SaaS adoption locks onto hockey stick

Profile picture for user pwainewright By Phil Wainewright May 21, 2013
Incumbent enterprise application vendors look out: research conversations with IT buyers suggests the pace of SaaS adoption is set to accelerate dramatically over the next few years, rising beyond 50 percent of total spending.

BillMcNee -CEO-Saugatuck-2013-05-18-c-arr-siia-800px
Speaking to an audience of ISVs at the SIIA All About the Cloud conference in San Francisco earlier this month, Saugatuck Technology CEO Bill McNee for a moment seemed reluctant to endorse the findings of his own company's research. An April 2013 survey of 218 IT budget holders had found that more than half of them expected to have 50 percent of their application portfolios in the cloud by 2015 — less than two years away. This despite the same survey finding that they were still spending two thirds of this year's budgets on-premise. "That means we haven't even started to see the impact of this move yet," said McNee, before adding a note of caution: "if even a portion of this move occurs."

Saugatuck's research implies either that the respondents are over-optimistic about the speed at which they can adopt new SaaS applications or that SaaS really is about to embark on the hockey-stick phase of its growth trajectory. Both interpretations are bullish for SaaS adoption and suggest that enterprise sentiment is tipping sharply in favor of implementing applications from the cloud.

Driving adoption

Anedotal support for Saugatuck's findings comes from a recent roundtable discussion with three enterprise CIOs hosted by Citi analyst Walter Pritchard. All three are already spending at least 10 percent of their budgets on SaaS and all are looking to increase that proportion, with one planning to triple its SaaS spending in the coming year.

What seems to be driving adoption is a growing recognition that SaaS allows for rapid implementation to solve pressing business needs, coupled with a greater readiness to trust the security, performance and stability of SaaS vendors.

Perhaps most worrying for incumbent vendors, in particular SAP and Oracle, is the accompanying perception that they are failing to keep up in the race to add new functionality. As a food industry CIO participating in the roundtable told Pritchard:

"The incumbents have such a huge fixed investment in their legacy premise-based plaforms, they just don't have the agility or the speed of the Workdays, the Aribas or the NetSuites to move quickly into the SaaS space ... I see them moving in this direction but when it comes to making decisions today about business benefits that can be driven in the next four quarters, they just don't have the business benefit in the SaaS platform that the smaller, more agile players do."

SaaS reservations

Of course there are still reservations about SaaS for certain requirements — two of the three CIOs in the Citi discussion say they have recently ruled out Workday and NetSuite for financials because of a shortfall in functionality. All agreed that SaaS vendors fall short when it comes to change management (a theme covered in my recent post, Skills gap saps SaaS success rate). There was criticism in particular of the difficulty of reconciling master data between different SaaS systems.

Saugatuck's research identified growing concerns about lock-in, while the proportion agreeing that cloud is costing more than originally anticipated had risen from 32 percent in 2012 to 41 percent now. "These are warning signs to the industry," McNee told his audience.

ROI contributors

Nevertheless, Saugatuck's findings that flexibility and agility are more important benefits of cloud than cost savings were borne out by the comments of CIOs in Citi's roundtable. Pritchard summarizes:

"ROI contributors beyond cost savings includ[e] faster time to value, richer feature sets such as mobile access, and easier integration into back-end systems. CIOs prefer the investment profiles of SaaS solutions, which have lower risk deployments and less upfront costs."

Here's a selection of notable CIO comments from the Citi recording:

  • "We have been in the cloud for five years and we now have a public cloud first policy. The reason for that is we've run out of datacenter space." This aerospace company initiated take-up of SaaS from the beginning of this year, mainly for collaboration, social and analytics. "We've seen a big uptake ... What's the incentive for us to move to a SaaS solution? One of the big drivers is that we can redeploy our staff. IT is overloaded. SaaS bypasses that."
  • "It's growing very rapidly. A year from now, because of the cheaper cost for each individual function and because of the much faster speed of adoption, especially now it's becoming part of our DNA to do SaaS, I think we're gong to triple the amount of SaaS we do in just a year."
  • At an educational services company, "Things that we don't think we should be spending a lot of time investing in custom functionality we're moving to SaaS."
  • "As we are moving forward, SaaS providers are giving features like use of mobile that we would not have invested in at all."
  • "If you stay current with the maintenance and the upgrades, then SaaS is cheaper. But if you buy something and you're going to run into the ground, then on-premise is cheaper."
  • "We've had really stellar success with each of these implementations," said the CIO of a food industry business, which over the past six years has implemented Ariba procure-to-pay, Concur travel expense management, and other SaaS applications including legal administration and treasury management. "I would give SaaS a pretty high grade for business impact at our company."
  • "I call it speed to benefits realization. Being able to have a business impact, there just isn't as much risk and there isn't as much time required to build out these solutions. We're seeing cloud and SaaS as a great opportunity to reduce TCO ... It's just business performance impact and the time to get there."

Hybrid cloud

Saugatuck has written up its findings in a blog post. It sees enterprises embracing a hybrid cloud model over the next few years as they transition from on-premise solutions to the cloud. From around a quarter of enterprises today, over half will have a hybrid infrastructure by 2015, before dropping back again as more and more organizations standardize on a pure cloud environment. Counting hybrid as well as pure cloud, the research forecasts that spend on cloud will rapidly replace on-premise spending:

"Over the next few years, based on recent buyer demand studies, Saugatuck estimates that Hybrid-Cloud together with the pure-play Cloud will command 75 percent or more of new enterprise IT spend — and the percentage of enterprises with half or more of their portfolio in the Cloud will nearly triple (from 20 percent to 57 percent). By 2016 all categories of Cloud business solutions are on the must-buy shopping list at over 60 percent of enterprises."

Disclosure: The author was a speaker at the All About the Cloud conference. Workday is a diginomica premium partner at the time of writing.

Photo credits: Field hockey © Leonid Shcheglov -; Bill McNee at rostrum © SIIA all rights reserved