Market research firm IDC predicts that the Software-as-a-Service (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.

One attraction of the service model is the ability for customers to shift off fixed enterprise costs for software and infrastructure to discretionary spending for different needs across the business. Robert Mahowald, director of on-demand and SaaS research at IDC, says businesses are taking up the proposition.

"Without a doubt, customers and SaaS vendors are saying that this argument is winning the day, especially mid-market customers that are facing ERP or CRM upgrades," Mahowald says.

Line-of-business and departmental budgets are allowing spending to spread through the enterprise and are escalating the case for more service-based products. "It’s winning over customers who are not tapping into IT cap-ex funds; they’re tapping into line of business op-ex funds that come from different pools of budgets and expensing things they didn’t know they could," Mahowald says.

Typical "beachhead" applications for SaaS vendors have included CRM and collaboration. Another research firm, Gartner Inc., is also predicting that customer relationship management will increasingly be delivered in the service model.

IDC’s Mahowald says success in these areas is leading to new SaaS investments in three areas: financial applications for procurement and payment processing, employee travel expense and payroll; business intelligence and analytics; and finally, B2B commerce-type offerings.

Time to market is another value proposition for customers contemplating SaaS. "They [vendors] are able to go in and make a compelling case for being up and running and mapped to existing business processes within a matter of weeks," Mahowald says. "There are all kinds of SaaS tools for data integration and generally, the sales to deployment time is less than two months, with larger, more involved applications taking a bit longer."

By the end of 2009, IDC predicts that 76% of U.S. organizations will use at least one SaaS delivered application for business use. Further, the percentage of U.S. firms committing at least 25% of IT budgets to SaaS will increase from 23% in 2008 to nearly 45% in 2010.

On the downside, IDC interviews with SaaS providers also found cash flow shortfalls among delinquent clients and tight credit from lenders, slowing the ramp to expansion and meeting new customer demand.

However, doubts about the viability of SaaS, often around service level agreements and security, are slowly abating, Mahowald says. "Uptime is an argument that’s getting blunted by the performance of SaaS vendors, Salesforce’s recent outage notwithstanding." What customers should look for is a SLA that makes clear which party—the ISV, the hosting entity or the VAR that sold the solution—will be servicing the agreement. Where that is clear, the analyst says, problems are less likely to arise.

The IDC study, "Economic Crisis Response: Worldwide Software as a Service Forecast Update" amends earlier reports to account for the current economic climate.

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