IT Business Edge and Info-Tech Research Group collaborate on groundbreaking research about SaaS prospects for 2007.

The stereotype of an IT professional is a person who is rational to an extreme degree, unlikely to engage in the hyperbole favored by their colleagues in areas such as marketing and sales.  Yet the industry often indulges in long-winded discussions about practices and technologies that have yet to be introduced, or ones that have had limited impact on "real" daily activity within the IT department. We may be an industry of pragmatists, but our trade journals frequently spend breathless column inches on techniques that have little immediate value.

The key to that last sentence, of course, is the word "immediate."  Over time, many of the most hyped products and services earn an important niche in the IT industry. The key to understanding which ones will be important, then, is not so much an issue of identifying high-potential technologies, but understanding when they will have a real impact on IT operations.

One of the issues looming over the 2007 IT landscape is on-demand software, also known as software as a service (SaaS). Software vendors of all sizes and specialties are promoting on-demand offerings, convinced there is a substantial base of buyers, especially within the small business community, ready to embrace SaaS as a way of gaining access to next-generation software without incurring high up-front capital costs. At some point, this scenario will probably come to pass. But where are we on the adoption curve? To help answer this question, IT Business Edge worked with Info-Tech Research Group on a unique research project that provides insight into IT managers' readiness to embrace SaaS.

The Spending Trend

Info-Tech surveyed more than 1,900 IT professionals, including more than 200 recruited by ITBE. In one area of the survey, respondents were asked to quantify the impact of SaaS as a proportion of new software spending over three time periods: two years ago, today, and two years from now.

The results show that SaaS, while still accounting for a modest portion of new software purchases, is a growing force in the industry. This year, on-demand software is expected to account for 20 percent more of your software acquisition budget than it did two years ago. If our respondents' forecasts are correct, it will grow by a further 30 percent over the next two years. In the near term, the uptake has occurred primarily in small  organizations (1-100 employees); these were already about 20 percent ahead of the industry-wide use of SaaS two years ago, and have increased by roughly 25 percent since then.

However, looking forward, it is large accounts that see the greatest proportional future growth. IT professionals in enterprises with more than 1,000 employees believe that although their organizations have been slower to respond to SaaS than smaller firms, they will experience strong growth - perhaps as high as 40 percent - in the proportion of new software acquisition budgets allocated to on-demand products.

What Is Driving the Growth?

It appears SaaS activity levels are beginning to catch up to the hype. The next question is what is driving this growth? The Info-Tech/ITBE research initiative tested reactions to four "positive" statements about SaaS, asking respondents whether they "strongly disagreed," "disagreed," "neither agreed nor disagreed," "agreed" or "strongly agreed" to the following:

• On-demand software is acceptable in some circumstances
• On-demand software is the best choice in some of the application areas we use
• On-demand software is ideally suited to our business requirements
• On-demand software will be used by our organization in the future

The first of these statements met with broad acceptance. More than half of all respondents (and more than 60 percent within large enterprises) either agree or strongly agree with the notion that SaaS is acceptable in some circumstances, versus just 7 percent who disagree/strongly disagree.

When asked if on-demand is the best choice in at least some current application areas, the proportion of respondents who think SaaS is a fit in some aspect of their operations is double (36 percent to 18 percent) of those who disagree that it is the best choice in at least some active areas. "Ideally suited to our business requirements" is a more difficult barrier to surmount: Only 24 percent agree/strongly agree, as compared with an identical number that disagree.

In the end, though, the real test is whether IT professionals believe their future acquisitions will include on-demand products. Here, we find that 28 percent of respondents - including more than one-third of those from large enterprises - indicate their organizations will buy SaaS products in the future.

What Are the Inhibitors?

With so much momentum, what is holding SaaS back? It's likely some common issues, such as a desire for the control that comes with on-premise software and the general tendency to embrace change only when pushed in some way from one's current comfort zone, have the effect of impeding penetration of SaaS. To try to dig into specific inhibitors, though, our survey also looked at four "negative" statements:

• On-demand software is too expensive

• The on-demand model is not trustworthy

• On-demand software cannot be integrated within our environment

• On-demand software is not secure enough for use in our environment

While each of these statements describes an inhibitor for some of the organizations surveyed, they do not, for the most part, have a broad detrimental impact on SaaS adoption. For example, only 15 percent of respondents believe the on-demand model is not trustworthy. Just 19 percent believe on-demand software is not secure enough, and a still-modest 22 percent agree or strongly agree with the notion that on-demand products cannot be integrated within their environments. In all three areas, the number of respondents who disagree with the statement exceeds those who find the issue troublesome. In each case as well, however, "neutral" responses represent more than 50 percent of the total. Clearly, SaaS advocates need to do more selling to overcome these objections.

The survey shows that the primary impediment in the minds of prospective SaaS buyers is price. Although software vendors try to position on-demand offerings as a cheaper way to gain access to sophisticated products, approximately one-quarter of buyers from all sizes of companies agree that "on-demand software is too expensive." This is double the number who disagrees with the same statement.

Which Software Categories Are "Ripest"?

The IT Business Edge/Info-Tech research asked respondents to rate the "appropriateness" of the on-demand model in each of 10 software categories:  desktop productivity software; financial/administrative applications; industry-specific applications; content/data management applications; business enablement applications (including CRM and business intelligence); application development and maintenance tools; networking and related connectivity software; security software; desktop operating systems; and server operating systems, middleware and similar utility software.

In each category, we look at two measurements - the proportion of users of that type of software who believe that a SaaS offering is appropriate (as a measure of the receptiveness of the user community to the concept), and the proportion of all respondents who view on-demand as an appropriate approach (as a measure of total market opportunity).  Highlights of findings include:

• Desktop productivity applications - There appears to be a huge appetite for this kind of  offering, across all company size categories. Small businesses are particularly bullish on a SaaS approach to desktop productivity applications, which may indicate a ready market for Google's new offerings in this area. There is a very healthy appetite for on-demand desktop productivity applications in larger  organizations, too, especially in the 101-1000 employee segment - but can on-demand desktop productivity applications scale to support the demands of this constituency?
• Financial/administrative applications - There is substantial interest in this kind of offering as well. Small business users of these applications indicate the highest level of interest in a SaaS offering, and may provide an interesting target for suppliers. Small businesses have limited legacy data and integration requirements - but still, this data and these requirements exist. How will a vendor deal with them on a client-by-client basis? The same question exists in the mid-market. Software suppliers targeting this constituency will need to be adept at working with services firms to ensure that customers receive adequate levels of support for process changes, integration and data migration.
• Content/data management applications - Within large organizations, there is healthy interest in obtaining content/data management through the SaaS model. Specialized, platform-agnostic suppliers that can address large enterprise concerns (such as security) may find a receptive audience in this market.
• Business enablement applications - This category, which was defined in the survey as including CRM, garners the greatest levels of user interest across all sizes of enterprise. Clearly, salesforce.com has defined the SaaS landscape.
• Application development and maintenance tools - Interest in on-demand delivery of these products is particularly strong in large enterprises. Both new market entrants and existing suppliers looking for renewal within their client basis may want to consider a SaaS model for future releases.
• Security software - Although mid-sized and large enterprises demonstrate little interest in pursuing SaaS for security products, small businesses rate this as one of the most compelling applications for on-demand delivery. In most cases, organizations with fewer than 100 staff members can't afford to employ security experts; the notion of tapping into a shared pool of expertise has demonstrable appeal within this group.
• Desktop operating systems - Small organizations again are unique in indicating that they would find substantial value in on-demand delivery of desktop operating systems. This is probably less an indication that small businesses will migrate en masse to thin client  devices than a reflection of their frustration with the cost of maintaining their Microsoft infrastructure.

Conclusion

Will 2007 be the year of SaaS? No. However, the history of hype in our industry suggests that monumental one-year changes in IT management priorities are very rare, and that important shifts in the IT landscape build over time. From that perspective, 2007 is at least an important year in the evolution of SaaS. The model has already built an impressive foothold in the small business market, and it is poised to play an increasing role in the software acquisition strategies of mid-sized and large enterprises over the next two years.

Although salesforce.com has blazed the trail for SaaS, the future success of on-demand software will not be limited to CRM; there are opportunities for near-term increases in SaaS delivery of desktop productivity applications, content/data management applications, application development and maintenance tools, and security software, as well as the prospect of longer-term opportunity in areas such as ERP. A number of practical challenges remain on both the user and vendor sides of the SaaS equation - but the evident desire of both groups to embrace SaaS will almost certainly result in 2007 being an inflection point for the on-demand software model.