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SaaS still on the rise, despite IT spending slowdown

Some users think software as a service could cause long-term financial pain. But with the recession putting pressure on IT spending, the immediate savings gains promised by SaaS are trumping such fears now.

February 9, 2009 12:00 PM ET

Computerworld - Overall IT spending has slowed down, forcing many IT vendors to lay off workers. But spending on software-as-a-service applications is growing at double-digit rates, as users look to take advantage of the relatively low cost of implementing SaaS technologies.

To be sure, SaaS is still very much a niche market from the standpoint of both revenue and user adoption levels. For instance, market research firm IDC expects $12.4 billion in SaaS spending worldwide this year — a drop in the bucket of the overall IT market.

But two weeks ago, IDC raised its projected SaaS growth rate for 2009 from 36% to 40.5%. The firm said recent surveys indicated that the recession would prompt more users to choose subscription-based services over on-premises applications. IDC also forecast that nearly 45% of U.S. companies will spend at least one-fourth of their IT budgets on SaaS by next year, up from 23% in 2008.

"I think SaaS has an element of being recession-proof," said Forrester Research Inc. analyst Ray Wang. Forrester last month released a report on the subscription revenue growth rates at Inc. and nine other SaaS vendors; most reported year-to-year gains of more than 40% in the third quarter of 2008.

Wang did offer some caveats about the SaaS market, noting that many corporate users are proceeding cautiously, with small deployments and short contracts — even month-to-month agreements. "People are likely to be commitment-phobic," Wang said.

More often than not, users aren't certain whether it would actually cost less to use a SaaS application than run an in-house one because they don't have a good breakdown of the IT costs associated with supporting individual apps. In addition, developing precise cost comparisons can be difficult because the potential savings from SaaS implementations often involve intangible items.

For example, when companies move to SaaS, they often shift control of applications to the business units that use them. A business unit may claim that it will get a time savings if it can deal directly with a software vendor instead of having to go through the IT department. But it isn't easy to quantify such savings.

In addition, there's the question of whether SaaS users are trading off the short-term benefits of no longer having to run applications internally in return for some potential long-term financial pain, in the form of ongoing subscription fees.

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