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Many of the teams that present their SaaS business plans to us list Small and Medium Businesses (SMBs) as their target market. The SMB segment includes companies with annual sales from a few million dollars (the “S” of the segment) to companies with hundreds of millions of dollars in annual sales (the “M” of the segment). To validate the opportunity offered by this market segment the teams typically point to Salesforce.com whose initial success came from companies in the SMB market. However, a close examination of recently released data shows that Global 2000 corporations may be the biggest users of SaaS applications and the most aggressive adopters of the model. Let’s start with this recently published data on the adoption of SaaS applications. - A report published by Morgan Stanley analyst Keith Weiss at the end of June states that 50% of the surveyed Global 2000 CIOs indicated that today their enterprises are using at least one SaaS-based application. According to the survey, the number of corporations using SaaS applications is expected to increase to 72% within 3 years.
- Pacific Crest analyst Brendan Barnicle reported equally impressive numbers in a presentation earlier this month. He stated that a survey of 170 decision-makers from Global 2000 enterprises revealed that 71% of them are currently using at least one SaaS application. Over the next two years 60% of that survey’s participants expect to increase the use of SaaS applications within their corporation, and 84% of them view SaaS applications as long-term solutions.
- Announcements from several SaaS vendors of large sales to Global 2000 companies further supports the two surveys mentioned above. Salesforce.com announced a deal with Misys involving 40K seats, Successfactors announced the sale of 85K seats to Wachovia, and Workday announced the sale of 200K seats to Flextronics. Concur announced a deal for 185K seats to a “large financial services company.”
SaaS applications were initially adopted as standalone products sometimes to replace higher cost on-premise applications and other times to satisfy unmet functional needs. For example, a survey conducted by Think Strategies revealed that 38% of the respondents have replaced on-premise applications with their on-demand equivalent, while 62% of the respondents are using SaaS applications to fulfill previously unmet needs. The applications initially adopted by the Global 2000 enterprises include collaboration (email and web conferencing), CRM, and certain back-office functions such as payroll, travel, and HR. Interestingly, the “adoption ranking” of these application categories is identical between the US and the rest of the world. These initial deployments showed that SaaS applications had low acquisition and implementation costs, short deployment times, and didn’t require the extensive involvement of corporate IT. All of these characteristics provided for high and speedy rates of return on investment (ROI). The successes of SaaS vendors to date have convinced IT organizations to start embracing the on-demand delivery model, incorporating it into their future information technology acquisition strategies, i.e., providing guidelines on how to procure, integrate, and manage SaaS applications much like they’ve been doing for on-premise applications. The SaaS applications initially adopted by Global 2000 enterprises were not required to meet the same level of functionality as their on-premise counterparts. - Morgan Stanley reports that today 4% of enterprise application functionality is delivered through SaaS solutions. Within 3 years they expect that 12% of enterprise application functionality will be delivered via SaaS.
- In their surveys Goldman Sachs has found that the more limited functionality of the SaaS applications compared to their on-premise counterparts is the biggest stumbling block in the broader adoption of on-demand applications in Global 2000 enterprises.
When questioned about the important requirements that today drive their decision to use a SaaS application business leaders list two priorities: the vendor meeting Service Level Agreements, and improved functionality. The SLAs that need to be met include application response time (particularly for applications with a large number of users), uptime (mean time between failures, and disaster recovery time (how long it takes for the application to come back online once it goes down and how much data, if any, is lost in the process). Future SaaS application functionality will need to satisfy four broad requirements: data access/data management, personalization and customization, workflow functionality, and integration. - Data management: Enterprises are now demanding that SaaS applications manage data in ways that facilitate and enable better access control (i.e., who can access the data), improve querying, provide for more granular and comprehensive backup, etc.
- Personalization and customization: The next generation of SaaS applications must be able to take into account the needs and usage patterns of different types of users (so one size fits all will not be acceptable any longer), as well as allow for enterprise-specific customizations that go beyond the application’s surface (i.e., putting the customer’s logo on every screen will not be sufficient customization).
- Workflow: Enterprises want to start incorporating their proprietary business processes into the SaaS applications they adopt just like they have been doing with on-premise applications.
- Integration: This requirement exists both at the application level, to allow connectivity between on-premise and on-demand applications, and the data level, to allow data from two or more applications to be accessed and used.
In addition, SaaS vendors will have to start a) developing their applications on top of broader software platforms and b) offering these platforms along with the applications. The platforms must provide public APIs, and support application extensibility and customization through high-level programming. While Salesforce.com and a few other SaaS vendors have already introduced similar platforms, we believe the innovation in this area is likely just beginning. Recent data is validating that the adoption of SaaS applications is accelerating and broadening. The biggest surprise revealed by this data is that Global 2000 enterprises are the fastest adopters of SaaS. Vendors of on-demand software should start evolving their product, sales, and implementation strategies in ways that will allow them to best address this market segment bearing in mind that the broader adoption of the SaaS model by Global 2000 enterprises could result in longer and more complex sales and implementation cycles. |
