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SaaS adoption set to explode

November 27, 2006

Large companies appear to be jumping en masse onto the software-as-a-service bandwagon, according to a new survey of CIOs by management consultants McKinsey & Company. The survey found that 61% of North American companies with sales over $1 billion plan to adopt one or more SaaS applications over the next year, a dramatic increase from the 38% who were planning to install SaaS apps in 2005.

Although the full survey results haven't been made public yet, I got a preview of the findings last week from two leaders of the study, Kishore Kanakamedala and Abhijit Dubey. McKinsey, they told me, regularly surveys a panel of CIOs and other senior IT executives from big companies in the United States and Canada to track their plans and priorities. The companies included in the surveys are chosen from a cross-section of industries that mirrors the makeup of the overall U.S. and Canadian economies. The most recent survey was completed a few weeks ago; the prior one was completed in Summer 2005.

Kanakamedala and Dubey see several factors driving the rapid increase in the adoption of SaaS. Some of the factors are economic. CIOs, they said, are coming to see SaaS as offering lower up-front costs, lower total ownership costs, and faster implementation than traditional licensed software. That substantially increases the likelihood a new application will provide an attractive return on investment.

Also propelling the trend is a desire for greater vendor accountability. CIOs, explained the consultants, have long been frustrated at their inability to get clearly defined service commitments from software vendors. Because the vendors don't own the infrastructure their applications run on, they've been able to avoid accountability for the performance of their software. But with SaaS, there's no such accountability gap. Because SaaS vendors are responsible for the infrastructure as well as the application, they have nowhere to hide should something go wrong. Buyers get an unambiguous, single point of accountability for performance - a big plus, in the eyes of CIOs.

The most popular SaaS business applications, according to the McKinsey study, are for human-resource management, billing and order entry, and sales management. Those were also the most popular in the 2005 survey.

The embrace of SaaS, say Kanakamedala and Dubey, is part of a broader shift in the way big-company CIOs think about information technology. CIOs are rapidly abandoning the assumption that they should own and control their entire IT architecture. Instead, they're embracing the idea of a "hybrid architecture" that combines components maintained internally with components hosted or otherwise supplied by outsiders. This model, say the consultants, promises to bring greater efficiency as well as greater flexibility - for both IT and the business in general.

Comments

Nick, for larger companies not SaaS, but SaCS - software as a customized service is a far more likely scenario - see

http://dealarchitect.typepad.com/deal_architect/2006/11/sacs_software_a.html

Posted by: vinnie mirchandani [TypeKey Profile Page] at November 27, 2006 02:05 AM

This shift will be short-lived as companies figure out they can get an even better ROI and much more control and flexibility with products like SugarCRM. Most Salesforce.com customers end up retaining an FTE dedicated to administering Salesforce. It's not much of a leap to have that individual manage a LAMP box for 10% of the time.

Posted by: pwb [TypeKey Profile Page] at November 27, 2006 02:24 AM

Good article, the adoption of SaaS and CWEO (commoditsed web operating environments) was a major theme of the web 2.0 summit.

General comments on comments

1. Software as a customised service is more likely to become the trend?

It all depends upon whether we are talking CODB, CA or transitional. There is a pre-occupation with customisation and a industry that does rather well out of it. A more likely scenario in my view is that as SaaS is adopted and the industry becomes more portable combined with a greater awareness that much of IT is CODB - then companies will be able to more clearly see the cost vs benefit of customisation. This I suspect will lead to less customisation in CODB areas (CRM, ERP etc) and not more.

2. Control, Flexibility and ROI are key?

The control and flexibility arguments can be covered in general by portability and commoditisation - no point in rehashing the arguments. However ROI? Well it seems (and experience backs this up) that companies on average use less than 20% of the computing power of their hosting environments. And almost two decades of personal experience tells me we are in a industry which just loves to rebuild the wheel. These are both areas which cause a large amount of waste and duplication and therefore are ideal for economies of scale especially in the CODB area.

Posted by: Simon [TypeKey Profile Page] at November 27, 2006 09:00 AM

Nick,

Over a year ago, I conducted a survey in conjunction w/Cutter Consortium which found that the adoption of SaaS was already more pervasive and well-accepted within the 'high-end' of the market than most industry observers realized.

I used that research, plus plenty of customer interviews and vendor briefings, as the basis of my commentary for BusinessWeek re: the myths about SaaS which stated that SaaS is not just about CRM and SMBs. This commentary became a manifesto for many SaaS upstarts trying to gain greater penetration in the market.

Since that time, each of the major research firms, as well as McKinsey, has conducted their own surveys which confirm this trend.

I was pleased to have Abhijit Dubey on a panel I moderated at the SIIA On-Demand Conference, discussing his findings and the implications for the software industry. McKinsey's findings will add more credibility to the rapidly rising competition in the SaaS market.

An indication of the exponential growth of this market is that THINKstrategies' SaaS Showplace [www.saas-showplace.com] now includes nearly 1200 company listings in 79 application, industry and enabling technology categories.

I think another important driver of accelerated growth of SaaS in 2007 will be the increasing number of brand-name companies already leveraging SaaS who will be willing to serve as public reference accounts. These success stories will further legitimize SaaS and will fuel further growth of the SaaS market.

As you are well aware, the major ISVs are all grappling with how to cope with the SaaS movement. They all have come to the realization that they can't ignore it, especially as enterprises of all sizes recognize the business benefits of SaaS. They're push into the SaaS market will also drive growth, even if they bastardize the terminology to satisfy their own corporate objectives.

Jeff Kaplan

Posted by: Jeff Kaplan at November 27, 2006 10:39 AM

There are several fundamental reasons why a company of any size would see this as a chance to off-load some of their IT burden.

Fundamentals:

- People Resources - Datacenter Footprint - Power - Connectivity - Space - Monitoring (both security and maintenance) - App Updates (Frequent and often) - Maintenance

People Resources are scarce in most places(don't thing Chicago, think Des Moines or Minot). So to take some away the slice of pie that a local resource is using to maintain an app at a 30 to 40% level and move that up year after year while providing increasingly more "9's" you resolve this issue.

Datacenter Footprint - Companies who sell, retail, heathcare or whatever other mainline business should get out of the IT business. They are wasting too much and can't scale without more and more investment. This would refocus them on who their clients are and allow them to also become clients who can set SLA's and monetary expectations.

Posted by: James Monroe at November 27, 2006 11:29 AM

Also propelling the trend is a desire for greater vendor accountability. CIOs, explained the consultants, have long been frustrated at their inability to get clearly defined service commitments from software vendors. Because the vendors don't own the infrastructure their applications run on, they've been able to avoid accountability for the performance of their software.
Our company prefer the SaaS model because we can offer the service levels customers demand in the knowledge we have the necessary skills and infrastructure to deliver. If you are deploying into a customers site there are a huge number of unknowns, which you either have to guess about or undertake a feasability study. Also monitoring and support are more difficult as we must rely on the clients in house team to determine if the problem is down to an infrastructure issue that they must address or a problem with our software.

Posted by: Charlie Barker at November 27, 2006 12:19 PM

Another SaaS benefit for corporate CIOs: outsourcing the management of cranky, self-important IT workers to someone else.

Posted by: Ron [TypeKey Profile Page] at November 28, 2006 08:54 PM

SaCS - Software as Compromised Service is even more likely.

Posted by: Mike O [TypeKey Profile Page] at November 28, 2006 09:56 PM

Nick,
I'm still trying to figure out what SaaS is and isn't, so kudos for Mckinsey for figuring out how big the market is going to be.

I've ranted about the SaaS cult here.
http://theotherthomasotter.wordpress.com/2006/11/29/the-cult-of-saas-nobody-expects-the-saasquisition/

As much as I hate the numerical suffix game, SaaS is Bureau3.0.

Posted by: Thomas Otter [TypeKey Profile Page] at November 29, 2006 10:37 AM

Nick,

Interesting is the list of SaaS offerings that are most popular. Most are not compute intensive (e.g. most costly to 'host' as well).

Perhaps as the 'utility' style compute infrastructures become more industrial strength and real, we should see a more software services become available.

Dare I ask, could SaaS revive the mainframe?!!...

Posted by: Wiley Vasquez [TypeKey Profile Page] at December 1, 2006 09:06 PM

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