Dataquest Insight: SaaS Demand Set to Outpace Enterprise Application Software Market Growth

Transcription

1 Dataquest Insight: SaaS Demand Set to Outpace Enterprise Application Software Market Growth Gartner RAS Core Research Note G , Sharon A. Mertz, Chad Eschinger, Tom Eid, Ben Pring, 3 August 2007 RA Software as a service is forecast to have a compound annual growth rate of 22.1% through 2011 for the aggregate enterprise application software markets, more than double the growth rate for total enterprise software. Adoption varies widely between and within markets and subsegments. WHAT YOU NEED TO KNOW Key findings are as follows: There is great diversity in the delivery of software as a service (SaaS) solutions. Each enterprise application software market is made up of large and small vendors offering only SaaS options, as well as large and small vendors using SaaS to augment traditional licensed approaches. The content, communications and collaboration markets show the widest disparity of SaaS revenue generation, with enterprise content management (ECM) seeing 1% of its size generated through SaaS, and Web conferencing experiencing more than 75% of total software revenue through SaaS. SaaS in the enterprise application software markets also varies by application categories within each market. SaaS revenue as a percentage of total software for each market ranges from less than 1% in ERP s manufacturing and operations to 30% of supply chain management s (SCM s) supply chain sourcing. CRM shows more general market adoption, ranging from 7% to 18.5% of total software revenue, depending on the subsegment. Sales represents the highest adoption, with 18.5% of revenue attributable to SaaS. In 2006, SaaS accounted for an estimated 12% of all CRM total software revenue. Recommendations are as follows: For IT and business managers Evaluate SaaS within the context of an overall corporate sourcing strategy before choosing this option or selecting a service provider. Identify where SaaS makes sense as an alternative or replacement option, and where onpremises solutions are better application choices. For IT and business managers Understand the broader nature of costs incurred with a SaaS solution. Identify what costs are actually included in the monthly fees, and which additional costs will be required for customization, training, integration or infrastructure, such as additional storage. Determine if and when the longer-term costs associated with SaaS solutions match or outweigh an on-premises offering. For software vendors In the enterprise application software markets, focus initially on simple, easy-to-use solutions. Identify how and where you can add value by offering or partnering with others to provide vertical-specific functionality or integration assistance. Develop opportunities within larger enterprises through the direct sales channel.

2 2 For software vendors If SaaS is a new deployment model for you, proactively address the organizational implications of moving from a product-centric to a service-centric delivery model. For software vendors Independent software vendors must pay great attention to the segmentation of the potential audience for on-premises versus on-demand. Segmentation is key to limit the potential of cannibalizing current revenue streams. INTRODUCTION Adoption of SaaS varies widely across software markets, contributing as little as 1% of total software revenue in some markets to more than 75% in others. Adoption is highest in applications that support simplified, common business processes or large, distributed virtual workforce teams. Ease of use, rapid deployment, limited upfront investment in capital and staffing, plus a reduction in software management responsibility all make SaaS a desirable alternative to many on-premises solutions, and they will continue to act as drivers of growth. ANALYSIS Forecast Overview There exists a great deal of market hype and confusion regarding SaaS. Gartner defines SaaS as software that is owned, delivered and managed remotely by one or more providers. In addition: The application is based on a single set of common code and data definitions. It is consumed in a one-to-many model by all contracted customers. It uses a pay-for-use model or a subscription model based on usage metrics. SaaS is a collective term for a software product that is delivered as a shared online service from a remote host, and it includes ondemand applications and infrastructure. SaaS offerings are gaining market presence in emerging areas, such as compliance, risk management, office administration, sales and service automation, procurement optimization, and small integrated business systems, in which their multitenant networked architecture offers advantages such as speed of deployment, ease of use and embedded service management. In contrast to SaaS, a software license is the right to use a copy of software on either a perpetual or time-limited basis. Software license revenue includes new, upgrade and update licenses. New license revenue is the initial fee charged by a vendor to use a given version of a software product. Customers can purchase update licenses as new versions become available (a common approach for PC software), but enterprises usually contract for an annual maintenance service that includes the right to install all new versions of the product released during the contract period. It is important to also differentiate SaaS from hosting or application management or application outsourcing. Because the SaaS/ondemand (SaaS/OD) market is currently hot, many suppliers are re-branding their hosting or application management or application outsourcing capabilities as SaaS/OD. The core proposition behind SaaS/OD is the delivery of a multitenant service from a remote location over an IP network via a subscription-based outsourcing contract. The SaaS/OD proposition can also be characterized as a pre-implementation outsourcing contract as opposed to taking an application that is already implemented by another party, and as being based on payment for a service rather than for software products and professional services. As noted, much relabeling of more-traditional application outsourcing approaches is occurring. Suppliers run the risk of both confusing and antagonizing buyers if they persist in this approach. Enterprises run the risk of getting nasty shocks when the thing they thought they were buying turns out to be something altogether different. Hosting and application management are not synonymous with SaaS. This forecast is focused on enterprise application software and does not include the infrastructure software markets, such as application development and project and portfolio management (PPM), data management and integration, and IT operations software. While there are other markets in which we see SaaS developing, Gartner believes this is a representative view of market potential and can be used as a proxy for adoption. The major enterprise application software markets that are tracked by Gartner and that are included in this forecast are: Content, communications and collaboration CRM ERP Office suites and digital content creation (DCC) SCM The forecast also includes an estimate for a category of software referred to as others. Other application software represents a group of applications (such as financial governance, risk and compliance management; PPM; and payment services) that include SaaS offerings. The rapid adoption of SaaS has contributed to growth in varying degrees across the enterprise software markets. The forecast in Figure 1 and Table 1 covers SaaS for enterprise application software markets, aligned to estimated revenue. The forecast is 2007 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although Gartner s research may discuss legal issues related to the information technology business, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein are subject to change without notice.

3 based on results from hundreds of vendors across the markets (see Table 2 for a representative vendor listing). Gartner s last forecast of the SaaS market was published in December This forecast covered software, IT operational services used in the provisioning of the service, and associated professional services that SaaS vendors report for additional development work, integration and process re-engineering, and so forth. Strong growth is expected to continue for applications supporting simplified business processes or distributed workforce teams, but only low-single-digit growth is anticipated in areas of increased application complexity. For example, CRM SaaS revenue is forecast to have growth of approximately 26% annually through In contrast, SCM SaaS revenue is forecast to have a 9% growth rate for the same period. 3 Figure 1. Total Software Revenue Forecast for SaaS Delivery Within the Enterprise Software Markets, Millions of Dollars 14,000 12,000 10,000 8,000 6,000 4,000 2, Content, Communications and Collaboration CRM ERP Office Suites and DCC SCM Others Source: Gartner (July 2007) Table 1. Total Software Revenue Forecast for SaaS Delivery Within the Enterprise Application Markets, (Millions of Dollars) Content, Communications and Collaboration CRM ERP Office Suites and DCC SCM Others Total Enterprise Application Software , , , , , , , , , , , , , , , , , , , , , , , , , , , ,498.3 CAGR (%) Source: Gartner (July 2007)

4 4 Gartner defines total software revenue as revenue from new licenses, subscriptions, and software maintenance and technical support services that include new version license sales to update/upgrade an existing license to a new version, telephone support and on-site remedial support. Gartner believes SaaS is primarily a software delivery and management approach that exists in an established market, such as CRM or ERP. However, Gartner also believes it is valid to total vendors revenue from SaaS-based delivery in these established markets to create a market size and forecast for SaaS. This SaaS data, therefore, is a metamarket that consists of data sourced from other markets. Market Landscape The vendor listing in Table 2 is representative of each category, and vendors are listed in alphabetical order. For a comprehensive list of CRM vendors, see CRM On-Demand Vendor Guide, Table 2. SaaS by Enterprise Software Market, Representative Vendors Content, Communications and Collaboration CRM ERP Office Suites and DCC SCM Source: Gartner (July 2007) Representative Vendors ECM CrownPeak, EMC, Eskudos, Hyland Software, Mediasurface, PaperHost, SpringCM, Treeno Software, Xerox, Xythos Google, HP, IBM, Microsoft E-learning GeoLearning, Intellinex, KnowledgePlanet, Learn.com, NIIT, OutStart, Plateau Systems, Saba Software, SumTotal Systems Instant messaging FaceTime Communications, Google, Jabber, MessageLabs, Symantec Search SLI Systems, Visual Sciences Team collaboration Designlinks International, Grove Technologies, IntraLinks, Jive Software, Teamspace Web conferencing Adobe, Cisco Systems (WebEx), Citrix, Genesys Conferencing, Interwise, Microsoft, Web Dialogs Sales ATG, Centive, Entellium, Firepond, Involve Technology, NetSuite, Oracle, Sage, salesforce.com, SAP, Xactly Marketing Aprimo, ExactTarget, Lyris, NetSuite, Responsys, RightNow Technologies, SAP, SAS Institute, Silverpop, Unica Customer service and support ATG, Entellium, HardMetrics, InQuira, Kaidara Software, Merced Systems, NetSuite, Oracle, Parature, RightNow Technologies, salesforce.com, SAP HR Employease, Infor (Workbrain), Kenexa, Peopleclick, SilkRoad, Softscape, SuccessFactors, Ultimate Software, VirtualEdge, Vurv, Workscape Financials: NetSuite AdventNet, Corel, Google, PZT, Simple Groupware Solutions, Smartsheet.com, Team and Concepts, ThinkFree Sourcing and procurement SAP (Frictionless), Ariba, Emptoris, I-many, Ketera Technologies, Prescient, Procuri, Quadrem, Verticalnet Supply and demand chain planning Agentrics, BetweenMarkets, E2open, Elemica Warehouse management Accellos (Radio Beacon) Transportation management BridgePoint, Descartes, GT Nexus, Log-Net, Management Dynamics/BridgePoint, TradeBeam Service parts planning Click Commerce (Xelus), MCA Solutions, Servigistics

5 5 SaaS Adoption Varies Widely for Content, Communications and Collaboration Markets For content, communications and collaboration technologies, the usage of SaaS varies widely across the market segments. The projected CAGR for revenue attributed to SaaS in this market is 20%, versus an estimated 14% CAGR for total software revenue. For certain markets, such as ECM and search, SaaS is barely used at all, while for e-learning and Web conferencing, it is the predominant form of software access. Recent market analysis for SaaS adoption in 2007 indicates the following: ECM Very small adoption, in the range of 1% to 2% of total software spending; early adoption for Web content management, records management and digital asset management. Much more focused on the consumer segment rather than the enterprise segment; Google s entry in February 2007 may drive adoption later in the decade, but SaaS currently represents less than 10% of total enterprise market spending. E-learning Rapid adoption, with more than 60% of total software spending attributed to SaaS; key factor for provisioning large, distributed users quickly. Instant messaging Limited adoption in the enterprise, with total spending approximating 5%; more focus on instant messaging hygiene. Key focus is the consumer market (the consumer market is not included in this forecast) from providers such as AOL, Google, Microsoft and Yahoo. Search and information access Very limited market impact at this time, with total market spending approximating 2%. Team collaboration A growing segment gaining in popularity from influences from social software and distributed virtual teams; represents approximately 45% of total market revenue. Web conferencing Accounts for more than 70% of total market revenue; on-premises offerings are increasingly taking hold and so are hybrid offerings that combine hosted and onpremises access. On-Demand Drives Growth Across CRM Subsegments SaaS continues to become an increasingly larger portion of the CRM market, representing 12% of total software revenue in 2006, up from 8.6% in The projected CAGR for SaaS CRM revenue is 25.9% versus an estimated 11.7% CAGR for total software revenue. Salesforce.com, RightNow Technologies and NetSuite all enjoyed strong double-digit revenue growth. Traditional on-premises vendors, such as Oracle, Aprimo and Comergent, have also seen their SaaS-derived revenue grow. SaaS solutions offer a workable alternative for small or midsize businesses (SMBs), which were historically unable to benefit from CRM applications because of their significant investment requirements. They also pose an attractive option for larger line-ofbusiness buyers who seek to enable groups of users quickly and at relatively low cost, without incurring potential delays or the development expense associated with overburdened internal IT department projects. SaaS solutions benefit from painful reminders of previously failed implementations, encouraging buyers to seek simpler alternatives with more-rapid implementation horizons. A growing intolerance for shelfware and misdirected investments also spurs buyers to evaluate SaaS more closely as a viable option. Another significant factor in the adoption of CRM SaaS, and again indeed relevant to other application domain areas, is that SaaS applications are typically being bought by business, rather than technical, audiences. The popularity and availability of these solutions persists as traditional on-premises vendors add ondemand offerings as an important deployment option within their portfolio. Adoption in the CRM market indicates growth across the three primary subsegments: Sales The sales subsegment accounts for more than half of CRM on-demand revenue, primarily focused on sales force automation applications. SaaS accounts for more than 18% of overall sales subsegment revenue. Marketing Marketing automation solutions include campaign and lead management, marketing resource management, and analytics. Nearly 10% of subsegment revenue is attributable to SaaS. Customer service and support This subsegment accounts for about 24% of CRM SaaS revenue, or 7% of revenue in the subsegment. Contact center customer service, contact center technical support and e-service are primary application areas. SaaS Will Selectively Contribute to ERP Market Growth SaaS has gained much media attention and mind share in the realm of CRM, but within the ERP arena, it remains firmly focused on discrete application areas, such as human capital management (HCM), in which delivery by SaaS lends itself in particular to areas such as talent management and recruitment. While there is increasing potential for SaaS solutions to account for a larger percentage of ERP revenue, SaaS as a proportion of the overall market will remain confined primarily to delivering discrete solutions rather than providing a broad, functionality-rich and integrated ERP solution to a wide audience. The projected CAGR for SaaS ERP revenue is 15.9%, versus an estimated 7% CAGR for total software revenue. Trends by ERP segment are as follows: Manufacturing and operations Manufacturing is one of the most mature and larger ERP segments, with minimal adoption of solutions through SaaS. SaaS barely registers a presence in the market segment, with just more than half a percent share contribution in 2006 to total software and an estimated 1.4% by Financial management systems Financial applications make up the largest ERP segment but have had limited adoption of SaaS applications. SaaS accounting applications are creating a great deal of interest, and given the relative ease in translating them to a SaaS model, we expect they will have the largest potential. Today the penetration is minimal, especially with larger companies, because the complexity of interfaces means they will stay with the on-premises/user-owned software model for some time. In addition, security issues concerning sensitive financial data residing on a shared server are a show stopper for some buyers. We are starting to see some traction, although very small at 2% of the 2006 total software market, growing to 4% by As with many markets, SaaS is best-suited for SMBs, with straightforward needs and simple integration requirements. HCM SaaS is a relatively new delivery model for HCM applications, but it has become the preferred model for many technology providers offering solutions that address some of

6 6 the strategic HCM functionalities required by large and/or midsize businesses, such as recruitment and talent and performance management. Even so, SaaS hasn t experienced similar levels of adoption within larger enterprises because of a lack of global functionality and flexibility; total cost is also an issue because SaaS delivery can cost more than purchasing the same solution via the traditional license model and implementing it on-premises. We expect functionality improvements and pricing evolution to make SaaS more costeffective for large enterprises over time. Despite the lack of adoption within larger companies, SaaS delivery of HCM applications made up an estimated 17% of the segment s 2006 total software revenue, and it is expected to reach 24% of the market s size by Enterprise asset management (EAM) EAM is the smallest ERP market tracked. Similar to the manufacturing and operations segment, EAM is an older, more-mature market, with limited new entrants over the years. By 2011, we expect SaaS to represent 6% of the EAM market, up from its current 2% contribution. SaaS Adoption for Office Suites and DCC Software Begins in Earnest in 2008 Web-based inroads into the office suites and DCC software market have increased. Gartner tracks more than a dozen vendors that currently have beta or generally available Web-based versions for the office suites and DCC software market. Startup vendors have created a miniburst of market interest by offering Web-based applications for free and financing these applications through advertising-based revenue or through add-on sales. The key new competitor in 2007 is Google. In addition to offering Google Apps, which costs $50 per user, per year, Google added a presentation module to its Documents and Spreadsheets family by acquiring Tonic Systems. By 2010, Google and similar Web-based freeware and SaaS offerings are anticipated to have approximately 5% market share based on total software revenue. This momentum will typically be driven by new use cases and not by direct replacement of Microsoft products. The projected CAGR for revenue attributed to SaaS in this market is 95.7%, versus an estimated 7.5% CAGR for total office suites and DCC software. SaaS SCM Solutions Continue Growth in Pockets of Opportunity SaaS represents approximately 6% of total software spending for SCM, and its growth is not expected to mirror that of CRM. The projected CAGR for SaaS SCM revenue is 9%, versus an estimated 6.4% CAGR for total software revenue. Pockets of opportunity within the SCM market include e-sourcing (strategic sourcing) and global trade and transportation management. However, the more-complex and more-customized applications within planning, or the deep execution within the four walls of a warehouse management system, are unlikely to migrate toward a SaaS delivery model. We also expect demand for SaaS solutions offered by other traditional suite vendors to increase significantly throughout the forecast period. SaaS trends in SCM market segments are as follows: Supply chain planning (SCP) The technology has been widely used behind the firewall for many years, but the level of complexity in the business process and integration with other important business processes have slowed the adoption of SCP as a service. We estimate that 5% share of 2006 total software revenue in SCP was generated through SaaS, and it will grow to 14% of the market in Supply chain execution (SCE) Most of the segment s traction is driven by transportation management systems (TMSs), which are beneficial to customers without significant or complex planning requirements. Value is gained from digital connectivity with carriers, which is a primary reason for the adoption of TMS SaaS but which makes it difficult for vendors to differentiate themselves in a meaningful way. SaaS has the potential to open the TMS market to smaller, less-complex shippers (with less than $25 million in annual freight), which will fuel growth in this segment. We estimate that 14% of 2006 total software revenue in SCE was generated as a service and that it will grow to 15% of the market in Sourcing and e-procurement E-sourcing emerged during the late 1990s at the beginning of the business-to-business e- business bubble, and it is one of the survivors from that era. Its survival results from the value that e-sourcing delivers to enterprises and from the fact that many vendors have worked to offer their wares through the SaaS model. Similar to HCM, SaaS has become the preferred delivery model for many technology providers that have succeeded in penetrating larger enterprises with on-premises solutions and that are looking for opportunities in the midmarket. We estimate that SaaS accounts for 30% of the segment s 2006 total software revenue. Despite most vendors moving toward SaaS delivery, we are beginning to sense organizations wanting to implement solutions such as contract management behind the firewall. If this trend continues, we could see not only more bumps in associated revenue, but also a required shift for vendors to adjust their business to accommodate this user need. Service parts planning (SPP) SPP applications are specialized versions of SCP applications that focus on the unique characteristics of service parts management. It s a newer and smaller market within SCM, with several specialized providers often partnering with larger ERP suite providers. It may emerge as one of several new post-scp and innovation partner solutions targeted at specific industry requirements. We estimate that 10% of the addressable market has sourced SPP applications, with 8% of 2006 total software revenue generated through SaaS delivery, reaching 14% of the market by However, companies are not aware of its availability, and they make do with traditional SCP technology. Market Drivers and Inhibitors Market Drivers Many factors are driving adoption of SaaS, including the following: There is strong market growth within the SMB sector and increasing adoption of SaaS solutions by large enterprises within line-of-business applications and in remote locations. A heightened awareness of and growing intolerance for misspent investments on shelfware motivate buyers to purchase on-demand solutions. Vendors adding local language capabilities to their solution portfolios fuels growth globally. A shortage of skilled professional resources, within internal IT departments and system integrator organizations, contributes to adoption.

7 7 Painful reminders of lengthy, unsuccessful deployment cycles spur buyers to investigate simpler, quicker alternatives. Increasing familiarity with the Internet, improvements in security and an increase in broadband availability reduce earlier barriers to adoption. The benefits of rapid deployment, less upfront capital investment and a decreased reliance on limited implementation resources encourage SaaS deployments. Responsibility for continuous operation, backups, updates and infrastructure maintenance shifts risk and resource requirements from internal IT to vendors or service providers. Line-of-business ownership reduces dependency on internal IT, avoiding costly infrastructure integration requirements. An increase in line-of-business executives as buyers or influencers also drives growth. Market Inhibitors Certain factors can work to impede the adoption of SaaS, including the following: Concerns about data security and critical customer information continue to encourage on-premises applications for many. Initial investment costs required to create an on-demand infrastructure environment can restrict new market entrants. Investments in applications, capital and organizational expertise limit growth. Complex process requirements constrain adoption of simplified, standardized solutions. Regulations governing data privacy and protection vary by country and may restrict adoption of some vendors solutions in certain areas. An inability for vendors to shift to a service-based model for either architectural or cultural reasons restricts SaaS availability. Gartner Perspective Although SaaS as a percentage of total software revenue is expected to grow in most markets, other major forces will also impact market development during the forecast period, acting as either proponents or deterrents to growth. Major on-premises software vendors are re-architecting their application stacks to service-oriented architectures. Their customers will invest in migration for those processes that are complex or proprietary, but they also have an opportunity at this juncture to evaluate whether SaaS is an appropriate alternative for other aspects of their business. SMBs that have insufficient resources to convert their applications will also find SaaS an attractive 21st century solution to their legacy systems. Often-cited benefits of SaaS include low deployment costs, little upfront capital investment and elimination of ongoing resource requirements for back-end system management. These benefits are particularly attractive to SMBs that may be unable to take advantage of enterprise application functionality because of significant requirements for IT infrastructure and staffing. But unless the solution is adopted as a temporary measure or is designed to meet the needs of a small enterprise with straightforward process requirements, buyers should expect to encounter additional costs. Users may demand additional functionality as sophistication increases, necessitating an upgrade to a more-feature-rich edition or service. Integration requirements with current applications may be needed as the application becomes more ingrained in the overall business process. Professional services may also be required to make any companyor industry-specific customizations determined critical to the business. Buyers need to identify where SaaS solutions make sense in terms of their overall sourcing strategy and plan for potential downstream investments as adoption increases. From a regional perspective, the Western economies are still the largest consumers of SaaS solutions. Despite attractive growth prospects in emerging markets, vendors must expend resources to accommodate local cultural and language requirements and must prioritize opportunities. Data privacy and protection regulations vary by country and may place additional compliance requirements on vendors or otherwise limit their entry. The availability and character of SaaS solutions have evolved rapidly during the past two years. In 2006, most vendors added functionality to their on-demand solutions, and many extended their reach by offering versions in multiple geographic regions. Traditional on-premises vendors, such as SAP, added a SaaS component to their product portfolio, and salesforce.com widely expanded its AppExchange and announced the availability of a new programming language for applications developed within its data center. Vendors continue to work within and extend their ecosystems to make more development options and application functionality available to partners and communities. Microsoft s anticipated CRM Live launch in 2007 will provide another SaaS option to its extensive worldwide partner and customer base. Gartner expects breadth and depth of SaaS to evolve throughout the forecast period as buyers and suppliers find new ways to exploit the advantages of a service-centric model. Recommendations SaaS can become an important component of the overall enterprise application delivery portfolio. Evaluate the deployment options, and determine which vendor(s) to evaluate and then standardize on, based on the best alignment to other business applications and functions. Our recommendations are as follows: Evaluate use of SaaS within the context of an overall corporate sourcing strategy before choosing a service provider. Understand the broader nature of costs incurred with a SaaS solution. Identify what costs are actually included in the monthly fees and which additional costs will be required by your application for customization, training, integration or infrastructure, such as additional storage. Determine if and when the longer-term costs associated with SaaS solutions match or outweigh an on-premises offering. Partner or relabel solutions with established technology providers with an SMB focus. There are more opportunities within SMBs that have less extensive integration and international needs, but that prefer to purchase from a single source. Offer professional services focused on industry best practices to help differentiate from competitive offerings. Evaluate current offerings from all business relationships outside of traditional software sources. SaaS offerings are often available from companies offering outsourced processes rather than traditional on-premises software.