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Are SaaS vendors better positioned than other software companies to survive the recession?

Yes – Flexibility will increase customers

No – Too early to tell

On-Demand Services Market Predictions for 2009

By Jeffrey M. Kaplan, Managing Director, THINKstrategies, Inc.

Wondering what the on-demand services market will bring in 2009? Sure, we’re more than 5 months in to the new year, but I still have a few predictions. These predictions are based on THINKstrategies’ latest survey research and ongoing consulting work with IT/business decision-makers, IT solution providers and various technology investors.

I recognize that plenty of predictions have been made already, but hope mine offer a different perspective on the future direction of the on-demand services market.

1. On-Demand Services Move from Why to How
Now that SaaS has achieved widespread market penetration and the idea of cloud computing has become popularized in the business as well as trade press, the discussion will shift in 2009 from why organizations should adopt SaaS/cloud computing services to how to do it effectively. This shift will also encompass the best ways to adopt managed services to optimize IT operations. IT/business decision-makers will seek help evaluating the functionality and financial viability of the various vendors; better understanding the integration and security requirements; monitoring vendor performance and service level compliance; and measuring the economic impact and business benefits of these services.

2. New Hybrid Models
The technological evolution of on-demand services will enable SaaS and cloud computing vendors to offer customers the choice between on-premise and off-site hosted versions of their solutions without compromising the operational and financial efficiencies of the multi-tenant architecture that underlies these services. SaaS/cloud computing vendors will be able to ‘shrink-wrap’ their solutions into appliances or ‘applets’ which can be deployed behind the customer’s firewall and synchronized with the vendor’s primary service delivery infrastructure.

3. Short-Term Slowdown, Long-Term Growth
Although SaaS proved to be recession proof for most of 2008 as I predicted, SaaS vendors have not been able to avoid the speed-bump caused by the deepening economic crisis. IT/business decision-makers in organizations have been instructed to put a hold on all procurements until the economic uncertainty subsides. They are especially hesitant to make acquire solutions from new vendors who they believe won’t survive the current crisis. However, when the dust settles, organizations of all sizes will adopt SaaS and cloud computing services because the business case for these web-based alternatives is too strong and compelling.

4. VC/PE Retrenchment
The credit crunch and devastation of the financial markets has had a tremendous impact on the venture capital (VC) and private equity (PE) sectors. With limited IPO exit opportunities available and their limited partners (LPs) either unable to fulfill their funding commitments or demanding better returns from their investments, the VCs and PE firms are setting higher standards for performance from prospective and portfolio companies, and holding back on additional investments. Many VCs and PE firms may even shut their doors, leaving fewer funding sources available for SaaS/cloud computing companies.

5. Industry Shakeout and Consolidation
The past year may have been the peak of the ‘cloud-rush’ that produced a proliferation of SaaS and cloud computing players. The new year will see a shakeout of many of these players and consolidation of the market. IT/business decision-makers in user organizations of all sizes will shift their procurement strategies from best-of-breed vendors to strategic suppliers who they believe have a better chance of surviving today’s economic crisis. This will make it hard for niche vendors to compete against more prominent players with broader portfolios and stronger brands.

6. Acquisitions/Alliances
With the valuation of SaaS/cloud computing companies going down, the buying power of incumbent software vendors (iSVs) will rise. Companies like Microsoft, Oracle and SAP will acquire a series of SaaS/cloud computing players to accelerate their migration to the on-demand services world. Hardware vendors such as Dell, HP and IBM, as well as offshore companies like Infosys, Tata and Wipro will also make acquisitions to enhance their systems and automate their services respectively. With traditional funding sources drying up, many SaaS/cloud computing companies will seek corporate alliances which can provide alternative financing options and strengthen their positions in the market.

7. Focus on the Channel
The changing economic climate and rising costs of sales will drive a growing number of SaaS/cloud computing companies to seek new channels to market. At the same time, a growing number of traditional systems integrators, value-added resellers, hosting companies and other service providers will seek to add SaaS/cloud computing capabilities to their corporate portfolios. In some cases, this will blur the line of demarcation between SaaS/cloud computing and managed services companies.

8. The Google Generation Becomes Mainstream
The Google affect on the market will expand from eCommerce to the enterprise. Google Apps will gain acceptance in businesses of all sizes as a result of broader adoption among individuals, better support services aimed at corporate users, and broader alliances with companies like Salesforce.com. An indication of this trend can be found in primary schools and universities where use of Google Apps is expanding from individuals to the entire institutions in a systematic fashion. Just as Apple succeeded in building a new generation of users via schools and universities, Google is taking the same path to permeate the market.

9. Software/Business/Information/Managed Services Convergence
The line of demarcation is not only fading between software services, such as SaaS and cloud computing, and managed services, but also with business and information services. Business services companies, such as ADP and AmEx, are adding software services, such as Centive’s sales compensation management and Concur’s expense management capabilities their service portfolios, respectively. Thomson Reuters has teamed with Salesforce.com to deliver its information services via Salesforce.com’s SaaS solutions. It has also recently acquired Paisley – a governance, risk and compliance SaaS vendor – to broaden its capabilities. Meanwhile, Managed Service Providers (MSPs), such as mindSHIFT, are adding a layer of SaaS solutions to their IT management capabilities.

10. Obama Economic Policies Promote the Web
President Barak Obama has made it clear that he views the Internet as an important incubator of new business opportunities and jobs, and as a mechanism for better government services and more effective education programs, as well as a clean-tech alternative that can reduce people’s carbon-footprint. The Obama administration has promised to create a program, much like the Work Projects Administration (WPA) during the New Deal, which will fund public initiatives that encourage the growth and broader adoption of web-based services. This program will increase the visibility and viability of on-demand services.

This article was adapted from the author’s blog on THINK IT Services. Reprinted with the permission of the author.

Jeffrey M. Kaplan is Founder of THINKstrategies a firm which helps clients capitalize on the migration of the technology industry from a product-centric to a services-driven business model. He was formerly a leading industry analyst at IDC, Dataquest, META Group and successful senior marketing executive at InterOPS Management Solutions and International Network Services (INS). Jeffrey has over twenty years of experience and recognized expertise in IT/network management, SaaS, managed services, cloud computing, telecommunications and outsourcing trends. He serves as a member of the On-Demand Services steering committee of the SIIA and the Chairman of the SaaS/cloud computing/managed services track of NetworkWorld's IT Roadmap and Interops. Jeffrey is a frequent speaker at industry conferences and contributing columnist for BusinessWeek Online, Mass High Tech Journal, Financial Times of London, Business Communications Review, ComputerWorld, InfoWorld and Web Host Industry Review on SaaS, utility computing, outsourcing strategies, service level management (SLM), IT ROI and TCO calculations. For article feedback, contact Jeffrey at jkaplan@thinkstrategies.com

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