The momentum behind adoption of subscription and on-demand purchasing models is clearly being driven by SMB customers, for whom the pricing models have the greatest initial appeal. While the faster adoption in SMB is no real surprise, what is interesting is that there are some large enterprises that are converting to the models that underpin SaaS offerings. For vendors, this is a strong indication that there is a clear opportunity even at the largest prospects for those that can offer the right product in combination with the right selling strategy. Indeed, many large on-premise vendors have introduced SaaS-based offerings. But that also raises a key question for large customers in terms of how they integrate newer SaaS applications with existing on-premise applications.
The increasing adoption of SaaS is fueling the rise of a new generation of platforms to develop, integrate, deploy and host these applications. These SaaS platforms come in several flavors but they essentially belong to one of three "archetypes," each with different market prospects.
The first archetype consists of what we call delivery platforms, where the platform's competency lies in the delivery of applications. There are two major delivery platform types: (a) managed hosting and (b) cloud computing. Managed hosting, exemplified by companies such as QpSource, IBM and RackSpace, is similar to traditional hosting but tailored to SaaS. In this model, developers set up/obtain their infrastructure from a hosting provider who manages it for them. Developers can get superior service levels and support compared to doing it themselves. Cloud computing, such as offered by Amazon (EC2 and S3) is a model where a vendor provides on-demand access to infrastructure capacity over the cloud. Major advantages of cloud computing relative to managed hosting include faster provisioning of capacity and ability to scale capacity up and down as needed. On the downside, users don't get to choose or customize their infrastructure, need to be comfortable with sharing resources and may get lower service levels and support.
The second archetype is the development platform, typified by companies such as Bungee Labs and Coghead. The innovation here is around providing all or some of the integrated developer environment (IDE) tools needed for creating an application on the WebT in addition to hosting. It is a cost-effective alternative to licensing on-premise toolkits for developers, i.e., SDKs. While this is the most nascent, and hence least understood, of the three archetypes, it could create a tectonic shift in software development by opening application creation to a much wider array of developers for a modest cost and even enabling a new generation of non-developers to create SaaS applications easily.
The final archetype, Application-led platforms, is exemplified by companies like Salesforce.com, NetSuite and Ciscc-Webex. These platforms rely on the initial delivery of a business application to create a customer base and establish a foundation for the platform as a separate offering. This area has the greatest marketplace traction today, in large part because of the success these vendors have in selling rapid deployment of new applications to existing customers, as well as targeting developers to write for a platform that is already popular with potential customers.Of course, a final option for companies who are so inclined (and have the resources) is a "do it yourself approach, which is preferred by about 19 percent of customers.
The momentum toward adoption of SaaS platforms is surprising. Nearly three-quarters of the companies surveyed prefer to adopt platforms in at least one of the three archetypes we identity here. For platform vendors, the only falloff in interest comes at the largest enterprises, those employing more than 25,000 people. In short, nearly every company-or division of a larger enterprise-is a customer or a prospect for SaaS platforms.
When you look further into which archetypes are preferred by customers, two things stand out: who's responding, and how mature the archetype is currently.The most significant differences are in the preference for managed hosting versus application-led platforms. While managed hosting is the dominant preference of IT professionals and their non-IT counterparts, the six-point difference underscores that buyers like comfort: IT professionals like the control they get over the infrastructure with managed hosting, while front-line business decision makers like the applications they use. For vendors selling an application-led SaaS platform, the key to success is improving the value proposition for IT decision makers.
For both cloud computing and general development platforms, the issue is maturity. Especially with general development platforms, customers are still coming to terms with the value proposition, and have no significant real-world examples from which to draw. Their success will depend on time, increased familiarity, and the emergence of proven success in the marketplace.
These trends - the growing acceptance of SaaS and SaaS platforms - are likely to create a tremendous battle between the largest software vendors and the newer SaaS providers. While each of these players has an advantage at one end of the spectrum (large vendors such as IBM, Oracle, SAP and Microsoft do best in large enterprises, while SaaS "incumbents' such as Salesforce, NetSuite and RightNow are more in favor with small businesses), the real battle is in the mid-market space.
For SaaS platform startups, that means trying to get into a room where there are already two elephants vying for the customer's attention. Success will mean locating a unique niche - and being prepared to have it invaded.
Whether a SaaS platform vendor is finding a niche or trying to maintain a market advantage, the survey underscores the vital importance of offering customers speedy deployment and a smooth path to integration with existing applications and IT infrastructure. In fact, those factors were selected as the most important twice as often as costs. This gives SaaS platform vendors a potential advantage in the marketplace, because deployment speed and integration are their hallmarks.
However, it is also important to customers that vendors have proven themselves in the marketplace - and costs are a crucial secondary consideration. The good news for startups is that existing vendor relationships are very low on the priority list for most customers, indicating a willingness to switch vendors and providing an opportunity window for newer entrants.
Despite the economic downturn in the US, there is slow but steady growth in software's share of the overall IT budget. In fact, survey respondents projected that this growth pace will continue for the next two years, indicating that software plays an ongoing important role in delivering business productivity gains.
Vendors also continue to face buying decisions that are overwhelmingly centralized, with one exception. At the largest companies (those with more than 25,000 employees) the importance of the individual business unit in decision making is growing. This provides another opportunity for SaaS and SaaS platform vendors to sell into these large corporations, because it is easier to devolve the buying decisions for these platforms to more front¬line functions. But, it also creates an issue for the company's CIO or IT manager who will have to deal with any problems that might be created by different business units choosing significantly different approaches to SaaS implementations.
Purchasing decisions remain complicated even in enterprises that centralize IT purchases. While it's clear that the CIO and IT professionals remain the ultimate software decision makers in almost half of all enterprises, formal consultations are spread across an array of corporate and business unit functions, from finance and risk management to compliance and even users themselves. (The chief compliance officer and chief security officer functions are new to the mix this year, but have considerable influence already.) To succeed, vendors need to offer a compelling value proposition at many levels - particularly to business unit heads - in addition to the CIO in order to close the sale.