Friday, January 30, 2009

Inside Finance

Economy benefits SaaS, cloud computing

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Nearly every segment of the technology industry faces significant challenges as a result of today’s turbulent economic environment. One segment — software as a service and cloud computing — is actually poised to prosper because of the economy, but may also fall victim to the chaos that has been created by the credit crunch.

The SaaS/cloud computing market is perfectly positioned to capitalize on today’s economic uncertainty. SaaS and cloud computing permit organizations of all sizes to quickly deploy web-based services on a pay-as-you-go basis without the hassles, uncertainties, added costs or risks associated with traditional, on-premise hardware and software.

These web-based services are also perfectly suited for a rapidly changing workplace as fewer and fewer people actually work in traditional offices. Instead, they are either working from home or on the road, and need new methods to obtain and share critical data typically hidden behind the firewall, so they can better communicate with their peers, customers and business partners.

The rapid advances in broadband networking, mobile communications and web services are making all this possible, and even more affordable because of open-source technologies, offshore services and Web 2.0 innovations.

The maturation of on-demand services is making them attractive to corporate executives, as well as IT decision-makers, who are looking to shift their technology costs from capital to operating budgets where they can gain flexibility to meet the fluctuating needs of their organizations. They also are seeking to shift the burden of deploying and managing applications from their inhouse staff to the software vendors themselves.

THINKstrategies Inc.’s survey research has seen customer interest and adoption of SaaS nearly double over the past year, jumping from 32 percent of survey respondents reporting they were using SaaS solutions in 2007 to 63 percent in 2008. More importantly, more than 90 percent of these SaaS users reported they are not only satisfied with their SaaS solutions, but plan to renew and expand their services, and would recommend SaaS to their peers.

As a result, the SaaS and cloud computing market is attracting a plethora of players seeking to gain a share of this rapidly growing opportunity.

Yet, many privately-held SaaS vendors are facing significant challenges. The proliferation of players is creating greater competition and extending the sales cycle. Centive Inc.’s acquisition by cross-country rival Xactly Corp. last week is an example of the industry consolidation that will escalate during 2009.

The SaaS model requires vendors to invest in service delivery infrastructure and puts the burden on them to ensure the success of the software, from availability to optimization. But, the additional service delivery and support costs are not offset by the same upfront revenue recognition models which have benefited legacy software companies in the past. Instead, the pay-as-you-go SaaS revenue model denies them the same revenue stream to pay for their development, market, sales and other operating costs.

With VC, private equity and even traditional bank loans hard to come by, many SaaS companies cannot find the funding they need to finance their operations. As a consequence, the inevitable market shakeout, which would have occurred in the future as a result of market saturation, is likely to be accelerated.

Press reports regarding SaaS and cloud computing company failures, as well as service disruptions, could spark customer concerns about the viability of the overall SaaS and cloud computing industry. Many will wonder if SaaS and cloud computing are simply a rehash of the previous generation of application service providers, which disappeared because they failed to deliver real business value.

Today’s SaaS and cloud computing vendors have opportunities because they are delivering measurable business benefits. They must promote these customer success stories to convince other decision-makers to try SaaS and cloud computing solutions as well.

The survivors of the SaaS and cloud computing industry shakeout will be those who capitalize on the best enabling technologies and build the strongest ecosystems; fortify their market positions via a combination of organic growth and targeted acquisitions and mergers; properly target their services, and communicate the right business-oriented value propositions to decision-makers; and clearly demonstrate their tangible benefits.

 

Jeffrey M. Kaplan is the managing director of THINKstrategies Inc., a Wellesley-based strategic consulting company. He can be reached at jkaplan@thinkstrategies.com.