Hi there! Today we‘re going to take an in-depth look at the software-as-a-service (SaaS) market and some exciting new projections around its growth. According to leading IT research firm Gartner, the market for on-demand cloud applications is entering a period of rapid expansion that will see SaaS claim an increasingly central role in enterprise technology strategies over the next five years.
Let‘s start with the numbers – they really tell the story here. Gartner estimates that in 2010, worldwide SaaS revenue will hit $8.5 billion. For some context, that‘s a 14.1% increase over 2009 revenue of $7.5 billion. Really significant growth! But even more importantly, SaaS is steadily constituting a larger slice of the total enterprise software pie. Last year it accounted for around 10% of overall market revenue. By 2014, Gartner believes it will make up a full 16% and continue rising from there.
Several interlocking trends are fueling this uptick in SaaS adoption:
- Cost savings – According to Flexera‘s 2021 State of Tech Spend report, 63% of enterprises say SaaS helps them avoid major on-premises infrastructure expenses. The same report found that SaaS spending rose 33% in 2020 while hardware/infrastructure spend fell 6%.
- Speed & agility – A Cisco survey found that 73% of organizations cited faster deployment as a key driver for SaaS adoption. The cloud enables much quicker rollout of new capabilities.
- Workforce mobility – With today‘s distributed teams, the ability to access software from any device via the cloud has become paramount. Salesforce found that 63% of enterprise decision makers name workforce mobility as a top SaaS benefit.
- Innovation – The quick iteration cycles and economies of scale of multi-tenant SaaS enable vendors to rapidly deliver cutting-edge features like AI/ML. Capitalizing on innovations is easier for customers as well.
Clearly, businesses today are finding that on-demand SaaS solutions meet their software needs better than traditional on-premises applications across a variety of fronts – lower TCO, increased agility, mobile-enabled workforce productivity, faster feature delivery, and more. As enterprise IT decision makers gain firsthand exposure to these benefits, SaaS adoption is accelerating.
In terms of where SaaS usage is highest currently, customer relationship management (CRM) and collaboration tools lead the pack. Gartner says that in 2009, over 24% of CRM software revenue came from the cloud – a number they project will grow to 26% in 2010. SaaS has become the new normal for salesforce automation, marketing automation, customer service and other CRM capabilities. Collaboration platforms from vendors like Microsoft, Google and Zoom have also gone mainstream as connecting distributed teams gets prioritized.
But while CRM and collaboration have seen the fastest cloud adoption to date, virtually every enterprise application segment is now moving to SaaS:
- ERP – Cloud-based platforms like Oracle Fusion Cloud ERP and SAP S/4HANA Cloud are taking on incumbents with easier scalability and upgrades.
- HCM – From Workday to SuccessFactors, HR management functions like talent acquisition, onboarding and performance management are shifting to SaaS.
- Analytics – Cloud data platforms like Snowflake leverage elastic infrastructure to enable faster querying across vast datasets.
- Industry apps – Niche SaaS solutions for insurance (Guidewire), manufacturing (Plex) and more verticals drive domain-specific digital transformation.
- IT/Security – Tools like ServiceNow‘s ITSM platform and Zscaler‘s cloud security solution deliver capabilities on demand.
Across the board, there is significant momentum toward SaaS adoption. The appeal spans far beyond just small businesses and startups now as well – enterprises are increasingly cloud-first in their application strategies. According to IDG‘s 2022 Cloud Computing Survey, 93% of IT organizations now have some portion of their application portfolio in the cloud.
What‘s more, concerns that previously held some larger organizations back from SaaS – like security, availability and ability to customize – are fading. Enterprise SaaS vendors have made major strides in these areas in response to customer demands:
- Salesforce, Workday, Box and most leading vendors provide over 99% uptime guarantees backed by transparent SLAs.
- Security capabilities like data encryption, role-based access control, automated anomaly detection and integrated identity management are now standard SaaS features.
- Platforms like ServiceNow and HubSpot offer developer toolkits, APIs and app ecosystems that enable businesses to tailor solutions to their unique needs.
For most organizations today, the question is no longer whether to adopt SaaS – it‘s about determining the right mix of cloud vs. on-premises and carefully planning the shift. This brings us to the extremely competitive and crowded SaaS vendor landscape. Legacy players like Microsoft, SAP and Oracle now offer their flagship solutions in both cloud and on-prem versions. And meanwhile, newer entrants are disrupting markets with born-in-the-cloud alternatives:
- Salesforce in CRM
- Workday in HCM
- Snowflake in data warehousing
- Slack and Zoom in communications/collaboration
- Box and Dropbox for cloud content management
- Twilio for omnichannel communications
- Shopify for ecommerce
The variety of options makes it easier than ever for customers to find purpose-built SaaS solutions. But it also creates a buyers‘ market where switching costs are low. Vendors must obsess over customer success and product quality to retain subscribers. This level of competition ultimately benefits enterprises though – it puts downward pressure on pricing while constantly upping capabilities through rapid innovation.
Looking ahead, Gartner forecasts sustained double-digit growth for the global SaaS industry over at least the next five years. As comfort and familiarity with cloud-based solutions spreads, they expect adoption to accelerate across even the most complex, mission-critical enterprise systems. Strategies like "cloud first" and "SaaS first" will become the norm. Exciting innovations on the horizon like AI/ML capabilities, virtual desktops and industry-specific vertical solutions will continue expanding the SaaS value proposition as well.
In summary, the key takeaways around this booming SaaS market are:
- Lower costs, faster time-to-value, workforce mobility and easier scalability are driving rapid SaaS adoption.
- CRM and collaboration solutions currently have the highest cloud usage, but it is growing across sectors.
- Concerns around security, uptime and customization have been alleviated as SaaS matures.
- The market now includes specialized SaaS innovators and on-premises vendors adding cloud options.
- Gartner forecasts sustained double-digit SaaS growth over the next five years and beyond.
The bottom line is that SaaS delivery has hit an inflection point. While on-premises software isn‘t disappearing overnight, the cloud model offers clear advantages that appeal to enterprises of all sizes and across nearly every application category. Everything we‘re seeing indicates that SaaS will constitute an increasingly central piece of future enterprise IT environments. Exciting times ahead!
