SaaS Spending to Increase Exponentially: Report

Small to medium-size business (SMB) spending in the U.S. on software as a service (SaaS) will increase exponentially over the next five years, eclipsing growth in investments in on-premise software by a "significant margin", according to a report from IT research firm AMI-Partners. The company forecast a 25 percent compound annual growth rate (CAGR) in hosted business application services spending through 2014. AMI said this would come against a modest five percent uptick for all other categories of on-premise software combined.

However, the report also said growth will not be uniformly spread across all hosted applications. Mature applications such as ERP, SCM, procurement, finance, and core HR will turn over more slowly than those that are less saturated and have lower switching costs, according to the company’s research.

“There is an entire marketplace trained on and running PC-based applications that will not disappear overnight,” says Helen Rosen, a vice president with AMI-Partners. “Much of these investments are in applications that are highly embedded, and would not be cost-effective to replace wholesale. In our opinion, there is immediate potential for vendors to capture incremental revenues from installed products through partial upgrades and add-ons delivered via SaaS. As an interim strategy, this could help vendors—particularly those with large footprints of legacy applications—protect their base, allow for an organic migration, and create a platform for an ecosystem of application enhancements to emerge.”

The cost advantages of SaaS could also have a big impact on how business process outsourcers (BPO) participate in the market opportunity going forward, she said. “Our research shows there is real opportunity for lower-cost hybrid models (SaaS + BPO) in which BPO is provisioned as a SaaS service running on a multi-tenant cloud platform,” Rosen explained. “We see this as a game changer and long-term growth engine for outsourced services providers.”

Rosen noted SaaS is now a mainstream alternative to on-premise business applications and BPO for a “rapidly expanding” portion of the small and mid-enterprise market. “The multi-tenancy model offers U.S. SMBs comparable performance on a lower-cost basis and the flexibility to scale usage in line with shifting needs of their businesses,” she said. “This is a value proposition that U.S. SMBs find highly attractive. The intense focus on cost management precipitated by an uncertain economy has also been an important catalyst of demand.”