A recent forecast predicts software-as-a-service will be the dominant source of the market's revenue growth.
Posted Aug 7, 2007
Software-as-a-service (SaaS) is anticipated to have a compound annual growth rate of 22.1 percent through 2011 for the aggregate enterprise application software markets, more than double the 9 percent CAGR expected in the market as a whole, according to a forecast by Gartner. The research firm also projects that "by 2011, 63 percent of products in the software infrastructure market and 56 percent in the software application market will support Web services and Web 2.0 technologies."
"We limited the forecast to the enterprise application software market because [SaaS] is a very hot topic in the application markets and in some markets, it's an absolutely common way to deploy software," says Sharon A. Mertz, research director of customer relationship management at Gartner.
The vendors involved in Gartner's study were highly varied: large and small vendors, as well as "pure-play" vendors (e.g., Salesforce.com) and software companies using SaaS as just a part of their solution. "The mix [of SaaS revenue generation] varies depending on the application market," Mertz says. According to the report, the widest disparity fell primarily within the content, communications and collaboration market, ranging from content management (1 percent of its total software revenue from SaaS) to Web conferencing (75 percent).
Mertz described SaaS as growing well within the CRM market, adding that CRM is "a little bit less volatile," with revenues from SaaS landing between 7 and 18.5 percent.
The new figures struck a chord with at least one longtime player in the SaaS marketplace. "I usually don't believe those forecasts. They're usually way over the top, but they might actually be right on this one--I think it's that big of a trend," says Michael T. Fitzgerald, founder and managing general partner of Commonwealth Capital Ventures, which has invested in several SaaS companies, including email marketing vendor Constant Contact. Compared to the traditional software systems, Fitzgerald says, SaaS allows companies to bypass the extravagant costs (often ranging from $100,000 to $1 million for installation, then an additional 20 percent of that for monthly maintenance charges), as well as the time and effort to implement and educate its users.
And for the most part, Fitzgerald adds, "most of them don't work, people are unhappy, so it's a risky decision." On the other hand, he says, with SaaS, "you just turn it on and it's ready to go. You can do it with a small group, a little department, or install it on a much wider basis. Learn it, experiment with it, and decide if it's the right thing--without much cost." But because of this, he says, the SaaS market is highly catered to the customer.
Mertz explains that the strong growth of SaaS has been present for a while. "It's more of an option now," she says. "People are considering it more often when they're looking at different application solutions. [They're] looking at it as their overall sourcing strategy--'Is this right for me, or not?' It's just a much more important element in the market as time goes on." For many businesses, SaaS is extremely popular because it is far more simplified and easy-to-use than traditional enterprise software applications. "A lot of the processes [in a SaaS application] are more streamlined," Mertz says. "It's more repeatable, [and the] software isn't really specific to any one company's business."
Not surprisingly, Mertz adds, with rapid growth comes intense competition: pure-plays, big traditional suite vendors, and vendors who have both on-premise and SaaS offerings. "There's a lot of people in the game right now," says Mertz. She warns that by the time Microsoft finishes rolling out its CRM Live edition in early 2008, companies will have to work even harder to compete. Microsoft, she notes, is focusing on making the application very easy to use and if offered at a low enough price, it will not be difficult for businesses, particularly small businesses, to adopt and integrate CRM Live into their already existing Microsoft Office Suite.
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