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Will Software-As-A-Service Grow Significantly in 2006? If So, What Apps Will Be Hot?
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I was an executive at software companies for almost 15 years before becoming a venture capitalist, and I have become a bit more conservative than others on predicting how fast a new technology is adopted. I am a big supporter of Software as a Service (SaaS), but I think it fights all the usual obstacles in gaining initial traction and then mass adoption by small business. I think 2006 will be a year of growth and experimentation, but not a watershed year for moving to "on-demand" software. Because most companies already have existing solutions, there is not the urgency to jump forward in most application areas. While there are some great new accounting systems (like Intacct) available in a SaaS delivery model, most small businesses are not terribly dissatisfied with QuickBooks or Great Plains as accounting systems.

I think we will see steady adoption rates, rising from virtually zero today, up to 10-15 percent over three years in logical areas like Sales Force Automation, Accounting, and even inventory/supply chain management. However, I think most small businesses will wait until they need a new package to evaluate and not be driven to a new package simply due to a SaaS delivery model. In 10 years, I think more basic apps will be delivered in a SaaS model than an "on premises" model. History tells us that market shifts start very slowly and then his some tipping point. I don't see that point for SMB SaaS in sight yet.
–Matt Miller, General Partner, WaldenVC

I suspect there will be significant growth across the board among small and entrepreneurial businesses in terms of SaaS services dealing with CRM. However, it's a mistake to think that one can significantly enhance business performance by merely investing in SaaS solutions. The savings that companies realize upfront by embracing a hosted solution (as opposed to an on-premises one) should be reinvested in business process enhancements, professional development and organizational change efforts.

Companies should not merely invest in hosted software and expect their sales force, for instance, to produce at a much higher level if they don't simultaneously invest to enhance the professional skills and capabilities of that sales force. Unfortunately, too many companies will merely pocket the savings and end up disappointed when real performance gains don't materialize.
–Britton Manasco, Executive Consultant, Prime Resource Group

In 2004, customers spent more than $4.2 billion worldwide on software delivered via SaaS. IDC expects customer spend to increase over the next five years at a 21% compound annual growth rate (CAGR), reaching $10.7 billion in 2009. A number of important trends will help fuel this adoption including the amount of SaaS offerings that become available to the marketplace resulting in more choice and flexibility for customers. SaaS has the potential to re-invigorate the single-digit growth software industry. IDC believes the midmarket in particular represents a source of opportunity for SaaS as it has provided an alternative to costly software acquisition and given access to many small and medium sized businesses that otherwise could not afford software.

In terms of where IDC is seeing adoption and interest occur in SaaS, there is CRM of course, in addition to collaborative applications, human capital management, content management, and enterprise resource management areas. In addition we are seeing adoption and interest in security software such as intrusion detection. Application areas that have appeared low in terms of adoption and interest, according to the adoption survey we conducted in 2005, include Web analytics, and product lifecycle management.
–Erin Traudt Research Analyst, Software as a Service, IDC

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