SaaS for Enterprises Approaches Tipping Point

Recently I spoke with Justin Perreault, a general partner with Commonwealth Capital Ventures in Boston who focuses on IT and has a particular interest in software as a service (SaaS) business models. Perreault believes 2012 will be the year when enterprises begin to aggressively embrace SaaS, which is a software distribution model in which applications are hosted by a vendor or service provider over a network, rather than purchased and owned by the enterprise.

Perreault acknowledged that until now there has been a significant gap between industry discussion of SaaS (among trade press, suppliers, analysts and consultants) and the actual adoption of SaaS-based applications by enterprise IT organizations. Significant disparity between the enthusiastic discussion of a new technology or service and its real-world adoption happens frequently in the IT realm.

Because this situation tends to create confusion about whether a given technology or service is real, IT organizations often are hard-pressed to put their adoption plans into a broader context. Furthermore, this gap sometimes encourages IT personnel to become cynical about any new technology or service, because, in their experience, the greater the amount of discussion surrounding that new technology or service, the lower the near-term adoption rate.

SMB Adoption Outpaces Enterprises

At the end of 2011, Perreault pointed out, there was no shortage of SaaS-based applications designed for enterprise IT. Yet to date enterprises have been much less likely than small and medium-sized businesses (SMBs) to adopt SaaS. And though SaaS applications have a long way to go before they replace traditional applications, he believes 2012 will be the tipping point for SaaS to move into enterprise organizations. Why? Because many of the barriers to adoption, such as IT's concerns about the security of SaaS-based applications, have either gone away or IT groups have figured out how to deal with them.

Other shifts on the part of both SaaS providers and enterprise IT organizations support Perreault's belief in this tipping point. For one thing, enterprise IT is taking SaaS more seriously. As evidence of this, Perreault noted that when enterprises first began using SaaS-based applications, they typically signed a simple one- or two-page contract. Nowadays they tend to put the acquisition of such applications through the same exacting purchasing process they use for traditional, on-premise software.

Traditional Business ISVs Embrace SaaS

Another shift: until recently, many of the traditional large software providers, such as Oracle and SAP, actively belittled SaaS-based applications. Now many of these same providers are acquiring companies that will provide them with an entry into this market. Furthermore, many SaaS providers, Perreault said, are now offering functionality (such as security and post-sale customer support) that is on a par with that provided by vendors of traditional software.