SaaS Growth: It’s Addictive

An interesting press release crossed my desk the other day, saying IDC is boosting its SaaS growth projection for 2009 from 36 percent to 42 percent over 2008. According to this leader in market research, surveys and customer interviews indicate the current economic downturn “will actually accelerate the growth prospects for the software-as-a-service model as vendors position offerings as right-sized, zero-CAPEX alternatives to on-premise applications.”

You won’t get any argument from me there. “Right-sized, zero-CAPEX” is exactly how we and every other sane SaaS vendor are positioning our offerings. And IDC’s market projections bear out the accelerated “growth prospects” part of the statement, including this formidable nugget: “The percentage of U.S. firms which plan to spend at least 25 percent of their IT budgets on SaaS applications will increase from 23 percent in 2008 to nearly 45 percent in 2010.”

But here’s the part of this announcement that really got my attention. Robert Mahowald, director of on-demand and SaaS research at IDC, was quoted as saying: "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."

Well, SaaS can certainly be seen as a tactical fix, “allowing for easy expansion in hard times,” and I’m sure that many customers look at it that way, which is fine. But more to the point, SaaS is even more of a highly strategic, long-term investment, and that’s true in both good and bad times.

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.

Meanwhile, sound SaaS vendors will be using their mounting revenues to continue enhancing their offerings and expanding their functionality – and doing so at a rate that may be difficult for many harder-pressed, on-premise vendors to counter during this recession.

In short, even before the present economic melt-down, it was clear that SaaS was approaching the tipping point vis a vis on-premise software. IDC’s insights reveal the tipping point 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.