MUMBAI, INDIA: Worldwide software-as-a-service (SaaS) revenue in the enterprise application markets* is on pace to surpass $6.4 billion in 2008, a 27 per cent increase from 2007 revenue of $5.1 billion, according to Gartner, Inc. The market is expected to more than double with SaaS revenue reaching $14.8 billion in 2012.

Gartner analysts said the adoption of SaaS is growing and evolving within the enterprise application markets as new entrants challenge incumbents, popularity increases, and interest for platform as a service grows.

"The popularity of the on-demand deployment model has increased significantly within the last four years. Initial concerns over security, response time, and service availability have diminished for many organisations as SaaS business and computing models have matured and adoption has become pervasive," said Sharon Mertz, research director at Gartner.

"It is important to differentiate SaaS from hosting or application management or application outsourcing," said Chris Pang, principal analyst at Gartner. "Because the SaaS/on-demand market is 'hot', many suppliers are rebranding their hosting or application management or application outsourcing capabilities as SaaS/on-demand. The core proposition behind SaaS/on-demand is the delivery of multi-tenant service from a remote location over an internet protocol (IP) network via a subscription-based outsourcing contract."

Some of the key industry trends that contribute to the rapid growth of SaaS globally include businesses examining ways to reduce their IT capital expenditure budget, the increased availability of broadband which extends the viability of Web-based service solutions globally, and the demand from businesses to rapidly implement software which supports a specific business need. 

The fastest-growing markets for SaaS are office suites and digital content creation (DCC), albeit from small bases. Gartner estimates that the revenue attributed to SaaS within the office suites market will reach 99.2 per cent compound annual growth rate (CAGR) from 2007 through 2012, with a total SaaS revenue reaching $1.9 billion in 2012. By 2012, Gartner estimates that web-based freeware such as Google Apps, Adobe Buzzword, ThinkFree, Zoho and SaaS offerings will account for 9 per cent market share of total software revenue. These offerings will coexist with traditional office products, such as Microsoft Office and complement the way individuals work today.

Gartner forecasts that the revenue attributed to SaaS in DCC market will be 96.1 per cent CAGR from 2007 through 2012. "DCC software is becoming increasingly important as organisations evolve toward a more Web-centric business model. Consumer decisions and confidence control the mainstream flow of the segment and future development of SaaS in this market will depend on internet broadband capacity," said Ms Mertz.

The content, communications and collaboration (CCC) markets remains the largest contributor to the overall SaaS enterprise application markets with revenue exceeding $2.1 billion in 2008, and it is expected to amount to $4.7 billion in 2012. It also shows the widest disparity of SaaS revenue generation, with SaaS representing 2 per cent to 3 per cent of enterprise content management (ECM) and more than 70 per cent of Web conferencing in 2007.

The second largest contributor to the overall SaaS enterprise application markets is customer relationship manager (CRM). In 2008, SaaS within the CRM industry is expected to exceed $1.7 billion in total software revenue. Gartner expects CRM SaaS revenue to exceed $3.2 billion in total software revenue in 2012. "Although the sales sub-segment still represents the largest contributor to SaaS revenue, demand is increasing for marketing automation and customer service and support solutions," said Ms Mertz.

"Before IT leaders embark into deploying SaaS, they need to determine where SaaS is most appropriate and advantageous within the organisation's overall sourcing and applications strategy. It is also important that they identify the costs incurred with a SaaS solution to establish whether SaaS is the better choice," said Mr Pang.

Gartner defines SaaS as software that is owned, delivered and managed remotely by one or more providers. Gartner's forecast is focused on enterprise application software and does not include the infrastructure software markets, such as application development and project and portfolio management (PPM); data management and integration; and IT operations software. Enterprise application software markets included in the forecast are content, communication and collaboration (CCC); customer relationship management (CRM); digital content creation (DCC); office suites; enterprise resource planning (ERP); and supply chain management (SCM).