SaaS Market to Shrug off Economic Turmoil

By Greg McNevin

January 27, 2009: While the economic crisis is making its presence felt in many parts of the IT industry, it appears that the Software as a Service (SaaS) market may escape unscathed, as IDC has found that it will expand rather than contract over the coming year.

The analyst firm says that recent surveys and customer interviews support its finding that the harsh economic climate will actually accelerate the growth prospects for the SaaS model, as buyers opt for easy-to-use subscription services which meter use, not future capacity, and vendors and partners look for new products and recurring revenue streams.

Due to this, IDC has increased its SaaS growth projection for 2009 from 36 percent to 42 percent growth over 2008.

"With a broad slowdown across IT sectors, businesses are increasingly bearish about their short-term ability to invest, whether for stability, growth, or cost savings down the road," says Robert Mahowald, director, On-Demand and SaaS research at IDC. "But SaaS services have benefited by the perception that they are tactical fixes which allow for relatively easy expansion during hard times, and several key vendors finished the year very strong, reporting stable financials and inroads into new customer-sets."

Overall, IDC’s study, Economic Crisis Response: Worldwide Software as a Service Forecast Update, found that:

• By the end of 2009, 76 percent of U.S. organisations will use at least one SaaS-delivered application.
• The percentage of U.S. firms which plan to spend at least 25 percent of their IT budgets on SaaS applications will increase from 23 percent in 2008 to nearly 45 percent in 2010.
• While demand for SaaS is strongest in North America, new contracts from customers in Europe, Middle East, Africa (EMEA) and Asia/Pacific (excluding Japan) also look particularly positive, and IDC expects that by year-end 2009, nearly 35 percent of worldwide revenue will be earned outside of the U.S.

On the downside, IDC says that interviews with SaaS providers have uncovered several issues, such as cash-flow shortfalls related to slow-paying current clients, liquidity challenges stemming from tight credit at lenders, and limited resources to scale up with expanded infrastructure to support new customers and new service offerings, could create some issues with rapid growth of the SaaS market – at least in the longer term.

Comment on this story