Forecast Analysis Software as a Service, Worldwide, 2009-2014

Dataquest

Publication Date: 1 July 2010 ID Number: G00201597

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Forecast Analysis: Software as a Service, Worldwide, 2009-2014

Sharon A. Mertz, Chad Eschinger, Tom Eid, Hai Hong Swinehart, Chris Pang, Laurie F. Wurster, Yanna Dharmasthira, Ben Pring

After a decade of use, adoption of software as a service (SaaS) continues to grow and evolve within the enterprise application markets, as tighter capital budgets demand leaner alternatives, popularity and familiarity with the model increases, and interest for platform as a service and cloud computing grows. Adoption varies between and within markets. Although use is expanding to a wider range of applications and solutions, the most widespread use is still characterized by horizontal applications with common processes, among distributed virtual workforce teams and within Web 2.0 initiatives.

Key Findings

Project and portfolio management (PPM) emerged in 2009 as a fast-growing market for SaaS with a compound annual growth rate (CAGR) of more than 41% projected for the next five years. Tight budgets and frustrated users have forced mature vendors to provide SaaS alternatives to counter new entrants to the market with SaaS-only low-cost offerings.

Office suites and digital content creation (DCC) also continue to show rapid growth for SaaS although starting from a smaller base, with a 31.8% CAGR and a 35.7% CAGR, respectively. Adoption is driven by new entrants in office suites but gated by Internet broadband availability for DCC.

The content, communications, and collaboration (CCC) market continues to show the widest disparity of SaaS revenue generation, with SaaS representing 4% of enterprise content management (ECM) and approximately 82% of Web conferencing.

Adoption of SaaS within ERP and supply chain management (SCM) varies based on process complexity.

SaaS within ERP remains a relatively small proportion of the overall market (in comparison with other software segments featured in this report) at approximately 6% in 2009.

SaaS continues to penetrate the CRM market, accounting for nearly 24% of total CRM market revenue in 2009. SaaS in CRM exhibits more-general market adoption, ranging between 11% and nearly 40% of total software revenue, depending on the CRM subsegment. SaaS may exceed 26% of CRM market total revenue in 2010.

Publication Date: 1 July 2010/ID Number: G00201597 of 28

© 2010 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

TABLE OF CONTENTS

Assumptions ................................................................................................................................ 4

Analysis ....................................................................................................................................... 4 Changes in Market Conditions ......................................................................................... 4 Forecast Overview ........................................................................................................... 5 Market Landscape ......................................................................................................... 11

CCC Markets .................................................................................................... 12 SaaS Drives CRM Market Growth Despite Leaner Budgets, While Competition Heightens .......................................................................................................... 13 SaaS Within ERP — Penetration Varies by Submarket but Still Most Notable in HCM ................................................................................................................. 15 Development of SaaS in the DCC Software Market Depends on Internet Capacity16 SaaS Offerings Complement and Coexist With Traditional Office Suite Products 17 PPM SaaS Alternatives Gain Favor in Difficult Times ......................................... 17 SaaS SCM Solutions Experience Double the Growth of the Traditional SCM Market ............................................................................................................... 18 Other Markets ................................................................................................... 19

Regional Context and Outlook ....................................................................................... 19 SaaS in Asia/Pacific .......................................................................................... 19 SaaS in Europe ................................................................................................. 21

Current SaaS Adoption ......................................................................... 21 SaaS Application Use ........................................................................... 22 Future SaaS Investment ....................................................................... 24

SaaS in North America ...................................................................................... 24 Current SaaS Adoption ......................................................................... 24 SaaS Application Usage ....................................................................... 24 Future SaaS Investment ....................................................................... 25

Business and Market Drivers and Inhibitors .................................................................... 25 Factors Promoting Adoption .............................................................................. 25 Factors Limiting Adoption .................................................................................. 26

Market Model ............................................................................................................................. 26

Recommended Reading ............................................................................................................. 27

LIST OF TABLES

Table 1. Evolving Role of SaaS as Segments Mature ................................................................... 7

Table 2. Total Software Revenue Forecast for SaaS Delivery Within the Enterprise Application Software Markets, 2007-2014 (Millions of Dollars) ........................................................................ 9

Table 3. SaaS by Enterprise Software Market, Representative Vendors ..................................... 11

LIST OF FIGURES

Figure 1. Total Software Revenue Forecast for SaaS Delivery Within the Enterprise Application Software Markets, 2007-2014 Millions of Dollars........................................................................... 9

Figure 2. Percentage of SaaS by Enterprise Application Software Markets, 2009-2014 ............... 10



Figure 3. Reasons for SaaS Adoption ......................................................................................... 22

Figure 4. SaaS Adoption by Application ...................................................................................... 23



ASSUMPTIONS

Assumptions that impact the growth of SaaS include broader industry trends, changing user preferences and consumption patterns, and factors that are germane to each of the enterprise application markets included in this forecast. Primary assumptions include the following:

Continual cost pressures on businesses drive the search for less-capital-intensive alternatives and opportunities to operationalize costs.

More widespread use of SaaS in companies of all sizes, and the appearance of larger deals and expanding deployments within enterprises legitimizes the model and broadens adoption.

Growing interest and slowly developing familiarity with cloud computing contributes to the acceptance of SaaS as the application layer in the broader cloud stack.

Rising maintenance fees from the "megavendors," such as SAP and Oracle, can constrain budgets and encourage buyers to entertain other options and choice of vendors.

New expectations for time to market and more-rapid return on investment (ROI) demand ease and speed of deployment for enterprise solutions.

The extension of SaaS to the platform creates new opportunities for developers and independent software vendors (ISVs) and more solution choices for buyers.

Financial markets favor investments in vendors with subscription-based revenue models due to the potential for greater margins and incremental market opportunity.

Increased availability of broadband extends the viability of Web-based service solutions globally, though network instability remains an issue in certain countries.

Growth opportunities for vendors exist across various submarket segments, in specific vertical industries, and within underserved niches, and within the small or midsize business (SMB) market.

Increasing functional sophistication of some SaaS vendors and growing solution portfolios offers a more extensive range of options to address business requirements.

ANALYSIS

This report discusses trends, market forces, and forecast estimates for SaaS in the enterprise application markets. Gartner's forecast represents our most recent data for SaaS in the enterprise application software markets, updating "Market Trends: Software as a Service, Worldwide, 2008-2013, Update" published in November 2009. Market-level forecasts for the enterprise application markets featured in this report, including detailed regional and country-specific forecasts, can be found in "Forecast: Enterprise Software Markets, Worldwide, 2009-2014, 1Q10 Update."

Changes in Market Conditions

Adoption of the on-demand deployment model has grown for nearly a decade, but its popularity has increased significantly within the past five years. Initial concerns about security, response time, and service availability have diminished for many organizations as SaaS business and computing models have matured and adoption has become more widespread. Usage and



vendors' on-demand "ecosystems" continue to evolve to provide additional business and technology services, more-vertical-specific functionality, and stronger communities of partners and buyers. Although some attrition occurred during 2009 due to business workforce reduction, nearly all SaaS vendors grew revenue during the economic downturn, as buyers continued to confirm their acceptance of on-demand. Expect adoption of SaaS to far outpace market growth through 2014.

The composition of the worldwide SaaS landscape is evolving as vendors continue to extend regionally, increase penetration within existing accounts and "greenfield" opportunities, and expand their solution offerings, either organically or through acquisition. During the past 12 months to 18 months, Gartner has observed the following shifts in how SaaS is sold, consumed and perceived by vendors and buyers:

There is increasing involvement from executives in purchasing decisions, as well as greater participation from IT in the purchase process due to larger deals, the expanding footprint of SaaS in the enterprise, and higher requirement for downstream integration as SaaS becomes incorporated in the enterprise business process.

Growing communities of professional service providers are emerging for SaaS, not only to fulfill technical integration and deployment requirements, but also to assist buyers with process re-engineering and change management initiatives. Firms of all sizes are growing practices focused on SaaS, ranging from small-to midsize deployments to large implementation efforts in the complex deals.

An increasing number of enterprises are using a variety of SaaS applications from multiple vendors that were procured and deployed without participation from IT, creating management issues and challenges.

SaaS deployments are becoming larger, with deals more frequently appearing in the range of thousands to tens-of-thousands of subscriptions within large enterprises.

Social media and social software is becoming increasingly integrated with SaaS solutions, as social platforms such as Facebook and Twitter are leveraging customer service, sales, and marketing initiatives.

Deal structures are slowly changing to more often accommodate an actual pay-for-use model, rather than a pay-up-front subscription model, especially in emerging markets, to reach a wider audience and respond to customer demand.

Many buyers are facing application migrations to service-oriented architectures as vendors rearchitect their stacks, and are entertaining SaaS alternatives for specific functionality, particularly when the solution is not available from the incumbent vendor.

Immediate financial advantages may be outweighed by downstream costs as users demand richer functionality and as customization or integration requirements with on-premises applications increase.

Forecast Overview

During 2009 and 2010, the significant industry buzz surrounding SaaS and other off-premises models shifted to cloud computing. Cloud computing is a broad concept, of which SaaS is only one variation, representing the application layer of the overall cloud architectural stack. SaaS has been a "lead indicator" of the cloud concept for some time. Gartner defines cloud computing as a style of computing in which massively scalable IT-enabled capabilities are delivered as a service to external customers using Internet technologies, where services are tracked with usage metrics



to enable multiple deployment models. One IT-related function can be a software application. If the software application is written in such a way that it meets the characteristics of this definition, then SaaS is considered a form of cloud computing. Gartner defines SaaS as software that is owned, delivered and managed remotely by one or more providers. The provider delivers an application based on a single set of common code and data definitions, which is consumed in a one-to-many model by all contracted customers anytime on a pay-for-use basis, or as a subscription based on use metrics. Based on our guidance calls with hundreds of vendors, Gartner estimates that 75% of the current SaaS delivery revenue could be considered as a cloud service, and that could exceed 90% by 2014 as the SaaS model matures and converges with cloud services models. For further discussion of the broader cloud service environment, refer to "Forecast: Public Cloud Services, Worldwide and Regions, Industry Sectors, 2009-2014."

It is important to also differentiate SaaS from hosting or application management or application outsourcing. Because SaaS and cloud are hot concepts in the market, many suppliers are rebranding their hosting or application management or application outsourcing capabilities as SaaS or are claiming their solutions are available "in the cloud." Much relabeling of more-traditional application outsourcing approaches is occurring. Suppliers run the risk of 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, nor do they necessarily comply with the definition of cloud computing.

Another complication in the difficulty of distinguishing between SaaS and hosting is that leading SaaS vendors increasingly offer customization capabilities that allow customers (either end users or ISV partners) to develop entirely customized versions of the core SaaS application, or also pure custom applications. These applications are no longer strictly one-to-many, and therefore, by definition, are more akin to being called a hosted application. On-demand vendors have extended their services through alliances, partner offerings, and more recently by offering and promoting user application development through platform as a service (PaaS) capabilities. The development of custom PaaS applications is gaining momentum with ISVs that are developing multitenant SaaS applications, and with enterprises that are shifting development resources to create custom applications for the organization. Where a custom application is developed on PaaS it is no longer, by definition, available to other customers and, thus, is not a SaaS application but simply an application developed by the client and hosted by the provider. During the market share analysis, Gartner develops estimates that recognize the difference between revenue that is attributable to SaaS and that which represents PaaS for vendors that offer solution and platform capabilities to their customer base. Because that revenue attributable to PaaS is still extremely small, this issue is more a theoretical debate than a pressing practical one. But Gartner will watch and comment on it during the next few years

Adoption of the on-demand deployment model has grown for the past decade, and as organizations reach increasing levels of maturity and gain familiarity with the model, initial concerns about security, response time, and service availability have diminished, and adoption has become more widespread. Users are demanding more functionality and better contractual terms as they expand their use of SaaS in the enterprise by extending existing on-premises applications, building net new SaaS solutions, or replacing existing on-premises applications (see "User Survey Analysis: Software as a Service, Enterprise Application Markets, Worldwide, 2010").

Although use and adoption continues to grow, deployment of SaaS still varies between the enterprise application markets and within specific market segments because of buyer demand and applicability of the solution. The value proposition of SaaS varies, depending in part on the stage of maturity of the SaaS offering (see Table 1). For example, early in the evolution of a market for wiki technology, SaaS enables enterprises to enable user and IT experimentation with



that technology at minimum risk. Much later in the evolution of a market for e-mail technology, SaaS may enable enterprises to benefit from the dramatic economies of scale that a very large service provider may be able to achieve. The table explores the value proposition and value magnitude variations by maturity level. Not all market segments at any particular maturity level are equally appropriate for SaaS. There are many other factors to consider (such as degree of dependence on, and integration with, internally developed or highly tailored systems). For example, CRM and e-mail are mature markets, but, for many enterprises, it should be somewhat easier to move to a SaaS e-mail offering than a SaaS CRM offering. Table 1 profiles the evolving role of SaaS as application market segments mature.

Table 1. Evolving Role of SaaS as Segments Mature

SaaS Value Proposition Potential Value Magnitude

Examples

Vendor Risk

Emerging Easy for users (and IT) to experiment because of low barrier to entry; early experimentation leads to earlier

exploitation for business benefit

High Social software (such as communities and

wikis)

High

High Growth Lessen the effect of skill shortages, and make it easier to move away from the product,

managing peak loading

Modest (a lot of switching costs will

remain)

Web conferencing Moderate

Mature Exploit SaaS providers' economies of scale to drive down cost.

High E-mail, CRM,

PPM Low

Declining Lessen the effect of skill shortages, and make it easier to

move away from the product.

Moderate Not apparent Moderate

Source: Gartner (June 2010)

When considering market size or growth, all maturity levels are not equal. SaaS business volume in emerging market segments will be far lower, and with potentially far higher growth rates, than SaaS business volume in a mature market segment. A comparison of compound annual growth rates and estimated SaaS revenue between markets illustrates this point.

This forecast is focused on enterprise application software and does not include the infrastructure software markets, such as application development, data management, security software, and IT operations software. Although Gartner sees other markets where SaaS is developing, this is a representative view of market potential and can be used as a proxy for adoption. The major enterprise application software markets that Gartner tracks, and that are included in this forecast, are:

CCC

CRM

DCC

ERP

Office suites

PPM



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; and payment services) that include SaaS offerings.

Changes to this forecast are as follows:

For the CCC segment, e-learning and enterprise instant messaging have moved to the "Other Application Software" category and enterprise e-discovery has been added.

PPM estimates have been added to the market forecasts and have been moved from the "Other Application Software" category.

The rapid adoption of SaaS has contributed to growth in varying degrees across the enterprise software markets. Gartner's forecast for estimated SaaS total software revenue within the enterprise application software markets is a 15.3% overall CAGR from 2009 through 2014, or more than $15 billion attributed to SaaS at the end of the forecast period. This represents a lower CAGR, down from 17.7% in the November, 2009 forecast. Declines are more reflective of lower overall IT spending than waning interest in the SaaS deployment model. The updated forecast represents a shift in total SaaS revenue from just over 10% of the combined markets in 2009, to more than 16% of these combined markets in 2014. The forecast in Figure 1, Table 2 and Figure 2 cover SaaS for enterprise application software markets, aligned to estimated revenue. The forecast is based on results from hundreds of vendors across the markets.



Figure 1. Total Software Revenue Forecast for SaaS Delivery Within the Enterprise Application Software Markets, 2007-2014 Millions of Dollars


Table 2. Total Software Revenue Forecast for SaaS Delivery Within the Enterprise Application Software Markets, 2007-2014 (Millions of Dollars)

2007 2008 2009 2010 2011 2012 2013 2014

CAGR (%)

2009-2014

CCC 1,782 2,157 2,488 2,862 3,382 4,089 4,935 5,652 17.8

Office Suites 51 56 68 100 150 199 248 271 31.8

DCC 18 44 65 92 143 207 277 298 35.7

CRM 1,231 1,872 2,279 2,502 2,831 3,177 3,598 4,015 12.0

ERP 1,044 1,177 1,248 1,346 1,465 1,612 1,805 2,013 10.0

SCM 582 690 807 922 1,056 1,200 1,378 1,547 13.9



2007 2008 2009 2010 2011 2012 2013 2014

CAGR (%)

2009-2014

PPM 22 30 70 138 216 280 339 394 41

Other Application

Software 304 385 462 580 718 855 1,019 1,084 18.6

Total Enterprise

Software 5,035 6,410 7,486 8,543 9,961 11,620 13,599 15,275 15.3


Figure 2. Percentage of SaaS by Enterprise Application Software Markets, 2009-2014


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. SaaS is primarily a software delivery and management approach that exists in established markets, such as CRM or ERP. However, a valid approach is to total vendors'



revenue from SaaS-based delivery in these established markets to create a market size and forecast for SaaS. The forecast is based on two base years of actual vendor revenue estimates plus a five-year forward projection, an approach that is consistent with Gartner's market-level forecasts for the enterprise application markets. This SaaS data, therefore, is a composite market that consists of data sourced from other markets.

Market Landscape

The vendor listing in Table 3 is representative, but not inclusive, of each category; vendors are listed in alphabetical order. Additional vendors may also have functionality in a software product category, but are not identified in Table 3. For the CCC segment, e-learning and enterprise instant messaging have moved to the "Others" category and enterprise e-discovery has been added.

Table 3. SaaS by Enterprise Software Market, Representative Vendors

Representative Vendors

CCC ECM — Alterian, Auersoft, Clickability, Content Management AG, CrownPeak, EpiServer, Eprise (SilkRoad Technology), Hyland, IBM, NetReach, Open Text, PaperHost, PaperThin, SpringCM, Treeno Software, Xerox

E-discovery: AccessData, Anacomp, Autonomy, Case Central, Commvault, Epiq Systems, FTI, Huron Consulting, Iron Mountain, KCura, LexisNexis, Renew Data,

Summation

E-mail — Cisco, Google, HP, IBM, Microsoft

Search — Atomz, SLI Systems

Team collaboration — DesignLinks International, EMC, Grove Technologies,

Huddle/Ninian Solutions, IntraLinks, Jive Software, TeamSpace

Web conferencing — Adobe, AT&T, Cisco, Citrix, IBM, InterCall (Genesys

Conferencing), Microsoft, NetViewer

CRM Sales — Access Commerce, ATG, Callidus, BigMachines, CDC Software, Demandware, Firepond, Imano, Involve Technology, Kadient, Microsoft Dynamics CRM, NetSuite, Oracle CRM On Demand, Sage, salesforce.com, SAP, SugarCRM,Venda, Xactly, Zoho

Marketing — Alterian, Aprimo, Assetlink, Elateral, ExactTarget, Coremetrics, Genalytics, L-Soft, Lyris, Marketingisland, Microsoft Dynamics CRM, Neolane, NetSuite, Responsys,

RightNow Technologies, SAP, SAS Institute, Silverpop, Unica

Customer service and support — AIM Technology, Confirmit, eGain, Enkata, HardMetrics, InStranet, InVision, Knowledge Solutions, Merced Systems, Oracle, Parature, RightNow Technologies, salesforce.com, SAP, Teleopti, TOA Technologies

DCC Adobe, Corel, Google, Microsoft, Avid, Yahoo, Paint.NET, Serif

ERP Human capital management — CornerStpne on Demand, CyberShift, Infor (Workbrain), Kenexa, Saba, SilkRoad, Softscape, Sonar 6, SuccessFactors, Taleo, Ultimate Software,

VirtualEdge, Workday, Workscape

Financial management systems — FinancialForce,com, Intaact, Exact Online, NetSuite,

SAP (Business ByDesign), Twinfield, Workday

Manufacturing & Operations — Plex Systems, NetSuite, SAP (Business ByDesign)

Office Suites Adobe, AdventNet, Ajax13, Approver.com, Corel, ExpressO, Google, iNetOffice, Microsoft, Open Source Software Institute, Peepel Technology, Sheetster, Simple Groupware Solutions, Smartsheet.com, Software Garden, Team and Concepts,

ThinkFree, TrimPath, Vyew



Representative Vendors

PPM @Task, Atlantic Global, Augeo, CA, Clarizen, Compuware, Daptive, Element Software, EPM, Genis Inside, HyperOffice, Innotas, Instantis, OpenAir, Planview, PowerSteering, Project Inverision, Project.net, ProjectPlace, Qtask, Severa, Skire.com, Tenrox and VCS

Online.

SCM Sourcing/procurement — Ariba, Emptoris, Ketera, Procuri, Quadrem

Supply and demand chain planning — E2open, Elemica, Agentrics, BetweenMarkets, Kinaxis

Warehouse management — Accellos, SmartTurn (RedPrairie)

Transportation management — BridgePoint, Descartes, GT Nexus, Log-Net, Management Dynamics/BridgePoint, TradeBeam

SPP — MCA Solutions, Servigistics

Others Expense management — Cerylion, Invoice Insight

Compliance management — Axentis (Wolters Kluwer), BI International, Paisley (Thomson Reuters)

E-learning — ACS Learning Services, GeoLearning, Global Scholar, Learn.com, Mzinga,

NIIT, OutStart, Plateau Systems, Saba, SumTotal

Instant messaging — FaceTime Communications, Google, Jabber, MessageLabs

(Symantec)

Disaster management — Send Word Now

Data cleansing — HyperQuality

Business intelligence — LucidEra

Data integration — Informatica, Hubspace

Business process management — Appian, Savvion

Storage — Amazon, Google, Symantec

Retail management — DigiPoS Store Solutions

Healthcare management — TriZetto

Physical security management — CrimeReports

SPP = service parts planning


CCC Markets

For CCC technologies, SaaS use varies across the market segments. The projected five-year CAGR for revenue attributed to SaaS in this market is nearly 18%, versus more than 11% CAGR for total software revenue for all delivery models. 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 2009 indicates the following:

ECM — Very small adoption, approximately 4% of total software spending; early adoption for Web content management and in related markets, such as e-mail management, records management, and digital asset management.

E-mail — Much more focused on the consumer segment rather than the enterprise segment; Cisco's entry in November 2009, Google's entry in February 2007 and Microsoft's SaaS-based Exchange and Business Productivity Online Suite delivery may drive accelerated adoption starting in 2011, but SaaS represented about 5% of the total enterprise market spending in 2009.



E-discovery — Multiple actions and technologies are used as part of the e-discovery process. The most popular use of SaaS delivery is for the processing, review, analysis and production functions, which accounted for approximately 44% of vendor revenue in 2009.

Search and information access — Limited market impact at this time, with total market spending of about 4% to 5%.

Team collaboration — A growing segment gaining in popularity from influences from social software and distributed virtual teams; SaaS represents approximately 45% of total market revenue in 2009.

Web conferencing — SaaS accounts for approximately 82% of total market revenue in 2009; on-premises offerings are increasingly taking hold and so are hybrid offerings that combine hosted and on-premises access.

SaaS Drives CRM Market Growth Despite Leaner Budgets, While

Competition Heightens

For the past five years, SaaS has continued to represent a key driver of growth in the CRM market. SaaS revenue grew at 19% within the CRM market during 2009, compared with slightly positive growth of 1.2% for the CRM market overall. SaaS in 2009 represented nearly 24% of the total CRM software market revenue, or more than $2.2 billion, nearly double the 2007 estimates. Gartner expects growth to continue, with SaaS representing 26% to 27% of the CRM market total software revenue in 2010.

More than half the historical SaaS revenue for CRM has come from salesforce.com in each year, with strong double-digit growth annually, and total company revenue exceeding $1.2 billion in January 2010. Salesforce.com continues to enhance its portfolio functionality with Sales Cloud 2, Service Cloud 2, and the Collaboration Cloud (Chatter), introduced during Dreamforce in November 2009. Regional business expansion continued in 2009 as salesforce.com officially opened its first international data center in Singapore and signed its first wholesaler agreement with software distributor Tallard Technologies, which will act as a value-added wholesaler throughout all of Latin America except Colombia. Salesforce.com continues to actively promote its growing PaaS solution, force.com, and claims 150,000 custom-built applications on the platform. The rapidly growing PaaS community is evolving the nature of on-demand from its early days of simplified, repeatable application solutions to an enterprise-specific development platform on demand.

The market landscape for on-demand CRM continues to evolve and mature as the availability and use of SaaS solutions becomes more pervasive. Greater market competition and increased focus by the megavendors reinforces the legitimacy of on-demand, mitigating initial objections about security and availability for many, as acceptance of SaaS as a viable model for enterprise computing services grows. SaaS vendors are responding to increasing demand to incorporate access to social software and social technologies into solutions, such as salesforce.com's acquisition of Jigsaw in 2010, RightNow's acquisition of HiveLive in 2009, or by providing interfaces to popular social forums such as Twitter and Facebook. The rapid adoption of SaaS and the marketplace success of salesforce.com have compelled vendors without an on-demand solution to acquire smaller niche SaaS providers or develop the solution internally in response to increasing buyer demand. Acquisition activity continues, as vendors across the CRM market acquire smaller on-demand firms to complement their product portfolios, such as CDC's acquisition of Truition, NetSuite's acquisition of QuickArrow, and Unica's acquisition of MakeMeTop. SAP, Microsoft, and Callidus developed their own solutions, but with varying



degrees of success and market adoption. Despite a widening field of competitors, salesforce.com continues to maintain its leadership position for SaaS CRM.

Recent survey data reinforces the intention to deploy more applications to an on-demand environment. Worldwide survey results in 2010 indicate 95% of respondents expect to maintain or increase SaaS investments (see "User Survey Analysis: Software as a Service, Enterprise Application Markets, Worldwide, 2010"). Many pure-plays continue to perform well, and most traditional on-premises vendors offering SaaS enjoy higher growth rates for their on-demand offerings than for traditional software licenses. Vendors are experiencing increasing pressure to negotiate on price and provide more-flexible contractual terms, and the competitive environment is intensifying. For example, RightNow Technologies officially announced their Cloud Services Agreement in March, 2010, which offers more-flexible terms and the ability to rebalance usage. Many vendors are offering free trial periods for their solutions, and extremely competitive pricing. Microsoft, for example, introduced an offer in late 2009 targeting salesforce.com and Oracle on-demand users that provided the option to switch to CRM Online at no cost for the first six months, with terms which a included a pay-as-you-go basis. This was followed by another offer in April 2010, designed to entice existing Microsoft Dynamics GP customers to adopt CRM Online at a rate of $19 per user per month. Gartner believes that market competition within CRM for SaaS will continue to be fierce, as vendors seek to differentiate and show value in solution offerings and contractual arrangements to a more-astute customer base in an increasingly commoditized environment.

Although the sales subsegment still represents the largest contributor to SaaS revenue, demand is increasing for marketing automation and customer service and support solutions. Vendors that offer both on-premises and on-demand solutions are shifting their customer bases and revenue models to a greater proportion of SaaS in response to market demand and more highly scrutinized budgets. Vertical-specific SaaS solutions are also growing for major vertical and microvertical sectors, enabled by development efforts of enterprise service providers, small niche players, and development organizations, such as those within the Microsoft partner channel. We expect that growth will continue through 2010, benefiting pure-play SaaS providers and other traditional on-premises vendors that now offer this deployment option. In 2014, SaaS within the CRM industry is expected to exceed $4 billion in total software revenue, representing more than 32% of the overall CRM market.

Adoption of SaaS in the CRM market also varies within each subsegment. The majority of SaaS total software revenue within the sales subsegment is represented by sales force automation, where benefits of rapid time to deployment and ease of configuration for sales administrators make it an attractive alternative to on-premises solutions. Interest has been growing for e-commerce SaaS solutions in business-to-consumer environments, although some buyers express concerns about a potential lack of differentiation, impact on the total IT portfolio, integration challenges with on-premises applications, and uncertainty over data ownership (client data versus aggregated data). Although they are still relatively new, SaaS solutions for incentive compensation management have been gaining popularity, particularly among SMBs with basic or moderate levels of complexity in their compensation structures and functional requirements. The sales subsegment will remain the largest contributor to CRM SaaS during 2010, representing less than 75% of SaaS revenue within the CRM market. Currently SaaS accounts for more than 40% of overall sales subsegment revenue.

The broad categories of campaign and lead management and marketing resource management represent the most significant use of SaaS within marketing automation. More specifically, e-mail marketing, Web analytics, and community marketing solutions have been accepted as a SaaS model and support overall campaign management functionality. Most deployments are still operationally or tactically focused, emphasizing the usual benefits of ease of deployment and use; less IT involvement; and predictable, subscription-based cost structures. SaaS in marketing



automation is expected to exhibit the highest CAGR, but it will remain the smallest subsegment within CRM throughout the forecast period. SaaS total software revenue represents just over 11% of the marketing automation subsegment.

The popularity of SaaS within customer service and support is increasing with the success of vendors such as salesforce.com and RightNow, although it still represents a relatively small percentage of subsegment revenue. Call centers with lower call volume and limited workflow requirements, such as B2B customer service centers, are generally better candidates for SaaS. On-demand solutions in the call center can offer a cost-effective alternative to costly on-premises maintenance renewals, and allow buyers to take advantage of newer technologies and functionality. Greater demand for SaaS in areas such as knowledge management, workforce management, quality management, and e-mail response management is expected as use evolves and buyers evaluate alternatives as replacements for legacy applications. Gartner expects SaaS in customer service and support to account for more than 12% of customer service and support subsegment total software revenue during 2010.

SaaS Within ERP — Penetration Varies by Submarket but Still Most Notable

in HCM

The proportion of revenue attributed to SaaS within the ERP market remains consistent to previous estimates at a little more than 6% of the total market with slow annual growth. For 2009 total SaaS revenue for the ERP market was estimated at $1.25 billion. By year end 2010, we are projecting this to increase a further 8% to $1.35 billion in total software revenue.

The penetration of SaaS within ERP varies greatly between subsegment, with HCM being the most penetrated (in terms of adoption and revenue growth) and EAM and manufacturing being relatively unaffected by SaaS. Observations from client inquires and industry trends suggest that SaaS as a delivery method for ERP is more readily considered than in previous years, but we have not seen a mass switch in preference from on premise to SaaS based ERP solutions. Only a small handful of vendors have delivered anything close to "full suite ERP functionality," but within individual ERP domains, a number of increasingly strong vendors provide solutions only via SaaS. However, these vendors are still small compared with the "megavendors" and so they struggle for brand recognition outside their home regions. As SAP moves away from ramp-up mode and closer to general availability for its ByDesign product, this will bring further attention (and to some extent validation) to the existing SaaS-based ERP suites solutions in the marketplace

ERP consists of four major subsegments related to SaaS:

Within EAM, the outlook for SaaS applications remains extremely conservative. This is because of the complexities involved with EAM implementations, in which a high amount of industry and specific process knowledge is required (such as in the manufacturing and transportation sector). Another major inhibitor is that many industries that typically invest in EAM, such as utilities, and oil and gas, have strict data and network security policies that preclude the holding of business data outside of the business or systems that are "shared with others." From a physical and information security perspective, SaaS applications are often more secure than "hosted at home" systems in corporate data centers, but the cultural aversion to SaaS in some of these industries remains strong.

Within FMSs, SaaS applications are still a minor part of the overall market, and many systems in use today are related to core accounting solutions for the small business sector. However, this is rapidly changing with the development muscle and pedigree of some well known vendors in the FMS space, such as FinancialForce.com (from Unit4)



and Workday, extending its reach beyond HR functionality to financial management as well. SAP's ByDesign ERP suite will also feature FMS functionality at its core.

Within strategic HCM applications (such as recruitment, performance and talent management, and expense management), SaaS-delivered applications have been available as a high-growth area for a number of years. The double-digit growth of SaaS HCM providers has been a distinguishing feature of the HCM software segment in recent times. One reason for this is the horizontal applicability of strategic HCM applications (for example, recruitment and performance management), which can be consumed out of the box across many industries and do not require major configuration or customization efforts. Overall, HCM SaaS applications will continue to see elevated growth through the next few years.

Within manufacturing and operations software, SaaS is a minority component to the market. Manufacturing organizations often require a high degree of additional customization for their applications because they often operate in a microvertical, which generic industry templates cannot fully satisfy. Microvertical specialization can be achieved, but for many SaaS providers, the economics of doing this in-house (versus via an external partner) can be prohibitive. However, some vendors, such as Plex Systems, have managed to achieve notable momentum through their focus on a select number of industries. Although not a major threat to the more established on premise vendors, the progress that vendors such as Plex have achieved suggests that we will continue more innovation and entrants in the manufacturing and operations domain.

Development of SaaS in the DCC Software Market Depends on Internet

Capacity

We expect SaaS to represent 9% of total DCC software revenue and reach total revenue of $298 million by 2014. The projected CAGR for revenue attributed to SaaS in this market is 35.7%, versus an estimated 9% CAGR for total software revenue in the overall DCC market.

Storage costs can still be significant; companies are evaluating any kind of storage in the cloud, recognizing that collections of images and video that vary in size and serve collaborative purposes will prove cumbersome to manage internally. This dovetails with the general need for partner enterprises, such as advertising agencies and their customers, sales partners and other constituents, to access and share real-time images and video — making inside-the-firewall models less attractive.

In addition, much application-based functionality is migrating toward browser-based capabilities. Consumer adoption of these tools, especially among "digital natives," is significant. As these tools evolve further, hybrid systems — browser-based tools and online storage and publishing platforms — will enable new business opportunities beyond software sales, such as premium subscriptions, various advertising forms and promotional services for content creators.

Although interest in premium subscriptions continues to grow and evolve within the enterprise application markets, there will not be a big wave of full-feature DCC products using the SaaS model through 2014. This is mainly because of the current limitation of broadband, which makes it difficult to transfer rich digital content.

Within digital imaging (desktop painting, photo editing, drawing, and illustration), SaaS solutions are expected to experience strong growth because of an increase in low-cost or no-charge options for graphics tools provided through SaaS initiatives, as well as by market leaders.

In the digital video segment, the outlook for SaaS is more positive than in other segments because of the new and exciting products within consumer markets, as well as growth of a mass



market for individual users and media professionals. Consumer demand is accelerating as the popularity of social networking sites grows unabated. Each of these websites provides a suite of best-of-breed online video editing tools, enabling users to have greater control over media access and manipulation.

SaaS Offerings Complement and Coexist With Traditional Office Suite Products

In the best-case forecast scenario, by 2014, Google and similar Web-based freeware and SaaS offerings are anticipated to have combined revenue of $406 million and 2.4% share of the office suites market based on total software revenue.

Web-based office suites are not a replacement for standard office suites and should be viewed differently. However, with the limitations in today's Web-based office offerings, some business users will still find them appropriate for real-time collaboration or as secondary online tools for editing docs or taking notes. In most cases, business users are looking at Google docs, Zoho, Adobe Buzzworld and ThinkFree Office because they prove to be most-viable from the usage point of view.

Consumers and small businesses will continue be the major forces for Web-based office suites through 2010. Most small businesses are expected to behave similarly to consumers in Web-based adoption, because those companies are unlikely to have restrictions on adopting Web-based office. Also, businesses worry less about the homogeneity of office suites within their organizations, and they tend to have multiple products in use.

Office 2010 will offer collaboration tools and a free Web version office. Once Microsoft's offerings are available, it will push Web-based office adoption to a higher level. However, because there is a significant functionality and performance gap between full-function, fat-client suites and Web-based versions, no major cannibalization of office productivity markets by Web-based office suites will occur through 2014. However, Web-based office suites could significantly boost business revenue if their performance increases substantially and they prove attractive to general-business users.

In a previous office SaaS forecast, we measured the Web-based office software's impact on total office suites market (include proprietary, open source and Web-based). In this update, we define total Web-based office software revenue as those generated from subscriptions, hosting, technical support and maintenance. Based on these changes, there may not be continuity with published historic reports for this market.

PPM SaaS Alternatives Gain Favor in Difficult Times

The PPM SaaS market is rapidly growing in percentage of sales and is projected to do so at a significant pace of more than 41% during the forecast period. SaaS alternatives may help to grow the overall PPM market again rather than cannibalizing on-premises sales; however, some SaaS revenue growth will be at the expense of on-premises license, as several new entrants to the market are able to provide solutions at less than the cost of maintenance on more mature solutions.

Small budgets, potential of rapid deployment and functionality that meet immediate needs (without requiring extensive process and behavioral changes) continue to drive the interest and adoption of SaaS-based PPM systems. In addition to smaller IT departments (fewer than 100 employees) requiring PPM systems, larger enterprise IT departments are also considering the SaaS option.



SaaS-based solutions allow prospects to minimize the risk of a PPM implementation with a 12-month financial commitment with a SaaS offering, as opposed to the exponentially higher costs driven by licensing fees, consulting services and three-year maintenance contracts usually associated with on-premises solution. In addition, potential customers new to PPM disciplines or low in PPM maturity can use SaaS as a way to test organizational commitment, assess the potential impact of adopting PPM en masse, and evaluate the organization's adaptability to PPM in terms of people, process and technology.

As demand increases, the PPM SaaS model continues to mature. Through agile development methods and transparent seasonal feature releases, SaaS PPM vendors are quickly advancing solution capabilities and pushing improvements out to their customers faster than their on-premises counterparts. In response to the emergence of SaaS PPM as a competitive threat, several vendors offering on-premises and hosted deployment options are now transforming their businesses to be "deployment agnostic" or "SaaS first."

SaaS SCM Solutions Experience Double the Growth of the Traditional SCM

Market

Our estimated revenue growth for SaaS within SCM markets is in line with that published in September 2009, remaining more resilient than the overall SCM market through 2013. In a recent report ("User Survey Analysis: Understanding Supply Chain Management Software Buyers, North America, 2010"), supply chain practitioners indicated that twice as many supply chain solutions would be sourced through a SaaS model than had been the sentiment in the three years prior. This finding, coupled with the performance of many specialized vendors offering their solutions via SaaS, provides confidences in a 13.9% five-year CAGR for growth, from 2009 revenue estimates of $807 million. Growth takes into account businesses postponing enterprisewide upgrades of core applications while continuing to seek more-rapid results from application purchases that are often deployed around an enterprise application core. Greater traction from existing vendors, more new vendors incorporating SaaS, and growing competition increase the opportunity for supply chain solutions and are positive influences on the SaaS forecast.

Higher-growth markets are within organizations with less than $2.5 billion in annual revenue and within 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 wholly toward a SaaS delivery model. Expect demand for SaaS solutions offered by other traditional suite vendors to increase significantly throughout the forecast period, in an effort to capture lost opportunities.

SaaS trends in SCM market segments are as follows:

Supply chain planning (SCP) — The technology is pervasive as an on-premises solution. The mature installed base has endured considerable customization because of complexity in the business process and integration with other important business processes, and this will continue to hinder adoption of SCP as a service. We estimate that, while growth did come from emerging vendors, the market segment has low penetration (3%) but growth of (15.6%) though 2014.

Supply chain execution (SCE) — Most 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. With an estimate of 12% of 2009 total software



revenue in SCE generated as a service, we feel optimistic about continued opportunities for SaaS in the execution market, increasing our forecast estimates to 18% of the market in 2014.

Procurement — Strategic sourcing (e-sourcing) emerged during the late 1990s, at the beginning of the B2B 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 because many vendors have worked to offer products through the SaaS model. In 2009, we estimate that SaaS accounted for 26% of the segment's total software revenue and will generate 33% of the market's revenue by 2014. Despite most vendors moving toward SaaS delivery, applications such as contract management are often desired to be behind the firewall. If this trend continues, then 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.

SPP — Specialized versions of SCP applications 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. Our 2009 total software estimate for SPP is $147 million. The dynamics influencing the SPP market have shifted little, but perhaps have been heightened lately because manufacturers are selling fewer new products and they need to enhance their service capabilities as consumers and businesses increase the life cycle of existing goods. SPP may well emerge as one of several new post-SCP and innovation partner solutions targeted at specific industry requirements. We continue to maintain that about 10% of the addressable market has sourced SPP applications, with 6% of 2009 total software revenue generated through SaaS delivery, reaching 7% of the market by 2014.

Other Markets

SaaS is also fast-penetrating a host of other markets and subsegments (as shown previously in Table 4). Although most, if not all, of these are still small market spaces, the increasing prevalence of SaaS demonstrates that SaaS is far from being simply a phenomenon of CRM and associated application markets.

The idea of PaaS, which began to emerge in 2008, has continued to gain traction through 2009 and 2010, although in reality this is still more a theory than a driver of significant revenue to leading SaaS vendors that have been touting this idea.

Regional Context and Outlook

SaaS in Asia/Pacific

Overall SaaS adoption in Asia/Pacific has been fragmented, not only by countries, but also by vertical industries. Asia/Pacific (excluding Japan) is a combination of mature markets (such as Australia, New Zealand, Hong Kong, Singapore, South Korea, Taiwan) and emerging markets, including China, India, Malaysia, Thailand, Indonesia, Vietnam and the Philippines.

The following are SaaS dynamics in the region.

Current SaaS adoption:

SaaS adoption is more prominent in the more mature countries/markets in Asia/Pacific such as Australia, New Zealand, Hong Kong, Singapore, and South Korea because of established infrastructure (such as more-stable network), as well as the availability of vendor sales, marketing and support services structures. In



many cases, the use of English as a common language in these countries (exception South Korea) make them as attractive destinations for foreign providers investing in the region.

SaaS adoption in emerging countries is significantly more fragmented. Although adoption is relatively low, however, there are pockets of mature SaaS users that have been using SaaS for long periods of time, and with high adoption among end-user organizations, comparable to those in mature countries/regions (see "Emerging Market Analysis: Plans for SaaS Application Software Use in China and Malaysia, 2010-2011").

Reasons to adopt SaaS in the region has been cost-effectiveness from total cost of ownership (TCO) perspective, limited capital expense and fast/easy deployment compared to on-premises solutions. Gartner research indicates these are the top reasons for SaaS adoption in both emerging and mature countries in Asia/Pacific. As the market is back in the growth mode in 2010, end users attitude is not expected to change and the key reasons mentioned will remain critical in the increasing competitive environment.

SaaS Use

SaaS in CRM has been significant, specifically with revenue growth contribution from salesfore.com in key mature countries — such as Australia and Singapore. With its continuous yearly double-digit growth, salesforce.com occupied 12.1% CRM market share in Asia/Pacific in 2009, or the third-largest CRM vendor after SAP and Oracle. Nevertheless, salesforce.com still has sporadic presence in this diverse region.

Our user surveys indicate that core/basic applications such as financials (accounting), e-mail have been the most-popular SaaS applications used among respondents in Asia/Pacific, specifically in emerging countries. The popularity of financials (accounting) in emerging countries are not surprising, as they are being used to satisfy the needs of local financial reporting requirement. Mature countries in the region have more apparent adoptions for wider range of applications in addition to financials and e-mail. Gartner research indicates that more SaaS contracts in the emerging markets are on a pay-as-you-go basis, which offers a more-attractive option for SMBs that may not have an IT budget.

Future SaaS investment

End-user investment mood has been much improved to accommodate the growth mode attitude after the economic slowdown in 2009. Our user survey indicates that China, India and Malaysia have higher intentions to increase their SaaS investment significantly in the next 12 months, compared with the mature countries. Yet, the mature countries are also not conservative with notable intention to increase their SaaS investment "slightly" during the next year. The emerging countries are specifically interested for SaaS investment on net new solutions, and to a lesser extent will use SaaS as extension of their on-premises solutions.

There is an increasing trend that SaaS contract renegotiation may occur, as end users are demanding for greater functionality. This is not surprising, specifically in emerging countries, where users are fine tuning their scope of SaaS deployments, and growing their user base, amidst significant economy improvement. Other reasons for contract renegotiation are to look for better financial terms due to the rising competition.



SaaS in Europe

SaaS adoption in Europe runs along three major trends:

Northern Europe showing adoption and acceptance levels similar to North America.

Continental and Southern Europe seeing slower adoption compared with Northern Europe due to business acceptance, culture and specific localization issues.

Eastern Europe is relatively low in adoption, but the Czech Republic, Hungary and Poland are showing greater potential in the near term.

For the purpose of this report, the focus of the following text is on Northern and Continental Europe because of their current and near-term potential for SaaS adoption. For areas not discussed, please contact Gartner.

Current SaaS Adoption

SaaS penetration and adoption is showing most in Northern Europe, which is composed of the U.K., Ireland, Netherlands and the Nordics. This is due to a culturally open outlook toward technology adoption, well-established and generally good Internet infrastructure within these countries and English being the primary business language. This makes it much easier for North American vendors to branch out into the region and for local vendors in one country to adapt and sell their applications in other Northern European countries with less localization effort.

SaaS adoption in Continental Europe is generally lower than in Northern Europe due to reasons of high localization requirements, such as language translation within the product, sales and support services/resource in local language, specific data security rules in certain countries (such as Germany) and a generally slower adoption of new technology.

Gartner recently conducted a user wants and needs study for SaaS software in France, Germany and the U.K. to gauge adoption trends and while the results are a not a proxy for Europe overall, they do provide insight into why SaaS is being considered or currently in production in the three largest European country markets (collectively the three countries represent 54% of the European software spending — see "Market Share: All Software Markets Worldwide, 2009"). The highest-ranking reason for choosing and using SaaS were TCO, followed by ease of deployment and limited capital expense, as shown in Figure 3. Although we lack survey data to support this, from client interactions we believe these reasons also figure very highly across the rest of Europe when shortlisting SaaS solutions. However, the reality of SaaS ownership may not be quite so clear — especially when it comes to TCO. And although SaaS is easier to deploy, there will be tradeoffs regarding areas such as integration to other systems and customization.These subjects were commented on by our respondents when asked what their issues were after having used SaaS in their businesses.



Figure 3. Reasons for SaaS Adoption


SaaS Application Use

Similar to the trend seen in other parts of the world, SaaS adoption and use varies greatly from application to application, with SaaS CRM being the most-popular business application, but others such as e-mail and employee self-service for HR management also see high acceptance, as shown in Figure 4. SaaS usually sees lower adoption in areas where complex customization/configuration is needed, such as supply chain execution systems and manufacturing/operations software.

In Gartner's recent user wants and needs survey for SaaS software in France, Germany and the U.K., the findings again closely mirror the pattern above, although small business accounting solutions also featured fairly highly in the statistics. However, categories such as employee performance management, use in other parts of Continental and Southern Europe is likely to be more muted than the results below suggest, simply because the major vendors behind these applications have yet to fully localize and focus on other European markets.



Figure 4. SaaS Adoption by Application




Future SaaS Investment

In terms of the applications that European buyers will consider and shortlist in the near and medium term, Gartner expects established SaaS solutions, such as CRM, employee self-service and e-mail, will continue to be in high demand. However, as North American vendors further develop their applications for the European market, other areas, such as talent management, travel and expense management, will see greater penetration in the region. Furthermore, as SAP begins to ramp up selling efforts around its SaaS ERP application this may help drive further acceptance and awareness of SaaS solutions generally within Europe. However, the full impact of this is unlikely to occur overnight, and SaaS CRM/e-mail are likely remain tops in overall popularity and usage for many years.

SaaS in North America

North America, and specifically the U.S., represents the largest opportunity for SaaS, and is the most mature of the regional markets. Vendors initially tested the market appetite for services-based application solutions with an application service provider (ASP) model in the U.S. during the late 1990s, many of which subsequently fell victim to the dot-com bust. But as broadband availability became more pervasive, Internet technologies became more robust, and fluency with Internet use became more widespread, the accessibility and viability of SaaS evolved, and with it, rapidly growing adoption in North America. The majority of large SaaS vendors are also headquartered in the U.S., and have been able to benefit from a more technologically mature commercial user population, as well as access to less risk-averse venture capital firms and resources.

Current SaaS Adoption

With only two countries, North America represents a reasonably homogeneous user population, eliminating much of the diversity in regulations, language, and culture inherent in the other regions. Widespread availability of high-speed and generally stable Internet connectivity also reduces some of the infrastructure issues we observed in other regions from our 2010 survey results.

Survey respondents ranked ease and speed of deployment highest among reasons for deploying SaaS in North America, followed by lower TCO. Limited capital expense, the third-highest category indicated, was considered more important in North America than the other regions based on percentage of respondents.

More companies in North America have established policies governing the evaluation, procurement and/or deployment of SaaS than in the other regions, according to survey results. This is not surprising, given the relative maturity of SaaS among the three regions.

SaaS Application Usage

Consistent with the other regions, CRM shows the highest use of SaaS among the enterprise applications. Use of Web conferencing, e-learning, and travel booking was higher in North America than in other regions. Although adoption of financials (accounting) is lower in North America, Usage is nearly three times higher in Canada than in the U.S. We believe this is attributable, in part, to the survey demographic, in which Canada had a higher percentage of companies under 1,000 employees.

A higher percentage of companies in North America responded that they were using SaaS to replace an existing on-premises solution than in the other regions, with half of all U.S. companies indicating that replacement was the primary intention. In contrast,



half of the Canadian respondents were using SaaS as extensions to existing on-premises solutions, and only about one-third were planning to replace them.

Future SaaS Investment

No organizations surveyed in North America expect use of SaaS to decrease significantly this year, and less than 2% expected a slight decrease. Seventy-five percent expected increases in use.

Sixty percent of North American organizations expect purchasing decisions to be made jointly by the business and IT, which is higher than the worldwide projection of 52% and representative of a more-mature market, as SaaS becomes more pervasive throughout the enterprise. In addition, a higher level of executive decision-making is expected for SaaS in North America than at the worldwide level. We attribute this to greater executive participation based on higher levels of budget approval, larger deals, and the recognition that widespread use of SaaS has become a more strategic, rather than tactical, decision.

Business and Market Drivers and Inhibitors

Factors Promoting Adoption

Many factors are driving adoption of SaaS, including the following:

Business

The benefits of rapid deployment and rapid ROI, less upfront capital investment, and a decreased reliance on limited implementation resources encourage SaaS deployments.

With SaaS, responsibility for continuous operation, backups, updates and infrastructure maintenance shifts risk and resource requirements from internal IT to vendors or service providers.

A heightened awareness of and growing intolerance for misspent investments on shelfware motivate buyers to purchase on-demand solutions.

A shortage of skilled professional resources, within internal IT departments and system integrator organizations, contributes to adoption.

Painful reminders of lengthy, unsuccessful deployment cycles spur buyers to investigate simpler, quicker alternatives.

Rising maintenance fees and the imperative to update to Web 2.0 technologies contribute to legacy replacement decisions.

An increase in the number of executives as buyers or influencers also drives growth.

Market

Greater market competition and increased focus by the megavendors reinforces the legitimacy of on-demand solutions, mitigating initial objections about security and availability for many and driving market growth. Buyers facing costly upgrades or platform decisions are more likely to consider on-demand solutions as an alternative.



Strong market growth within the SMB sector and increasing adoption of SaaS solutions by large enterprises exists within line-of-business applications and in regional locations.

Vendors adding local-language capabilities to their solution portfolios fuel SaaS growth globally.

Increasing familiarity with the Internet, improvements in security, and broader acceptance of a service alternative reduce earlier barriers to adoption.

Factors Limiting Adoption

Certain factors can work to impede the adoption of SaaS, including the following:

Business

Concerns about data security and critical customer information continue to encourage on-premises applications for many.

Increasing concerns about scalability and downstream integration requirements as the number of users per company grows may limit additional installed-base purchases.

Questions about vendor longevity and viability arise as buyers begin considering larger deployments.

Existing investments in applications, capital, and organizational expertise limit SaaS growth.

Buyers perceive a lack of competitive differentiation through use of common, repeatable business services.

Complex process requirements constrain adoption of simplified, standardized solutions.

Market

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 architectural or cultural reasons restricts SaaS availability.

Limited broadband availability in specific countries restricts growth.

MARKET MODEL

The SaaS forecast for each of the enterprise application markets included in this document are developed according to Gartner's multistep forecasting methodology (see "Dataquest Guide: Software Market Research Methodology"). The latest available market data is carefully reviewed and compared with the most recently completed forecast. The methodology then directs the formulation of assumptions about the future, with consideration given to factors that could cause the forecast to stray in one direction or the other and to potential market discontinuities. These include a range of influences, such as SaaS user adoption patterns, growth and competitive impact of key market players, macroeconomic and regional conditions, and the relationship of SaaS to other developing trends in the IT industry such as cloud computing.



Finally, the methodology dictates an iterative approach to a final forecast in which successive preliminary forecasts are reviewed, critiqued and revised by all those involved in the forecast process in Gartner's analyst community. For further discussion please contact Gartner.

RECOMMENDED READING

"Emerging Market Analysis: Plans for SaaS Application Software Use in China and Malaysia, 2010-2011"

"User Survey Analysis: Software as a Service, Enterprise Application Markets, Worldwide, 2010"

"Market Share: All Software Markets, Worldwide, 2009"

"Forecast: Enterprise Software Markets, Worldwide, 2009-2014, 1Q10 Update"

"Q&A: Top 10 Things You Need to Know About SaaS in Asia/Pacific"

"User Survey Analysis: Understanding Supply Chain Management Software Buyers, North America, 2009"

"Essential SaaS Overview and 2010 Guide to SaaS Research"

"Forecast: Public Cloud Services, Worldwide and Regions, Industry Sectors, 2009-2014"

"Dataquest Guide: Software Market Research Methodology"

"Dataquest Guide: Software Market Research Definitions"

"Forecast Analysis: Enterprise Application Software, Worldwide, 2009-2014, 1Q10 Update"

Acronym Key and Glossary Terms

CAGR compound annual growth rate

CCC content, communications, and collaboration

DCC digital content creation

EAM enterprise asset management

ECM enterprise content management

HCM human capital management

PaaS platform as a service

PPM project and portfolio management

ROI return on investment

SaaS software as a service

SCE supply chain execution

SCM supply chain management

SCP supply chain planning

SMB small or midsize business



SPP service parts planning

TMS transportation management system

This document is published in the following Market Insights:

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Forecast Analysis Software as a Service, Worldwide, 2009-2014

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