With Economy off the Rails, SaaS Picks up Steam

Ann All

Last month Gartner predicted that the economic downturn would increase interest in software-as-a-service as companies looked for ways to reduce capital spending. The same thinking led IDC earlier this month to raise its projected growth rate for SaaS in 2009 from 36 percent to 40.5 percent, reports Computerworld. IDC also believes that almost 45 percent of U.S.companies will spend at least 25 percent of IT budgets on SaaS by 2010, up from 23 percent last year.


A Forrester Research analyst told Computerworld that SaaS "has an element of being recession-proof." Several SaaS users interviewed by Computerworld, including the U.S. Army, played up its cost-effectiveness. Salesforce.com's CRM software gave the Army "a very robust and very capable system for almost inconsequential cost and almost no [staff] time," said the officer in charge of a new, high-tech recruitment center using the software.


In a November interview with IT Business Edge's Carl Weinschenk, Scott Sehlhorst, president of software consulting firm Tyner Blain, said that SaaS allows companies to allocate cost and make better management decisions. Said Sehlhorst:

You are not making a fixed-price asset allocation and trying to distribute the amount across the business and pay for functions as you need them. That impacts your contribution margin instead of being a big capital outlay. That might be a key in today's economic situation. .... Being able to avoid a capital outlay frees up capital for other investments. You have to make a choice if you are faced with buying an enterprise software package or, for instance, building a secondary distribution center. Or you can [use software-as-a-service] to absorb the necessary software as part of ongoing operations. That's a good thing.


SaaS is apparently winning friends among CFOs. According to recently published Saugatuck Technology research, finance executives see SaaS as a cost-effective means of getting their organizations out of software and systems management and enabling them to focus more on their core competency. The execs ranked improving ROI as one of the top four business goals that SaaS could help finance organizations achieve. (The other three: managing performance in the context of risk, reducing process inefficiencies and optimizing business processes.)


In yet another endorsement of SaaS as a way for companies to trim IT costs, Aberdeen found that best-in-class retailers were able to reduce their IT costs by 17 percent using SaaS. Sahir Anand, Aberdeen senior retail analyst and author of the "SaaS in Retail" benchmark report, said:

Under present economic conditions, SaaS-based web commerce applications do support the lean IT initiatives of retailers both in terms of reducing capital infrastructure and associated IT support costs.

Still, not everyone believes SaaS is as cost-effective as traditional on-premise software over time. Among those warning of added expense are Gartner, which said in late 2006 that companies trying to expand their SaaS usage beyond isolated departmental deployments would experience cost and complexity issues, and J. David Lashar, leader of the IBM SaaS Center of Excellence, who last spring said companies risked making "an expensive long-term mistake" if they didn't carefully evaluate the SaaS vs. on-premise software question.


Companies undertaking a cost analysis might want to start with this SaaS vs. On-Premise TCO Calculator, added to the IT Business Edge Knowledge Network earlier this month. Other handy SaaS references in the Knowledge Network include a SaaS Checklist and, for beginners, a SaaS Primer.

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Add Comment      Leave a comment on this blog post
Feb 13, 2009 2:36 PM Julien Dionne Julien Dionne  says:

I have a post about on-premise versus SaaS solutions here:


It's specific about sales performance management solutions, but the comparison really applies to any area including CRM. 

I can't say that this is true for every software segment, but with SPM solutions, over time, on-demand solutions usually end up being more expensive.  However, if the breakeven point is at year 2 or 3, this usually coincides with the time where an on-premise solution is no longer supported by the vendor.

In other words, the cost differentiation argument is not that great, and other factors should be taken into consideration.  For example, the pricing model (monthly vs upfront), the convenience, the ability to maintain the application,  the features offered in the solutions under consideration, etc. 

Julien Dionne



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