Saugatuck's most recent Web survey research indicates that small and mid-sized businesses (SMBs) are nearly twice as likely to commit business-critical operations to software-as-a-service (SaaS) than large enterprises.

R esponses from more than 150 U.S. business and IT executives surveyed in January 2006 indicate that SMBs intend to use SaaS for core, business-critical operations at a much higher rate than do large enterprises. The trend is clear: SMB executives are embracing SaaS as a business-critical, strategic investment at a much greater rate than are executives of larger enterprises.

SaaS delivers several clear benefits to SMBs, including the following:

  • Outsources expensive skills necessary for development, deployment, and maintenance of key applications
  • Provides key infrastructure and capabilities - as well as maintenance and upgrades - without significant CapEx investment
  • Reduces operating expenditures through flexible billing and payment

This willingness to adopt SaaS, and to commit critical operations to SaaS, fits well with Saugatuck's SMB organizational and executive profiles. SMB executives tend to be less risk-averse and more aggressive adopters of IT than their counterparts at larger firms, even though this is often in an environment of constrained IT budgets. This is driven in large part by SMBs' tendencies toward:

  • Less bureaucracy, enabling faster adoption of emerging technologies;
  • Smaller (and often less-complex) business systems and processes;
  • More favorable IT investment risk/reward ratio; and
  • Less investment capital available.

Earlier research published by Saugatuck in 2003 and 2004 suggested that large enterprises would lead SaaS adoption in the very earliest phases of its evolution through 2005 - with 60 percent or more of early adopters. Our research went on to suggest that the tipping point for SMBs would occur in the 2006-2007 timeframe. Our most recent data supports this trend. Both Figure 1 and Figure 2 suggest that SMB executives see SaaS as "ready for prime time," and are convinced that SaaS is now a viable business-critical platform, especially for back-end database driven applications such as human resources, financials/ERP, CRM and various collaboration requirements (e.g., email), as well as highly distributed applications such as sales force automation and field support.
As vendors come to understand both the readiness of the SMB market for SaaS and the low barriers to entry for building a SaaS solution, Saugatuck expects an explosion of verticalized core application stacks and highly specialized vertical market niche applications. Over time, this could severely fragment SaaS markets.

At the same time, existing net-native horizontal SaaS offerings will need to fend off competition from traditional software vendors trying to move down-market via SaaS product line extensions.

Today's net-native (standalone) SaaS offerings are quite good at some aspects of business-critical operations. But many SaaS providers are still immature relative to more sophisticated data integration, applications customization, and/or systems integration requirements. Fully understand how standalone SaaS applications will work within the context of the broader enterprise, in particular relative to complex data integration needs.

SaaS vendors may be giving short shrift to their largest potential market. Current interviews with more than a dozen ISVs and SaaS providers indicate that many still see their greatest immediate opportunity with large enterprises. The newer, so-called "pure-play" and "net native" SaaS vendors with more modern business models and organizational structures are more aggressively courting SMBs - while simultaneously pursuing large enterprises.

For vendors, the winners will be those that find ways to master the channel. To reach the SMB market, vendors will continue to need VARs and SIs who help integrate the solution. However, there may be other channels worth pursuing, such as community banks and telcos in particular - especially as the SaaS market ultimately penetrates the true small business segment (100 employees) where solutions will be completely verticalized.

Some vendors may find it profitable to become SaaS aggregators rather than SaaS providers, focusing on marketing, distributing and handling the back-office billing and data integration needs of other SaaS solution providers. Ultimately, two or three key SaaS aggregation platforms will emerge that provide a trusted, low-cost environment for SMB and large enterprise users to deploy within.

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