reported a whopping 400% year-over-year increase. Apparently, overall declines in budgets are driving CIOs to cost-saving measures, including SaaS.

Moving to Main St.

SaaS and Cloud computing are, in fact, in the early stages of becoming mainstream delivery technologies for enterprise IT. Once the industry surmounted the architectural and revenue problems of the early application service providers (ASPs), these technologies took off like wildfire. Even Nick Carr, of “IT Doesn’t Matter” fame, is touting Cloud. Although I fundamentally disagree with the premise that IT doesn’t matter—it matters a great deal for industry leading companies—I agree with his belief in the inevitability of non-differentiating business services moving to the Cloud. On-premise delivery of services such as email, HR, and billing has simply become too expensive to sustain long term.

This optimism about the future of the industry was a theme of 2009’s SaaS Summit, held in San Francisco March 11-13. Although there were some of the familiar “what is SaaS and what is Cloud” debates going on, most of the conference focused on more relevant discussions that were particularly interesting because they reflected SaaS from the vendor perspective.

Readers may remember my 2008 article discussing the fact that two SaaS conferences—the SaaS Summit and SaaSCon—are held within weeks of one another. There are still two shows, with SaaSCon scheduled for March 31 through April 1, 2009 at the Santa Clara Convention Center. While SaaSCon is positioned primarily as an end-user conference, with presentations by companies that have successfully adopted SaaS in the enterprise, the SaaS Summit is a forum where SaaS vendors assess the state of the industry and intermingle with partners and customers.

Highlights of the show included an upbeat presentation by Don Tapscott, author of “Grown up Digital” and an evening sortie to San Francisco’s Exploratorium, a “museum of science, art, and human perception”. There were also excellent presentations on “Security in the Cloud”, by James Palmer from Symantec and “Delivering the Enterprise Ready Cloud”, by Treb Ryan, as well as a “Cloud Confusion” discussion by a press panel that demonstrated just how confused the press actually is on this topic.


But the show was also notable in that it drove home the fact that, for SaaS vendors, partners and customers are often other SaaS vendors. The industry is far more tightly integrated than, for example, traditional independent software vendors (ISVs). Almost every SaaS vendor depends on other service providers to deliver some portion of their own product, whether it is hosting, billing, or product integration. OpSource’s business software, for example, is used by many other SaaS vendors for their own on-demand billing. This interdependency should be reassuring for prospective IT customers, since it means that these services have been “hardened” by use in commercial environments by companies depending on SaaS services to serve their own customers.

Other factors driving SaaS growth include:

Flexibility: Seasonal businesses or those with highly variable demand for technology services—such as software companies whose demand peaks during product testing cycles—no longer have to over-provision for peak periods. SaaS provides a short-term option for meeting high-demand requirements. As a matter of fact, HP recently announced a software testing service, HP Quality Center as a Service, which specifically addresses this problem and includes 24 X 7 operational support.

Overall Cost: Low cost is often cited as a benefit of SaaS adoption, but the real numbers vary widely. Some SaaS vendors have been able to drive down costs to the point where their platform costs are negligible. Depending on how much of this is passed on to customers, however, estimates of total cost of ownership (TCO) vary from 10% of on-site hosting to 100%+. Actual costs depend upon multiple factors including service level expectations, number of users, degree of customization, amount of support required, etc. However, given that the typical IT organization has relatively fixed costs of 60%-80%, it’s hard to imagine that sharing the costs of centralized delivery can’t significantly drive down overall delivery costs.

Payment Structure: For many companies, SaaS vs. on-site decisions are similar to lease vs. buy decisions. Paying monthly tends to be easier than paying in one large payment, and also helps companies that are limiting capital expenditures in favor of “pay as you go” services. SaaS vendors not typically requiring long-term contracts is an additional incentive.

Security and Governance: Although one of the primary objections to SaaS is from the security standpoint, Treb Ryan, CEO of OpSource, said SaaS vendors have made major investments in security and compliance, with particular attention paid to industry standards such as Payment Card Industry (PCI) standards, Health Insurance Portability and Accountability Act (HIPAA), and Statement on Auditing Standards for Service Organizations (SAS 70).

Regarding the future of SaaS, there is one idea from the SaaS Summit that particularly struck me. In Don Tapscott’s presentation, he talked about a generation that equals the “baby boom” generation in size and has grown up with mouse in hand. Their view of an application is similar to our view of electricity—it’s just there. This generation didn’t have to write a program to access FaceBook— they went to the FaceBook site and the application was waiting. Same with texting on cell phones and using Ask.com as a source for research papers. They didn’t have to do the technical work to provision or support these services— and don’t even pay to use many of them. In another 15 years, these kids will become decision-makers in companies worldwide. And you have to ask yourself the question: "Will this new generation of CIOs see business value in the time, money, and effort we are currently expending to deliver IT services?"

Call me crazy, but I don’t believe they will.

Julie Craig is a senior analyst with Boulder, Colo.-based Enterprise Management Associates, an industry research firm focused on IT management. Julie can reached at jcraig@enterprisemanagement.com. Additional research into autonomic computing is available at EMA’s site at www.emausa.com. In addition, EMA is in the process of creating a new, End-to-End Application Management Online Guide, which will be available by the end of Q1, 2009. Continue to check EMA’s site for this Guide, which will feature detailed profiles of multiple application management products and be free of charge.