The Real Numbers

My friend, Patrick Fetterman of Plexus, a former on-premise, client server software firm in the ERP space that has transitioned to a SaaS-only model, recently sent me this note:

+++Rick,I hope this message finds you well. I thought I'd call your attention to a post on the BusinessWeek website yesterday:

Beware the Hype for Software as a Service
www.businessweek.com/technology/content/jul2008/tc20080723_506811.htm

Before you read further, I urge you to click on the link above and read the article. Most of the points it makes aren't particularly new, and some of them are very refutable. But, as I told Patrick, the article itself isn't really relevant. Why? Because the principal driver for SaaS these days isn't savings on IT, or the fact you buy less hardware, or the issue of operating vs. capital budgets, etc, etc.

The reason for the rapid growth of SaaS is that the model allows companies and people to buy software services they simply can't buy under the on-premise, client/server model. Let me give you just one example. Imagine you're a small county or town. Periodically, since this is America, you have to administer elections which have rules (except in Chicago and certain Bronx neighborhoods I'm familiar with, where the dead still vote). Voting stations have to be setup and staffed, expensive optical and touch systems that don't work as well as the trusty mechanical systems we used to use (thanks, Al Gore and the Democrats) have to be tuned and tested, staff has to be given instructions on what to do, etc, etc, etc. It's expensive, time consuming, picky work and few locales enjoy doing it. Worse, normally no one in a small town or municipality really knows how to do it all correctly; the documentation for this type of work is scattered, hard to access, and hard to read, and no one really wants to bother.

There have been attempts to make the process easier by selling software systems to states and municipalities that automate and assist the process, but if small towns have very little money to spend on elections, they have even less to spend on servers, client/server software, terminals, and all the personnel needed to manage and service the aforementioned. However, one thing even the smallest town does have is someone with a computer and a browser. That reality is why a SaaS firm I've recently talked with is making very nice headway selling a SaaS-based municipal voting system in several southern states. The reality is unless the system was SaaS, no one would buy anything.

I can back up this assertion with some numbers from our 2007 and 2008 SaaS reports. In 2007, we asked SaaS companies what was the primary reason customers were subscribing their software. The answers were as follows:

2007

There was an "Other" category, but most of the answers simply combined "new capabilities" with one of the other points.

Now, let's take a look at the preliminary results coming in from our 2008 survey. As I write this, we're at 83 responses and anticipate another 80 to 100 responses before we shut the survey down (BTW, if you want to take it, it's up here). But I can already tell you that the numbers below will not change substantially as more responses come in:

2008

As with 2007, most of the "Other" answers combine "access" with one of the other points. (Note that "access" is losing ground to "replace," which, if you're a SaaS vendor, should make you feel good.)

And that's the real story behind SaaS. SaaS opens new markets and opportunities to grow that simply aren't available to on premise, client/server companies. It's the model's principal growth driver and will be for some time to come.