The software-as-a-service (SaaS) ship has sailed with a boatload of
customers, while many traditional vendors of on-premise software have been
According to Gartner, the market for SaaS applications grew by 26
percent last year, from $5 billion in 2005 to $6.3 billion in 2006. The
consulting firm expects demand for SaaS to continue growing at a 25 percent
compound annual rate over the next five years, to $19.3 billion by 2011. Most of those dollars are going to new entrants rather than
established software vendors like Oracle (Quote), SAP
and Microsoft (Quote).
The reason for this boom in demand, said Gartner analyst Ben Pring, is that
customers are rejecting the business model for on-premise software.
“Customers were frustrated with the client-server, on-premise, $1 on
software, $10 dollars on services model that SAP and Accenture (Quote) have been flogging since the late 1990s,” he told
mission-critical, must-have piece of software, whereas the truth is that 80
percent of business technology makes no contribution to the business
whatsoever,” said Pring.
SaaS “represents a more sane approach coming into the marketplace.”
The big software vendors have thus far made only half-hearted attempts at
developing their own SaaS offerings because, said Pring, “they didn’t want
to see disruption in their enterprise space.”
He cited the notable lack of traction for the on-demand CRM applications
offered by Microsoft, SAP and Oracle. These offerings have failed to inspire the market because of a lack of a true commitment from leadership, resulting in a self-fulfilling prophesy.
“It was almost implicitly set up to fail — ‘we tried but the customers
didn’t want it.’ “This has left the door open for smaller, newer players who are now pouring into this gap,” said Pring.
But it’s still early. Eighty percent of the value of the market is in
companies with more than $1 billion in revenues, and SaaS has only
penetrated 6 percent or 7 percent of that segment. “The big space is where the
real revenue opportunity lies,” Pring said.
This means that those software vendors still have a significant opportunity
within their installed base of customers.
Moreover, with SaaS no longer a novelty, customers are becoming more
demanding of SaaS applications, giving the laggards a chance to catch up. As
SaaS matures, customers will also stand to benefit from better customization
options on the front end and interoperability with their legacy software