Worldwide Software-as-a-Service (SaaS) revenue in the enterprise application markets is set to surpass USD 6.4 billion in 2008, a 27% increase from 2007 revenue of USD 5.1 billion, according to Gartner. SaaS revenue is expected to reach USD 14.8 billion in 2012. The Indian market is expected to grow to US$48 million by 2008, representing the fastest growth in this region.
Customer adoption drivers
Some key trends in India that will contribute to the growth of SaaS in the SMB segment in spite of the tough economic climate:
1. India has traditionally been a very price conscious market and with the downturn this is more so. Companies are looking to options to reducing their IT capital expenditure budget.
2. Typically a stumbling block to an immediate SaaS transition for a company could be the presence of an existing legacy system. In India however, analysts say that only 5 to 8 percent of the 5 million SMB s have adopted some form of CRM.
3. SMB s today have a global customer base and the need to service them better and in a cost effective manner is an imperative. In addition, today, a distributed workforce is more the norm than an exception. Being connected to the customer or the employee is an important business need. This need makes the SMB s look favorably to SaaS.
4. The growth of the internet and increased availability at inexpensive rates of reliable high speed broadband connectivity.
5. Budget constraints and shrinking bottom lines is making SMB s lean more towards buying/implementing software that supports a specific business need.
In this scenario, SaaS seems to be well positioned to race ahead of licensed software. The key commercial advantage that SaaS offers is that companies do not have to make upfront investments in technology nor do they have to devote time and resources for software deployment and maintenance. The SaaS model is a subscription model where they can pay on a monthly or yearly basis. Vendors who provide specific modules like CRM (Salesforce), payroll, HR etc would gain more traction as this software addresses specific business needs at an affordable cost.
Business Challenges
The biggest challenge in the SaaS model is that vendors must satisfy customers on an ongoing basis in order to win renewals. Support becomes a very critical element as future contracts/more users depend on customer satisfaction unlike in a license model. A strong support plan should address response timeframes for server or service failures, software updates, patches and customer service clearly.
Another key challenge for SaaS vendors is the adoption of open source software. The logic of not investing heavily into software works even better with open source because it is free! With Open source customers can sleep easy knowing that their data is residing on their own server. The flip side is that companies cannot run with their software related problems to their vendor they have to solve it themselves!
The deferred-revenue-based business model will show a positive top line growth but bottom-line returns will get impacted. If the company has deep pockets it will be able to sustain itself otherwise such companies could be potential targets for acquisitions.
Technical challenges
Security: Potential customers perceive a loss of control over their sensitive data. This loss of control is aggravated because the data is stored with a third party provider. To ensure adequate physical security for data and the hardware on which the data resides is the vendor s responsibility and a failure in doing this a user s nightmare!
Protecting the application from viruses & hackers is another challenge. They can either bring the system down (best case scenario) or penetrate your system to steal data and create havoc.
Multi-tenancy is another area of concern User authentication is a key need to ensure that only authorized people has access to the software. Another area that providers have to address is to keep the authorized users from seeing each others data.
Conclusion
To turn profitable a SaaS vendor has to capitalize on economies of scale. The one size fits all approach is a direct response to this. If your business needs a lot of customization SaaS might not be your answer.
Customer perception and mainstream acceptance from a security aspect are still the biggest stumbling blocks to the popularity of this model. But as companies tighten their purses to brave the long road ahead, they might discover that SaaS might be their best bet!
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