Posted by: lrrp | March 12, 2009

SaaS for Rough Economic Times

“The Majority sees the obstacles; the few see the objectives; history records the successes of the latter, while oblivion is the reward for the former.”
– Alfred Armand Montapert

What Do Companies Have to Prepare for 2009?
What a year, 2009 will be for business organizations! The economy is in shambles, it’s getting harder to raise capital and customers are freezing budgets. 2009 won’t be the prettiest year ever for business.

Whether it’s a slowdown or full-blown recession, most people agree we’re heading into choppy economic waters. Growing concerns about the business implications of the turbulent economic climate and intensifying credit crunch are driving companies and non-profit institutions of all sizes to thoroughly reevaluate their corporate priorities, capital expenditures, operating budgets and sourcing strategies.

Many organizations continue to face increasing pressure to cut costs in all areas, including IT and labor costs, while maintaining and improving outcomes and customer satisfaction. In the face of pressures caused by economic slowdown, the need to improve services to maintain revenues becomes even more important to companies. Simply trimming costs without paying attention to quality of service is unacceptable.

IT and business decision-makers in nearly every industry must make cuts to their capital and operating budgets in order to offset rapid declines in business and tightening credit markets. Companies will have to cut somewhere, and take a hard look at each employee, business strategies, pricing, etc. Basically: Look at everything. In many cases, this is forcing them to fundamentally reevaluate the way that they acquire and utilize technology and business applications.

As “Cost cutting” becomes a popular topic during today’s uncertain economic times, you can opt to hide in fear and close your wallet or you can take steps to gain more predictable operating costs – while driving your business forward. The question, then, is which sectors and which companies are best positioned to withstand the tempest? One answer is technology; especially companies that help their customers stretch a buck – such as firms that run software as a service model.

There is good reason to take a look at these Saas products no matter what the prevailing economic winds, because they are riding trends that will barrel ahead in good times and bad. Any IT / business decision-maker who isn’t seriously considering these on-demand alternatives is doing their organization a disservice and could be jeopardizing their jobs and companies chances of withstanding the shocks of faltering economic markets as well.

Is SaaS resilient to recession?”
IT budgets can be precarious in the best of times, and the current economic recession will affect an IT department’s ability to spend while unwelcome, budget restrictions also can be an opportunity to be creative and try new things.

With possible economic hard times looming many companies don’t want to invest in large-scale software installations. As IT departments are tasked to do more with less, that’s an opportunity for SaaS to get a “foot in the door”. SaaS is certainly attractive from a capital perspective and SaaS wins when it comes to saving money on deployment.

With or without a recession, the SaaS delivery model offers the lowest and most predictable cost of ownership and in times like this makes lot of economic sense to the companies. As all companies will look to constantly improve their operations, SaaS applications become more attractive.

SaaS products offer customers the ability to do more with less, whether it’s money, people or both. SaaS offers a model where vendors own the enterprise system. The organization /customers pay for using the system but not for owning the system. SaaS is cheaper to implement and the enterprise can avoid the upfront capital expenditures for hardware.

The SaaS solutions not only lower costs, it simplifies implementation and updates. SaaS vendor takes care of a lot of the heavy lifting for customers and they no longer need to dedicate IT staff to patch management and maintenance.

This unique delivery model is bound to make enterprise applications more agile and relevant to the company’s strategy.

Will SaaS be the “Panacea” During tough Times?
It appears that SaaS model has emerged as an attractive proposition capable of delivering cost savings that makes lot of economic sense to the companies.

Worldwide software as a service revenue in the enterprise application markets is on pace to surpass $6.4 billion in 2008, a 27 per cent increase from 2007 revenue of $5.1 billion, according to Gartner, Inc. The market is expected to more than double with SaaS revenue reaching $14.8 billion in 2012. Gartner analysts say the adoption of SaaS is growing and evolving within the enterprise application markets as new entrants challenge incumbents, popularity increases, and interest for platform as a service grows, despite the challenging economic climate. If independent research reports of Gartner are any pointers, 25 per cent of new software business will come from SaaS by 2011. Many organizations are moving away from large packaged software implementation approach towards the on demand software.

As managing professionals construct crucial purchasing decisions in times of profitable slowdown, Forrester Research says software as a service (SaaS) can benefit organizations by offering a deployment model that lowers near-term expenditures, allows buyers to prove the value of a solution before committing to it, and shifts meaningful aspects of the investment risk from the organization to the SaaS provider. Many firms see the value of SaaS regardless of the profitable climate. But however, when software buyers are faced with fears of potential recession, SaaS offers even greater value, considering it provides a more flexible way of investing in software.

Market research firm IDC predicts that the SaaS market will expand rather than contract during 2009, even as broader markets for products and services are declining or at a standstill. The finding is the result of cumulative research and customer interviews conducted by IDC and predicts that the current economic crisis will actually contribute to growth of hosted service based software. The research firm now says year over year spending on SaaS will increase 40.5% in 2009 rather than the 36% predicted earlier.

SaaS Offers IT Agility
Companies need to try out new business ventures and products to see which ones work and they need ways to manage the risks inherent in doing this especially during turbulent times. SaaS is an integral part of how they can manage that risk and the three unequivocal benefits of IT agility offered by SaaS make it irresistible to many organizations.

The Three benefits of IT agility are;
1) No Capital Expense;
2) Variable Cost; and
3) Scalability.

No Capital Expense
The SaaS cost model is a pay as you go month to month arrangement that is based on actual usage. Over the long run a company may incur more costs using this model if a new business venture is successful and grows to a large size. But that possibility is far outweighed by the uncertainty over whether a new venture will actually succeed. So a variable cost business model is the best way to protect cash flow because costs will only rise if the business grows and operating expenses will drop or stay small if business volumes contract or don’t grow as big or as fast as expected.

There will also be no large sunk costs if the venture has to be abandoned or incurs loss. In this economy where it is so hard to predict what will happen next, and where companies need to keep trying new things to find out where new opportunities lie, variable cost business models are best for managing financial risk.

Two key factors exist here:

1. No need to invest in hardware/software as capital assets. SaaS allows rental of the applications through web based delivery. This lower cost model becomes an operational expense and not a capital expense.

2. requires fewer or no IT personnel. This can often be the most expensive item in the IT budget. Reduction of one or more technical resources can often cover the entire monthly cost of the SaaS offering.

Other benefits possible include: reduced helpdesk costs, more effective data backup, no management of license agreements, no data center or server farm management, and predictable monthly costs.

Variable Cost
The chief advantage of a SaaS solution is that the company only needs to invest in a subscription for the software. The SaaS vendor will deal with all the infrastructure costs, so you don’t have to. That can cut costs dramatically, and instead of a huge payment, you are looking at a monthly subscription fee. It should reduce your initial investment significantly and make the whole project more palatable from a budgetary standpoint.

Most SaaS solutions offer easy access to pilot services or a free trial solution before a buyer decides whether or not there is value in purchasing the service. Furthermore, SaaS makes rolling out software incrementally easier, meaning firms can prove the return on investment of their purchase in one area or division before rolling it out to other divisions or the whole enterprise.

Scalability
Scalability is another attractive option offered by SaaS. A scalable systems infrastructure enables a company to “think big, start small, and deliver quickly”. The top management can create strategies with big potential and try them out quickly on a small scale to see if they justify further investment. Companies do not have to guess how much system capacity they will need and they do not have to guess which technology to use to get that capacity. They can leave those questions to the SaaS provider. The SaaS provider typically has better information to make those decisions and can spread the costs over a wider customer base than any individual company. Besides it should be noted that companies don’t outgrow scalable systems; they don’t have to rip out and replace scalable systems as these systems rarely become liabilities. SaaS is typically easier to scale up or down to meet needs by date. Finally, since upgrades are seamless and automatic, firms do not need to nag about a spike in costs when they are forced to upgrade.

When The Going Gets Tough, the Tough Get SaaS(y)
In times of great change there are great opportunities. Now is the time for companies with new ideas to test them out and gain market share while their competitors are lying low and just trying to survive. Business agility requires an agile IT strategy to make it happen and SaaS is central to any agile IT strategy.

It seems clear that the economic malaise we are in is probably going to last a while, but that doesn’t mean that your company’s IT investment needs to stop, only that you have to get a little smarter in how you go about it. Looking at SaaS system may make a lot of sense in tough economic times.

A company’s business agility and the IT agility that propels it will determine whether it becomes a victim of tough economic turbulences and sink to the bottom or whether it rises to the challenge and reinvents itself to fit new fickle circumstances as a survivor to ride the crest of the wave.


Responses

  1. As an employee of an online database company, we are definitely seeing more customers adopting SaaS in 2009. We’ve heard the same benefits from our customers.

    As more companies begin to evaluate SaaS offerings it is important that they do their homework when evaluating solutions. Our CEO and CTO recently recorded a podcast with three tips companies should take into account when evaluating SaaS providers. You can find the tips in the following podcast:

    http://www.trackvia.com/blog/2009/03/02/saas-tips/


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