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SaaS on the up and up...but where's the public sector?

24th Jan 2007
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By Stuart Lauchlan, news and analysis editor

The booming market for Software as a Service (SaaS) is creating plenty of room for growth for the established players in this space, but the public sector is lagging.

Several new reports are bearing witness to the SaaS revolution, which continues despite barriers to entry including financial risk and competitive challenges from existing players - as outlined in a study by Tier1 Research (T1R), a division of The 451 Group.

Newcomers will face the challenge of leveraging the ability to be flexible and deliver unique value through software features and functionality that is not always available when working with the larger CRM providers, according to the study. They will also face the inevitable problem of becoming cash-flow positive, since the costs associated with building a multi-tenant environment are significant. New entrants will face a long breakeven point in the early stages of the business, given the cost of goods sold and indirect customer acquisition costs.

"Based on T1R's analysis, the estimated market size for the CRM software segment was $9.5bn in 2006, with 6.3 percent of the total market represented by SaaS deployments," says Michael Mankowski, senior analyst at T1R and lead author of the report. "Even with the buzz in the market around SaaS, on-premises deployments rule the roost, and the lower-than-expected penetration is great news for established players.

"SaaS has established itself as a viable business model with CRM on-demand, but larger companies cannot rest on their laurels. Larger on-demand CRM providers face a challenge of remaining nimble, and they need to build out additional functionality for continued success as they compete with smaller SaaS providers.”

The Tier 1 report covers more than 15 key public and private companies in the SaaS sector, including the following: Adobe, CDC Corp, Entellium, Google, Intel, Microsoft, NetSuite, Oracle, RightNow Technologies,, SAP AG, Savvis, SugarCRM, WebEx and Yahoo.

Nonetheless, Gartner reports that SaaS represented approximately 5 percent of business software revenue in 2005 and, by 2011, 25 percent of new business software will be delivered as SaaS. It accounted for approximately 8 percent of CRM total software revenue in 2005 with 2006 SaaS revenue estimated to reach 12 percent of total CRM software revenue.

"As SaaS became a viable delivery model from 2000 to 2003, most providers supplied ‘good enough’ functionality with core configuration capabilities. SaaS and solving business complexity were two phrases not associated with each other," suggests Robert DeSisto, research vice president for Gartner. "The trend has clearly begun to change. For example, SaaS providers are enhancing their software functionality and improving the ease with which companies can customise and more uniquely configure SaaS software to meet business requirements."

"The majority of SaaS deployments continued to be focused in individual departmental initiatives, such as sales force automation, except in small and medium-size businesses (SMBs). In SMBs, we are beginning to see vendors provide capabilities to support more end-to-end processes, such as opportunity to order and in integration as a service where companies are already using SaaS for large projects," continues DeSisto. "However, no provider offers the functionality capability or process management capabilities on par with on-premise software to support end-to-end cross departmental business flows."

Public sector among the slowest

SaaS is also gaining traction in organisations with more than $1 billion of revenue according to the San Diego-based Services & Support Professionals Association (SSPA). It reports that such companies will spend approximately $565 million on e-service, CRM, contact centre and field service technology while SMBs will spend around $884 million.

This study suggests that SaaS is more prevalent among business users because it is often deployed departmentally, with little IT involvement. "Typically, the numbers we get are from IT and not business users," says John Ragsdale, vice president of research at the SSPA. "You get a slightly different picture when you talk to business users compared to Gartner or Forrester, which are interviewing CTOs for what IT directors have the budget for."

Such users have often been disappointed with CRM in the past. "A lot of this is because business users have had solutions shoved down their throats by IT," said Ragsdale. "There's no business user controls. Now we're seeing, especially in the on-demand world, business users have far more clout. I'm hoping that's going to drive satisfaction levels up."

Some sectors have been quicker to adopt SaaS than others, with the public sector seemingly among the slowest. But there’s no reason for that according to SaaS leaders. Tien Tzuo,'s chief strategy officer, said that public sector agencies could cut costs using the hosted approach, meeting demands to reduce taxpayer burdens.

But Dan Chenok, a vice president at SRA International, suggests it is not enough to major on the cost-effective element of SaaS and insists that the best way of selling the hosted approach to the Government is to “make sure agencies know what SaaS is and what the benefits are." Suppliers, he says, need to “present [SaaS] in a way government buyers can understand.”

RightNow says Government clients account for about 15-20 percent of the company's total business. Elsewhere, Greg Gianforte, CEO and president of RightNow Technologies, believes more Government clients are switching toward a hosted model. "This is a very slippery slope," he suggests. "This is going to happen."

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