While the bulk of enterprise software is still deployed on-premises, SaaS (software as a service) continues to undergo rapid growth. Gartner has said the total market will top $22 billion through 2015, up from more than $14 billion in 2012.
The SaaS market will likely see significant changes and new trends in 2014 as vendors jockey for competitive position and customers continue shifting their IT strategies toward the deployment model. Here’s a look at some of the possibilities.
The matter of multitenancy: SaaS vendors such as Salesforce.com have long touted the benefits of multitenancy, a software architecture where many customers share a single application instance, with their information kept separate. Multitenancy allows vendors to patch and update many customers at once and get more mileage out of the underlying infrastructure, thereby cutting costs and easing management.
This year, however, other variations on multitenancy emerged, such as one offered by Oracle’s new 12c database. An option for the release allows customers to host many “pluggable” databases within a single host database, an approach that Oracle says is more secure than the application-level multitenancy used by Salesforce.com and others.
Salesforce.com itself has made a shift away from its original definition of multitenancy. During November’s Dreamforce conference, CEO Marc Benioff announced a partnership with Hewlett-Packard around a new “Superpod” option for large enterprises, wherein companies can have their own dedicated infrastructure inside Salesforce.com data centers based on HP’s Converged Infrastructure hardware.
Some might say this approach has little distinction from traditional application hosting. Overall, in 2014 expect multitenancy to fade away as a major talking point for SaaS.
Hybrid SaaS: Oracle has made much of the fact its Fusion Applications could be deployed either on-premises or from its cloud, but due to the apparent complexity involved with the first option, most initial Fusion customers have chosen SaaS.
Still, concept of application code bases that are movable between the two deployment models could become more popular in 2014.
While there’s no indication Salesforce.com will offer an on-premises option—and indeed, such a thing seems almost inconceivable considering the company’s “No Software” logo and marketing campaign around the convenience of SaaS—the HP partnership is clearly meant to give big companies that still have jitters about traditional SaaS a happy medium.
As in all cases, customer demand will dictate SaaS vendors’ next moves.
Geographic depth: It was no accident that Oracle co-President Mark Hurd mentioned during the company’s recent earnings call that it now has 17 data centers around the world. Vendors want enterprise customers to know their SaaS offerings are built for disaster recovery and are broadly available.
Expect “a flurry of announcements” in 2014 from SaaS vendors regarding data center openings around the world, said China Martens, an independent business applications analyst, via email. “This is another move likely to benefit end-user firms. Some firms at present may not be able to proceed with a regional or global rollout of SaaS apps because of a lack of local data center support, which may be mandated by national data storage or privacy laws.”
Keeping customers happy: On-premises software vendors such as Oracle and SAP are now honing their knowledge of something SaaS vendors such as NetSuite and Salesforce.com had to learn years earlier: How to run a software business based on annual subscriptions, not perpetual software licenses and annual maintenance.
The latter model provides companies with big one-time payments followed by highly profitable support fees. With SaaS, the money flows into a vendor’s coffers in a much different manner, and it’s arguably also easier for dissatisfied customers to move to a rival product compared to an on-premises deployment.
As a result, SaaS vendors have suffered from “churn,” or customer turnover. In 2014, there will be increased focus on ways to keep customers happy and in the fold, according to Karan Mehandru, general partner at venture capital firm Trinity Ventures.
Next year “will further awareness that the purchase of software by a customer is not the end of the transaction but rather the beginning of a relationship that lasts for years,” he wrote in a recent blog post. “Customer service and success will be at the forefront of the customer relationship management process where terms like retention, upsells and churn reduction get more air time in board meetings and management sessions than ever before.”
Consolidation in marketing, HCM: Expect a higher pace of merger and acquisition activity in the SaaS market “as vendors buy up their competitors and partners,” Martens said.
HCM (human capital management) and marketing software companies may particularly find themselves being courted. Oracle, SAP and Salesforce.com have both invested heavily in these areas already, but the likes of IBM and HP may also feel the need to get in the game.
A less likely scenario would be a major merger between SaaS vendors, such as Salesforce.com and Workday.
SaaS goes vertical: “There will be more stratification of SaaS apps as vendors build or buy with the aim of appealing to particular types of end-user firms,” Martens said. “In particular, vendors will either continue to build on early industry versions of their apps and/or launch SaaS apps specifically tailored to particular verticals, e.g., healthcare, manufacturing, retail.”
However, customers will be burdened with figuring out just how deep the industry-specific features in these applications are, as well as gauging how committed the vendor is to the particular market, Martens added.
Can’t have SaaS without a PaaS: Salesforce.com threw down the gauntlet to its rivals in November, announcing Salesforce1, a revamped version of its PaaS (platform as a service) that couples its original Force.com offering with tools from its Heroku and ExactTarget acquisitions, a new mobile application, and 10 times as many APIs (application programming interfaces) than before.
A PaaS serves as a multiplying force for SaaS companies, creating a pool of developers and systems integrators who create add-on applications and provide services to customers while sharing an interest in the vendor’s success.
Oracle, SAP and other SaaS vendors have been building out their PaaS offerings and will make plenty of noise about them next year.