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Software as a Service (SaaS): Cloudy in SMBs

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A recent survey shows limited awareness, constrained usage.


Small and midsize business (SMB) executives have significant challenges in today's economy, including finding and keeping customers, controlling costs, and positioning for growth. Technology must support those objectives if they want SMB executives to pay attention.


According to the research firm Saugatuck Technology, which focuses on emerging enterprise technologies, Software as a Service (SaaS) refers to "software provided and used in a utility computing context, where the services provider delivers the functionality of the application or utility infrastructure software over a network, through a services interface. Typically this functionality is sold via a subscription model, or on a utility-style, "pay as you go" (PAYG), or per unit, basis." Saugatuck believes SaaS is becoming ubiquitous--and is affecting nearly all solution sectors, industries, and business and IT functions. According to IDC, SaaS software revenues doubled between 2006 and 2008, with it taking as much as 5 percent of the total software market. Gartner says that by 2012 more than two-thirds of independent software vendors will offer their applications as SaaS solutions.


SaaS is available for virtually all software solutions--from customer relationship management (CRM) to Web content management. Some examples of SaaS include well-known applications such as Salesforce.com for sales force automation (SFA). Other SaaS solutions in fairly widespread use include Vocus for public relations and NetSuite for CRM. In addition, the large software companies are starting to offer SaaS alternatives, including Oracle and SAP. IBM provides packaged products and services for SaaS providers. Even Microsoft, considered an opponent of SaaS, is reportedly going to announce Windows Cloud for Internet applications development. While many claim SaaS is nothing but a rehash of application service providers (ASPs), it is more than that. Unlike the ASP business model, SaaS applications are designed specifically to be accessed over the Internet.


Saugatuck, based in Westport, Connecticut, has been studying SaaS since 2004. The firm recently interviewed executives and technology decision-makers at companies with between 50 and 1000 employees. Most of the executives interviewed said that their businesses are dealing with ramifications of a stalled global economy, with resulting lower demand and higher prices. With this economically fragile backdrop, SMBs look at software strategies and expenditures very carefully--including SaaS. "We regularly revisit market segments to determine activity around the adoption of emerging technologies," said Bruce Guptill, Managing Director of Research at Saugatuck. "SaaS is one of the most significant disruptive technologies we see in IT today. Amongst other findings, this recent research tells us that SaaS in and of itself is not a driver for most SMBs buying technology."


Five significant trends emerged from the research.

  • SaaS benefits are unclear to SMB executives.
  • SMB executives do not have specific strategies for SaaS.
  • SMBs are uncertain whether SaaS can provide competitive advantage.
  • Where SMBs use SaaS is generally limited in scope.
  • Security is a concern when considering SaaS.


While SaaS usage is growing and is relatively widespread among SMBs worldwide, SMB executives interviewed by Saugatuck display a lack of awareness regarding what business benefits SaaS can deliver. Their view remains cloudy because of limited experience with SaaS, as well as a general disconnect in many SMBs between technology and business value. "My business advantage comes from relationships, not technology," stated one company president.


Strategies for adopting and using SaaS are, for the most part, non-existent among SMB technology decision-makers. In most SMBs, technology acquisition is trial and error handled on an application-by-application basis. Suite selection is rare for anything other than office-style applications (word processing, spreadsheet, presentation). 

"This is not unusual regarding any IT in smaller firms. IT in many SMBs is a tactical business resource," asserted Guptill. "SaaS in many cases is either too new to SMB executives to be on their strategy radar screens, or they do not understand (or cannot yet completely communicate) the strategic value of SaaS to other executives in the firm."

In addition, SMB executives seem unsure about any business advantages specific to SaaS.  Among those who are aware of what SaaS can do, they see it as "just another business tool." For many SMBs, there is no competitive advantage per se, because their competitors can also use SaaS. Others perceive a business advantage of SaaS because of real or imagined cost savings, and some were able to scale faster than competitors using traditional software. Business executives focus on selecting applications they need at the lowest possible overall costs. "If the solution happens to be SaaS, so be it. But SaaS in and of itself is not a driver for most SMBs buying technology," said Guptill.


SaaS usage among SMBs tends to be limited in scope and focus, used for one or two basic business functions, especially payroll, CRM, Human Resources (HR), and/or SFA. On the other hand, many SMB executives interviewed by Saugatuck also cited use of Web hosting, Web conference services, location-based services, and online auctions as examples of SaaS.


The use of SaaS in SMB-critical applications, such as core transactional systems or core financial systems of record, is mixed. Some SMBs now trust SaaS for what they consider critical to operations. Others do not, because of security concerns. However, many SMBs consider all of their applications critical. "Anything we pay for is critical," said one SMB executive.


Some of the executives interviewed by Saugatuck said that their firms have what amounts to an irrational fear about SaaS security. These executives know their in-house applications are not really any more secure than an externally hosted or SaaS-provided solution, yet somehow they are comfortable enough with what they already have to stick with them. In many regards, many have an attitude of "the devil we know is better than the devil we don't know." Tangentially, some SMBs worry about Internet outages and hold back from SaaS to lower that perceived risk. Others are adamant about keeping data inside the firewall and refuse to consider SaaS, although some of this may be due to specific industry mandates and regulatory reporting (e.g., pharmaceuticals).


Resources for investigating SaaS include these:

•·       Cloud Computing Journal

•·       IBM SaaS

•·       Oracle On Demand

•·       SaaS Blogs

•·       SAP Business ByDesign

•·       Saugatuck Technology

•·       SmoothSpan Blog

•·       ZDNet SaaS


"SaaS is just another way of hosting and delivering what we need," shared one SMB executive interviewed by Saugatuck. SaaS is still new to most SMBs worldwide, and therefore such attitudes are expected. SaaS' role in SMBs, while still in its nascent stages in many cases, will continue to evolve and grow if SMBs experience the promised cost and resource advantages of SaaS. 

SaaS will continue to grow in use in SMBs and elsewhere as more end users learn about its benefits and vendors deliver SaaS alternatives to their solutions. SaaS offers the ability to quickly implement applications without IT people. Plus lower initial costs often provide SMBs with an attractive alternative. However, SaaS has perceptions to overcome with regards to security and, in some cases, functionality and performance. As with all technologies, decision-makers need to weigh the pros and cons of SaaS with their requirements.


Ron Exler

Ron Exler is a senior product manager at Arbitron, the media ratings company. Previously, he was an independent analyst and consultant. He was formerly Vice President and Research Fellow for Robert Frances Group (RFG), a provider of advisory services for information technology (IT) executives and vendors. Mr. Exler has worked with executives from some of the world's largest enterprises, so he understands how business executives make decisions. He also writes a blog (http://www.thegeofactor.com/) and was named one of the top English-language analyst bloggers by Technobabble 2.0. Mr. Exler has had more than 125 articles and technical papers published.


Prior to RFG, Mr. Exler worked for several enterprise software companies, including Landmark Systems (now ASG) and Intersolv (now Serena Software). He held positions in marketing, product management, research, sales support, software development, and training. He has an M.S. from the University of Wisconsin, Madison and also earned a B.S. from Oregon State University.



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