Industry Background

Many large enterprises purchased business management software applications in the 1990s to automate functions such as accounting, finance, order and inventory management, human resources, sales and customer support. According to Standard and Poor’s Industry Surveys for Computer Software, this enterprise software is now an overcapitalized and mature industry (Standard & Poor's, April 2011).

Software-as-a-Service (SAAS), a relatively new concept and a not yet fully adapted form of software, includes business or consumer applications that are accessed through the web. It is an attractive model because of the low upfront costs such as hardware, software, maintenance or IT personnel, and because of the rapid deployment of these services. The SAAS model is still in the early stages of development as businesses slowly begin to adopt these practices.

Although a new concept to many industries, SAAS is gaining wider market acceptance; IDC market researchers speculate that packaged software will grow at an annual growth rate of 5.8 percent from 2009-2014, whereas, the SAAS market will grow at 25.3 percent over the same period. (Standard & Poor's, April 2011). IDC further speculates that 80 percent of new software offerings will be available as a cloud offering by 2011.

SAAS is affected by the macro economy because on-demand sales are typically subscription based (or seat-based) therefore in a severe downturn, as employment levels decline, seat counts also eventually fall. As a competitive model there is constant pressure for these vendors to innovate and grow and therefore research and development costs need to remain relatively high (as compared to other industries), in order for companies who provide SAAS to remain competitive.

IDC estimates that spending on public cloud services in 2011 will grow by 30 percent to $29 billion and rise to $55 billion by 2014, with medium sized businesses being among those contributing to the growth in spending. To put this in perspective, in 2009 traditional packaged software had sales of $272 billion compared to $13.1 billion for SAAS. A complete shift from the traditional software model to SAAS would take a considerable amount of time. Standard and Poor’s notes that over time, the cost advantage of deploying SAAS solution versus an on-premise solution erodes, particularly as usage rises because businesses are paying on a per-user basis, and Standard and Poor’s think that total replacement is highly unlikely. (Standard & Poor's, April 2011).

Standard and Poor argue that there will always be a place for packaged and custom applications that are not ready to be migrated to the cloud, for the following reasons:

• Limited ability to customize
• Businesses are reluctant to migrate sensitive date onto third-party systems
• In some cases there may be regulatory constraints against migrating data to third-party systems
• Performance and availability concerns
• Most organizations have existing technology investments
• Some businesses already have internally developed applications
• Can SAAS be tightly integrated with existing on-premise deployments

It is clear that the SAAS model will not be a solution that every business can adopt. However, for medium sized businesses the SAAS model provides a low upfront cost solution that can give them the competitive edge as well as potentially bring them to a level where they can compete with larger corporations. Therefore, a critical success factor includes educating the public about SAAS as Salesforece.com is doing with their Customer Relationship Management solution. Other critical success factors for the industry include aggressive development, research and development, and a strong execution and growth. (Standard & Poor's, April 2011)