Analyst Insight: SaaS offerings are front and center in the intensifying battle for share of the small and medium-sized business marketplace. While traditional mid-market vendors are feeling the heat, the large enterprise vendors will not necessarily make a lot of headway, due to the economics of their entrenched approach to sales, delivery and support.

-Bill McBeath, chief research officer at ChainLink Research

I wish I had a penny for every time "cloud" was mentioned by the technology media in 2010. As with many overused terms, it's meaning is all over the map.  It can refer to Infrastructure-as-a-Service, Software-as-a-Service, Platform-as-a-Service, or even just the web and web phenomena like Facebook and Twitter. In spite of the vagueness of the term, all this hype about cloud has spurred growth in the Software-as-a-Service sector. The SaaS vendors as a whole are growing faster than their on-premise software counterparts.

In our 2004 report on the On-Demand phenomena, we predicted when various sectors would start to see significant sales in the SaaS model, such as forecasting that 2008-2010 would be the period when SaaS warehouse management systems would start to take off. Most of those predictions have come true and SaaS has become a powerful force to contend with, not just in sales force automation, B2B integration and TMS (the segments where the SaaS phenomena first took hold), but across the board in ERP, sourcing and procurement, PLM, WMS and almost all software application sectors. This has caused vendors from Oracle, SAP, Ariba and other best-of-breed vendors to respond by buying or building or even re-architecting their solutions or portions of their suites to become true SaaS (i.e., multi-tenant, single instance) solutions.

One result is that enterprise-class capabilities have become more accessible than ever to small and medium businesses.  In fact, the SMB market for software is a red-hot battle ground right now. Virtually all of the key enterprise software vendors have major pushes into SMB as an area ripe for growth. However, they will not necessarily find the going easy.  The entrenched SMB vendors have spent years honing their economic, selling and support strategies to this segment, while the large enterprise vendors are used to models with much higher cost-of-sales and more customized support. While some of those large enterprise vendors will crack the code, many will take years to make the changes needed.

The Outlook

SaaS solutions will continue to significantly outpace the software market as a whole. Double-digit growth will be the norm for SaaS companies, with many experiencing 30-percent growth or more. Traditional licensed vendors will continue their migration to provide more complete SaaS offerings. As a result, SaaS will gain significant market share year over year for the foreseeable future.