Economic crunch to accelerate growth prospects of SaaS model

The harsh economic climate will actually accelerate the growth prospects for the software as a service (SaaS) model as vendors position offerings as right-sized, zero-capital expenditure alternatives to on-premise applications.

According to research firm International Data Corp. (IDC), buyers will opt for easy-to-use subscription services that meter current use, not future capacity, and vendors and partners will look for new products and recurring revenue streams.

As such, IDC has increased its SaaS growth projection from 36 percent to 40.5 percent for 2009.

“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,” according to Robert Mahowald, IDC director for on-demand and SaaS research.

He added that SaaS services have benefited from 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.

The IDC study also showed that by the end of 2009, 76 percent of US organizations will use at least one SaaS-delivered application for business use.

The percentage of US firms which plan to spend at least 25 percent of their information technology budgets on SaaS applications will increase from 23 percent in 2008 to nearly 45 percent in 2010.

IDC noted that this market’s growth prospects will accelerate the shift to SaaS for the whole value chain as the promise of a recurring revenue stream, and the opportunity to tap operating expenses and project-related dollars, will benefit the whole SaaS ecosystem.

The same study revealed that while demand for SaaS is strongest in North America, new contracts from customers in Europe, Middle East, Africa and the Asia-Pacific (excluding Japan) also look particularly positive.

IDC expects that by the end of 2009, nearly 35 percent of worldwide revenue will be earned outside of the US.

On the downside, IDC interviews with SaaS providers highlighted several issues, such as cashflow shortfalls related to slow-paying current clients, liquidity challenges stemming from tight credit at lenders, and on the horizon, limited resources to scale up with expanded infrastructure to support new customers and new service offerings.