SaaS Vendors Bucking IT Spending Trend

The economic downturn has had a significant impact on IT spending, particularly in certain sectors. According to new EMA research, 2009 budgets in the education, retail, manufacturing, and banking/finance sectors are all down between 15% and 35% over Q1 of 2008. January and February 2009 IT dollars show a continuation of this decline in spending, with 46% of companies decreasing spending and only 27% on the increase. Although high-tech and government budgets have actually increased over 2008, the increases are not significant enough to offset overall cuts.

Although there were some bright spots—most notably within software-heavy companies such as BMC and Oracle—hardware vendors felt the impact as many CIOs decided to postpone non-essential technology purchases. In January, Cisco Systems reported that new orders were down 20% over the same quarter last year and Dell reported a dip in revenue of 16%.

Within this somewhat bleak overall picture, one would expect software as a service (SaaS) vendors to feel the pain, as well. SaaS, a subset of the Cloud computing technologies that have succeeded service oriented architecture (SOA) as the “hot topic” of the moment, is still viewed as an unproven technology in many camps. This attitude seems to be driven more by the FUD (fear, uncertainty, and doubt) factor rather than by objective analysis.

Apparently, this view isn’t shared by CIOs. In fact, 2008 saw significant revenue growth for established SaaS vendors, with double-digit growth being the rule rather than the exception. Concurrent with the Cisco/Dell announcements in January, SaaS vendor Keynote Systems reported revenue growth of 16.5% over FY 2008, significantly exceeding estimates. NetSuite, an SaaS-based business software vendor, reported year-over-year growth of more than 40%; with 30% growth in the storm-tossed fourth quarter. And in March, iRise, a systems visualization vendor, reported a whopping 400% year-over-year increase. Apparently, overall declines in budgets are driving CIOs to cost-saving measures, including SaaS.

Moving to Main St.

SaaS and Cloud computing are, in fact, in the early stages of becoming mainstream delivery technologies for enterprise IT. Once the industry surmounted the architectural and revenue problems of the early application service providers (ASPs), these technologies took off like wildfire. Even Nick Carr, of “IT Doesn’t Matter” fame, is touting Cloud. Although I fundamentally disagree with the premise that IT doesn’t matter—it matters a great deal for industry leading companies—I agree with his belief in the inevitability of non-differentiating business services moving to the Cloud. On-premise delivery of services such as email, HR, and billing has simply become too expensive to sustain long term.

This optimism about the future of the industry was a theme of 2009’s SaaS Summit, held in San Francisco March 11-13. Although there were some of the familiar “what is SaaS and what is Cloud” debates going on, most of the conference focused on more relevant discussions that were particularly interesting because they reflected SaaS from the vendor perspective.

Readers may remember my 2008 article discussing the fact that two SaaS conferences—the SaaS Summit and SaaSCon—are held within weeks of one another. There are still two shows, with SaaSCon scheduled for March 31 through April 1, 2009 at the Santa Clara Convention Center. While SaaSCon is positioned primarily as an end-user conference, with presentations by companies that have successfully adopted SaaS in the enterprise, the SaaS Summit is a forum where SaaS vendors assess the state of the industry and intermingle with partners and customers.

Highlights of the show included an upbeat presentation by Don Tapscott, author of “Grown up Digital” and an evening sortie to San Francisco’s Exploratorium, a “museum of science, art, and human perception”. There were also excellent presentations on “Security in the Cloud”, by James Palmer from Symantec and “Delivering the Enterprise Ready Cloud”, by Treb Ryan, as well as a “Cloud Confusion” discussion by a press panel that demonstrated just how confused the press actually is on this topic.