The Rise of Software as a Service (SaaS)

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At the end of the twentieth century, how many people had used the term Software as a Service (SaaS)?

Even fifteen years ago, the term was not in common use - but Google Trends data highlights the increasing popularity of users searching for information on SaaS:


With countless startups entering the fray and established companies looking for ways to further capitalize on the growth of the SaaS industry, what has contributed to the rise of SaaS - and what lies ahead?

What is SaaS?

SaaS is a business model embraced by many of the world’s largest organizations. Typically, it involves a third-party provider hosting an application which is made available over the Internet, usually via a subscription model.

This differs from the previous method of software delivery, which involved purchasing an application which had to be physically installed at a customer’s place of business.

SaaS applications remove the requirement for organizations to run applications on their own machines or in their own data centers. Users can usually access the application from any Internet-enabled device, and any software updates are performed automatically.

The growth of the industry has spawned products and apps used on a daily - sometimes hourly - basis by individuals and businesses around the world.

How many SaaS companies are there?

There are 11,288 SaaS companies in the world, according to a list of SaaS companies obtained from Crunchbase in November 2018.

The growth of the SaaS industry in the past two decades has been remarkable. Consider these facts - as the new millennium dawned:

  • Marc Benioff had only formed Salesforce the previous year (1999).
  • Amazon Web Services was still years away from public use.
  • Dropbox remained seven years away from formation.

The acceleration has continued at a rapid rate in recent years. From 2010 to 2017 (the last year for which full data is available), 7,500 new SaaS companies were formed - meaning almost two-thirds of companies operating in the SaaS space have formed in the last decade alone.

The peak occurred in 2015, with the foundation of 1,220 new SaaS companies around the world.


What has contributed to the growth of SaaS?

Organizations in all sectors and of all sizes are adopting SaaS solutions, and there are several factors driving this.

Perhaps the primary catalyst is the increased availability of the Internet across the world since the mid-1990s. This has made the idea of remote teams and hosted software not just a reality, but a preferred solution for many businesses.

Back in 1995, Internet access was restricted to 0.16% of the world’s population. By the end of 2017, the number of people with Internet access had risen to over four billion people - or 54%, powered by growth in developing economies.

What are the benefits of SaaS applications?

Amongst the many benefits of SaaS applications are improved communication, reduced costs and increased employee engagement and satisfaction. In a 2017 survey by BetterCloud, IT professionals were asked to name the three criteria they cared most about when purchasing SaaS applications. The most popular answers were:

  • Cost - SaaS applications are usually sold using a subscription-based model, reducing the need for expensive, up-front purchases.
  • Security - SaaS companies are inherently focused on data protection, often resulting in the highest possible level of security for client information.
  • Ease of use - many SaaS applications have integrated customer support features which can assist users in real-time.

What are some SaaS industry growth statistics?

The ongoing rise of the SaaS industry isn’t just anecdotal - data and research confirms that it is continuing to grow at a relentless pace:

  • Between 2015 and 2017, the average number of SaaS apps used by organizations has doubled (from 8 to 16) (BetterCloud).
  • Worldwide market revenues from SaaS companies hit $72.2 billion in 2018 (Gartner).
  • By 2021, the SaaS industry is forecast to generate over $113 billion of worldwide revenue (Forbes/Gartner).
  • 73% of organizations indicated nearly all their apps will be SaaS by 2020 (BetterCloud).
  • From 2010 onwards, the average spend per company on SaaS applications has increased year-over-year (Blissfully).

In organizations running almost entirely on SaaS, employee engagement was far higher, with 86% of end users saying SaaS helps them succeed more than desktop alternatives (BetterCloud).

Which sectors and companies are dominating the SaaS marketplace?

The nature of SaaS means that it has attracted certain sectors of the business world more than others, with startups launching in certain niches. Remote teams are a particular feature of businesses with a SaaS focus. In addition, major IT protagonists such as Microsoft and Adobe have diversified and moved into the SaaS marketplace to satisfy customer requirements.

As well as fulfilling customer needs, SaaS applications have also enabled companies to gain new insights on all aspects of their organization. Not only are they able to manage external relationships more effectively, but businesses can also gain insights into every aspect of their workplace - from project management to employee engagement.

Which functional markets are the biggest in the SaaS marketplace?

Customer relationship management (CRM) has been a cornerstone of the SaaS marketplace ever since Salesforce launched in 1999. In 2015, CRM accounted for nearly one-third of revenues in the global cloud applications market - although this is predicted to fall in the coming years.

In 2015, the five biggest functional markets for cloud apps were:

  1. Customer relationship management (31.6%)
  2. Human capital management (14.7%)
  3. ERP Services and Operations Management (8.4%)
  4. Collaboration (6.3%)
  5. Procurement (6.3%)

Which are the largest SaaS companies?

As a self-professed pioneer of SaaS, Salesforce had consistently racked up a significant chunk of the market share in recent years, topping the rankings up until 2016 when Microsoft took its place at the top of the charts.

In terms of market share, the top five SaaS organizations as of 2017 were:

  1. Microsoft (18.0% market share, $12.93bn revenue)
  2. Salesforce (11.5% market share, $8.30bn revenue)
  3. Adobe (6.7% market share, $4.86bn revenue)
  4. Oracle (4.9% market share, $3.50bn revenue)
  5. SAP (4.5% market share, $3.26bn revenue)

Notably, Microsoft’s year-over-year enterprise SaaS revenue growth was a staggering 47.8% between 2016 and 2017, which contributed to them catapulting ahead of Salesforce as the global leader in 2016.

How will the SaaS marketplace change in the future?

With many businesses already utilizing some form of cloud CRM application, growth in this particular section of the marketplace is expected to be slower than others. In 2015, CRM accounted for 31.6% of the global cloud applications market; by 2020, forecasts indicate this will drop to 23.8%.

By contrast, business areas such as Analytics, Content Management and Product Life Cycles are likely to see SaaS revenues grow at a much faster rate, with products in these areas currently in their early stages. The growth of cloud subscriptions in these areas is likely to correlate with an increased development focus, as well as providers migrating existing customers to new cloud applications.

As well as SaaS operating in different functional business areas in the coming years, the industry may also experience another change - geographically.

Are SaaS companies expanding away from the Silicon Valley bubble?

Many of the largest SaaS companies have traditionally been associated with the United States, and in particular, California. While there is no doubt that many tech startups still flock to Silicon Valley, is the expansion of the industry leading to new hubs and locations around the world?

How many SaaS companies exist in California and the United States?

According to data from Crunchbase, there were 2,058 SaaS organizations trading in California as of November 2018. This means over 18% of the worldwide SaaS market is based in the Golden State. However, in terms of new startups, there is a different picture emerging.

In 2017, there were 955 startups founded around the world. Of these, 347 (36.34%) were founded in the United States. That may sound a lot, but consider this - out of the 11,288 SaaS companies trading in the world, 48.39% are headquartered in the USA.

As a proportion, more startups are being founded outside of the United States, contributing to a more diverse and widespread marketplace.

Which countries are seeing an increase in SaaS startups?

As technology continues to stretch across the globe, SaaS organizations are forming in new countries each year. According to Crunchbase, SaaS organizations currently exist in 100 countries around the world, as highlighted on the map below:


As outlined previously, between 2007 and 2017, there was incredible growth in the SaaS sector. This is emphasized by the number of startups founded in emerging economies, with India seeing 55 new SaaS startups in 2017 - as a reference point, a decade previously, only a dozen new companies were founded.

Other countries seeing a boom in new SaaS companies include:

  • United Kingdom (58 in 2017, compared with 18 in 2007)
  • Germany (39 new SaaS startups in 2017, compared with 9 in 2007)
  • Netherlands (13 in 2017, compared with 3 in 2007)
  • Israel (12 in 2017, compared with 3 in 2007)
  • Brazil (9 in 2017, compared with 3 in 2007)

Which markets have the potential for expansion in the coming decades?

With almost half of the world now home to some form of SaaS organization, many are wondering where the expansion will head next.

The map highlights one blank area which may see significant growth in the coming years. Used as a force for good, SaaS has the potential to transform the lives of millions of people across Africa. Although some have tried and failed, it is clear that SaaS has the potential to expand across the world - even if it is presently in its infancy in Africa and other parts of the world.

Looking at data from other studies, SaaS also has the potential to transform the way all of us approach our day-to-day work and levels of employee engagement.

Are employees working for SaaS organizations happier than their non-SaaS counterparts?

On the face of it, businesses developing SaaS applications are the embodiment of the positive points of our modern day working culture - for the most part conjuring up the image of a fast-paced working environment with relentless innovation, employee flexibility and innovative reward systems.

Does this atmosphere have any tangible impact on employee happiness - in other words, does working for a SaaS company mean an employee is likelier to have higher job satisfaction than their colleagues at non-SaaS organizations?

Is there any benefit to having happier employees in an organization - SaaS or non-SaaS?

There are undeniable benefits for any organization if employees enjoy working there. Having faith in the company and its product can breed a harmonious culture which helps the team innovate further and respond to customer demand. In addition, productivity may increase and employee turnover is likely to reduce. This is important in a competitive industry such as SaaS, where the rapid pace of change means a high rate of employee turnover can affect product development.

Perhaps most importantly, engaged employees are likely to provide a better experience for their customers. In turn, this is likely to improve customer retention and have a similar effect on the company’s bottom line.

How engaged is the average American employee?

Gallup’s 2018 survey found that only 41% of employees - across all industries - strongly agree that they know what their company stands for and what makes it different from their competitors. The same survey found that a similar percentage of workers did not feel the mission or purpose of their company made them feel their job was important.

Numerous studies have shown that happier employees do have a meaningful effect on their organization. In one study, incentivized employees were almost 20% more productive than their non-rewarded counterparts. In another research piece, happier salespeople brought a 37% increase in sales.

Why are employees at SaaS organizations happier?

The fluid nature of an organization which develops SaaS applications lends itself to engaged employees. Typically, workers will be expected to ask questions and drive product innovation, particularly in smaller organizations.

With SaaS organizations often featuring a significant proportion of remote employees, businesses are able to offer workers a range of benefits and perks that are aimed at keeping their top talent and ensuring

The annual Fortune 100 Best Companies To Work For list provides an insight into some of the best workplaces in the United States. In recent years, tech companies have seen an increased presence on the list, with Google leading the pack in eight years since 2006.

In the 2018 list, Salesforce was ranked as the best place to work in America, having regularly featured on the list in prior years. Acknowledging Salesforce’s “unusual corporate culture from the beginning”, other reasons provided by Fortune for the ranking included:

  • Salesforce’s encouragement of philanthropy and community initiatives, with employees offered 56 hours of paid time each year for voluntary work.
  • Provision of mindfulness rooms and entire floors celebrating the company’s ‘Ohana’ culture (Hawaiian for “family”).
  • Perks including on-site gyms, health insurance for part-timers and college tuition reimbursement

The benefits offered by Salesforce are now being matched by other SaaS organizations which recognise the advantage of retaining talented and engaged employees - which resulted in companies such as Workday and Ultimate Software making it into the top ten of Fortune’s 2019 list.

How has the rise of SaaS contributed to increased security risks?

In the early days of SaaS, one concern IT directors raised was the security threat posed by a lack of on-site physical infrastructure. With data breaches becoming ever more frequent and increasing in size, this concern is not without merit.

Is SaaS less secure than physical infrastructure?

There are anecdotal stories and numerous studies to support both sides of the argument. On one side, a study by AlertLogic found that there was a 51% higher rate of security incidents in on-premises data centers. Alternatively, a report by the Cloud Security Alliance published detailed numerous concerns about SaaS and related data breaches.

Whether as a direct result of SaaS, or simply a by-product of the increased availability of the Internet and the increased savvy of hackers and criminals, there is little doubt that organizations need to exercise increased vigilance to keep company and customer data protected.

Has the finance sector been affected by security issues?

In recent years, there have been several stories highlighting how financial and credit establishments have been affected by data breaches and lax security:

  • Senator Intensifies Probe of Data Brokers (New York Times, Oct 24, 2013). Senator John D. Rockefeller of West Virginia asked the chief executive of Experian for information about a company subsidiary, Court Ventures, which sold sensitive customer data to an identity theft service in Vietnam.
  • Prosecutors Describe Massive Breach of Credit Card Data (Technology Review, Jul 26, 2013). A long-running data breach which involved the theft of over 160 million credit and debit card numbers. A federal prosecutor described it as “the largest hacking and data breach scheme ever prosecuted in the United States.”
  • Heartland Payment Systems Suffers Data Breach (Forbes, May 31, 2015). Attackers stole as many as 100 million credit and debit card numbers, with Heartland paying $140 million in fines and penalties. On May 8, 2015, the company fell victim to a break-in at their Santa Ana, CA offices - resulting in the theft of a significant number of computers and other materials.

These examples show that both physical infrastructure and cloud applications can be equally vulnerable to security breaches if not properly secured.

There is also little doubt that these security breaches can have real consequences for both businesses and their customers - meaning an emphasis on secure payments is more important than ever. This means organizations have to place an increased emphasis on data security to ensure personal and financial data is not put at risk.

SaaS is thriving - will the growth spurt end?

There is little doubt that the SaaS market has grown at an incredible rate in the last twenty years.

With the number of companies embracing cloud applications steadily increasing, combined with the untapped potential of emerging markets around the world, there is little to suggest this growth will slow any time soon.

With 38% of companies already running almost entirely on SaaS applications, it seems only natural to conclude that the SaaS industry as a whole will continue to grow.


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SOURCES

  • Crunchbase, Export of SaaS companies, November 25, 2018.
  • Internet World Stats, “History and Growth of the Internet from 1995 till Today”, June 2018.
  • BetterCloud, “2017 State of the SaaS-Powered Workplace Survey”, May 18, 2017.
  • Gartner, “Gartner Forecasts Worldwide Public Cloud Revenue to Grow 17.3 Percent in 2019”, September 12, 2018.
  • Forbes, “Roundup of Cloud Computing Forecasts and Market Estimates, 2018”, September 23, 2018.
  • Blissfully, “2018 Annual SMB SaaS Trends Report”, 2018.
  • AppsRunTheWorld, “Worldwide Cloud Applications Market Forecast 2016-2020, A Minsky Moment Awaits”, August 5, 2016.
  • Yoann Berno (Medium), “Timing Isn’t Quite Right for SaaS Startups in Africa”, March 16, 2018.
  • Gallup, “Gallup’s Approach to Culture | Building a Culture That Drives Performance”, 2018.
  • Social Market Foundation, “Happiness and productivity: Understanding the happy-productive worker”, October 2015.
  • Harvard Business Review, “The Happiness Dividend”, June 23, 2011.
  • Fortune, “100 Best Companies To Work For”, 2018.
  • Great Place To Work, “Salesforce”, retrieved February 21, 2019.
  • Fortune, “100 Best Companies To Work For”, 2019.
  • AlertLogic, “2017 Cloud Security Report”, 2017.
  • Cloud Security Alliance, “The Treacherous 12 | Cloud Computing Top Threats in 2016”, February 2016.
  • New York Times, “Senator Intensifies Probe of Data Brokers”, October 24, 2013.
  • Technology Review, “Prosecutors Describe Massive Breach of Credit Card Data”, July 26, 2013.
  • Forbes, “Heartland Payment Systems Suffers Data Breach”, May 31, 2015.


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