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, this term was not in common use - but Google Trends data highlights the consistent increase in popularity of users searching for information on SaaS worldwide:
With countless startups entering the fray each month and established companies looking for different 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 that has been 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.
Software as a service is usually hosted via cloud based technology. Users don't need to download the software to their desktop PC and are able to access everything needed via a standard internet web browser (Chrome, Firefox, Safari, etc).
SaaS applications remove the requirement for organizations to run applications on their own machines or in their own data centers. In general, users are able to access the SaaS app from any internet enabled device. Software updates are usually automated and the overall user experience is improved.
The growth of the industry has spawned a variety of products and apps that are now being used on a daily basis - sometimes even hourly by individuals and businesses from all around the world.
How many SaaS companies are there?
There are 15,529 SaaS companies in the world, according to a list of SaaS companies obtained from Crunchbase in June 2020. This figure also includes businesses founded before 1998 that have transitioned to provide SaaS.
According to Crunchbase data, 2018 and 2019 saw a decline in the growth rate of SaaS companies being founded across the globe. 2015 & 2017 saw the highest peaks with 1,469 and 1,460 new SaaS businesses respectively, however in 2018 this figure dropped to 1,196. In 2019, this number declined quite significantly again with only 674 new businesses founded, the lowest number for almost a decade.
* The decline in number of SaaS organizations founded in the past few years may simply be incomplete data for the past few year, but may possibly indicate a plateau being reached at this point in time in terms of number of SaaS companies founded, but continued growth is expected in the mid to long terms as cloud-based technology continues to be adopted and used by more and more existing and new businesses.
The growth of the SaaS industry over the past two decades has been remarkable. Consider these facts - as the new millennium dawned:
- FACT: Marc Benioff had only formed Salesforce the previous year (1999).
- Salesforce has consistently grown and has regularly been seen as the most successful SaaS business in the world. In 2004, they held an IPO (Initial Public Offering) which saw them raise $110 million. Since then, growth has continued and as of 2020, their customer base has hit 150,000 and Salesforce has over 49,000 employees. With a market cap of $156 billion, experts predict that they will continue to dominate the market for years to come.
- FACT: Amazon Web Services was still years away from public use.
- Amazon Web Services (AWS) was founded in 2006. In Q4 of 2019, Amazon’s cloud business generated $9.95 billion which was a 34% increase in revenue from the same quarter the previous year. Although only 11% of Amazon’s current total revenue, AWS has been a “cash cow” for the company and of the $3.88 billion operating income that Amazon reported in Q4 of 2019, 67% is attributable to AWS.
- FACT: Google had only been a search engine for 2 years (1998) and were a decade away from entering the cloud market.
- After AWS arrived, Google needed to act. In 2008 they announced their intention to release their own cloud service. In an effort to compete, Google released their App Engine to 10,000 developers on a first-come-first-serve basis. By 2010 Google Cloud storage was launched and has been growing ever since.
The acceleration has continued at a rapid rate in recent years. Gartner has predicted that there will be a 17% revenue growth in cloud services showing that that the next two decades will be no different:
What is the SaaS revenue forecast for the immediate future?
- - 2018 saw $85 million in cloud application services growth globally
- - In 2019, this figure grew to $99.5 million for SaaS enterprises
- - 2020 is currently forecast to see this consistent growth and the expected revenue is expected to grow to $116 million.
- - 2021 and 2022 are currently forecast to grow to revenues of $133 million and $151.1 million respectively
* Please note that this forecast was released to the public before the Global COVID-19 pandemic and as a result, the state-by-state lockdowns and economic hindrances have not been accounted for.
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 that are 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. Latest data indicates that Internet penetration rate worldwide in 2020 sits at 59.6%.
Will the growth of SaaS continue after the COVID-19 pandemic?
In 2020, the world was confronted with it’s biggest challenge in modern times as the COVID-19 virus arrived and spread quickly across the globe. Although detrimental for most countries' economies, will it stunt the growth of the SaaS landscape?
Early signs are showing that it won’t. Let’s use Kry as an example, a telemedicine app that helps you check symptoms without going to a doctor. Since March 2020, Kry has become the most downloaded application in Europe. Kry used the pandemic as an opportunity to grow and implemented a new product very quickly to help people check to see if they had coronavirus symptoms or not.
Now that the world has had to move into a remote mindset, SaaS companies expect to see continued growth as they are able to function perfectly without the need of people working in an office setting. You can continue to use the SaaS applications while working from home thus making that transition to remote working painless.
Project management and remote communication tools should also see a continued growth as more and more workers are finding themselves given the flexibility to work from home. This ensures that SaaS solutions will be at the forefront of efficiency with remote work/telecommuting.
What are the benefits of SaaS applications?
As SaaS applications have been billed as an alternative to the traditional software installation model, they needed to come with benefits to successfully disrupt the industry:
1. Saving Time
In SaaS, the software (application) is already installed and configured. This is a big advantage to the user as they are able to access what they need almost instantly from the server (cloud). This reduces any time spent waiting previously as it is a much quicker process to get to using the software.
2. Lower Costs
SaaS usually resides in a shared environment where hardware and software costs are low in comparison to the traditional model. It’s cheaper to have a SaaS model as a business but it’s also cheaper for the user too. Previously, major software was only available to those who could afford it but lowering costs have resulted in ISVs (Independent Software Vendors) expanding their customer base by opening the route to smaller businesses or those with less financial security. ISVs/SaaS providers have also lower maintenance costs as they usually tailor this into the costs across all the companies that have access to the software.
SaaS solutions reside in cloud environments and are therefore scalable. This allows for easy integration with other SaaS offerings. Users do not need to purchase new servers, they just need to enable the integration to have access.
4. Instant Upgrades
ISVs are regularly upgrading their software solutions. Once they have updates or new releases, they can instantly make this available to their customers. Costs are reduced for both the SaaS provider and the user as normally an upgrade only involves a quick installation. The traditional model would see users having to fork out a lot of money for the latest release.
One reason SaaS is becoming more and more popular is the focus that software businesses have on user-friendliness. The software usually comes with the best practices and samples inside it. Users also get to test the software functionality or a new feature in advance of a release. Many ISVs allow free trials and ‘sneak peaks’ to allow their users to try before they buy.
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:
- - Worldwide market revenues from SaaS companies could hit $151 billion by 2022 (Gartner)
- - From 2010 onwards, the average spend per company on SaaS applications has increased year-over-year (Blissfully).
- - 80% of businesses already use at least one SaaS application (99 firms)
- - The fastest growing SaaS companies averaged $250k in MRR and were only losing around 3.2% of that revenue each month to churn. (InsightSquared)
- - SaaS companies in the $7.5MM-$15MM range are among the fastest growers. (forentrepreneurs)
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 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 their 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 2019, Salesforce was the fastest growing SaaS solution and had revenues of $17 billion. Currently, 75% of SaaS spend is focused on the CRM market. This shows the decrease in interest that businesses have for on-premises deployments.
In 2019, the five biggest functional markets for cloud apps were:
- 1. Customer relationship management (23.9%)
- 2. Human capital management (13.9%)
- 3. ERP Services and Operations Management (7.9%)
- 4. Collaboration (7.0%)
- 5. Procurement (4.6%)
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 year after year.
In terms of market capitalization, the top five SaaS organizations as of June 2019 were:
- 1. Salesforce ($117.8bn)
- 2. Servicenow ($50.9bn)
- 3. Workday ($46.5bn)
- 4. Shopify ($33.7bn)
- 5. Atlassian ($31.5bn)
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. The expected growth has continued but since a large jump in 2017, the acceleration of CRM growth has been consistent and steady. The forecast for the next 3 years is expected to continue at this pace.
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.
Experts also predict that the following trends to the SaaS landscape will grow throughout 2020 and beyond the next decade:
1. Artificial Intelligence
Artificial Intelligence (AI) has popped up all over the place over the last few years. PwC has predicted that widespread implementation will see the AI industry grow to be worth $15.7 trillion over the next couple of years. With the ability to personalize, automate and speed up processes in a secure way should see AI-optimized SaaS solutions becoming a part of all of our lives.
The SaaS industry will evolve as innovation accelerates. Over the next couple of years, SaaS is expected to migrate into more of a PaaS (platform as a service) model. This model empowers businesses to build custom apps as addons to their original service. Salesforce has already launched their PaaS service and others are expected to follow. The enhancements to features and functionality of the product will give businesses more time to focus on commercial initiatives.
As the SaaS industry has its large players in the market, competition intensifies. Micro-SaaS have emerged as smaller versions that are usually run by small companies to provide micro products such as complimentary add-ons or by creating missing features. Micro-SaaS solutions will only focus on specific customers and won’t be backed by large hedge funds - the offering reaches a specific target audience but will enhance existing SaaS solutions.
4. Mobile Solutions
By 2022, experts predict that 72.6% of the world’s population will be browsing the internet through mobile devices. Companies across a variety of sectors are currently operating parts of their business through tablets or smartphones - this trend will increase. As a result, expect to see more and more mobile-only or mobile focused SaaS solutions being developed over the coming years.
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 2,517058 SaaS organizations trading in California as of June 2020 November 2018. This means over 158% of the worldwide SaaS market is based in the Golden State.
Of the 2,517 SaaS businesses that are operating within California, 758 are specifically within Silicon Valley. These figures confirm that Silicon Valley is still the SaaS hub within the U.S.
However, more startups are being founded outside of the United States, contributing to a more diverse and widespread marketplace.
A big example of a city that has embraced SaaS entirely is Tel Aviv in Israel. There are currently 1,012 software businesses operating from the Middle Eastern city meaning that they have now overtaken Silicon Valley as the world’s startup capital. Is the rest of the world catching up to the U.S.?
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:
According to the latest data from Getlatka, the U.S. is still the country with the highest revenue ($14.6bn), highest total funding ($16.2bn) and total number of employees (80k).
Other countries are catching up. The latest countries seeing a boom in SaaS companies in 2020 include:
- - Canada (revenues of $725m)
- - United Kingdom (revenues of $282m)
- - India (revenues of $67m)
- - Germany (revenues of $60m)
- - France (revenues of $53m)
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.
There is one region which could see significant growth over 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?
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 their workers a range of benefits and perks that are aimed at retaining their top talent while also attracting the strongest available candidates for any open vacancies.
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 from 2006 to 2017.
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:
- - 923% of employees said Salesforce was a great place to work.
- - 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. As a result, other SaaS companies such as Workday (number 5) and Ultimate Software (number 2) made it into the top ten of Fortune’s 2019/20 Top 10 list ahead of Salesforce (number 6).
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 have done surveys since the year 2000 to understand the engagement levels of American employees, here are some interesting findings:
- - In May 2020, the percentage of “engaged” employees in the U.S. (those who are highly involved, enthusiastic and committed to their work) reached 38%
- - The percentage of those actively “disengaged” (miserable at work, spreading their unhappiness) has continued at 13% tied from the 2018 and 2019 results.49% of workers are “not engaged” (psychologically unattached). These employees put their time in but with limited effort.
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.
Is SaaS less secure than physical infrastructure?
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.
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 quarter of a century.
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 the average employee currently using 8 SaaS apps at work, it seems only natural to conclude that the SaaS industry as a whole will continue to grow.
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