Dataquest

Publication Date: 1 July 2010 ID Number: G00201597

Forecast Analysis: Software as a Service, Worldwide,

2009-2014
Sharon A. Mertz, Chad Eschinger, Tom Eid, Hai Hong Swinehart, Chris Pang, Laurie F. Wurster,
Yanna Dharmasthira, Ben Pring

After a decade of use, adoption of software as a service (SaaS) continues to grow and
evolve within the enterprise application markets, as tighter capital budgets demand
leaner alternatives, popularity and familiarity with the model increases, and interest for
platform as a service and cloud computing grows. Adoption varies between and within
markets. Although use is expanding to a wider range of applications and solutions, the
most widespread use is still characterized by horizontal applications with common
processes, among distributed virtual workforce teams and within Web 2.0 initiatives.

Key Findings
Project and portfolio management (PPM) emerged in 2009 as a fast-growing market for
SaaS with a compound annual growth rate (CAGR) of more than 41% projected for the
next five years. Tight budgets and frustrated users have forced mature vendors to
provide SaaS alternatives to counter new entrants to the market with SaaS-only low-cost
offerings.

Office suites and digital content creation (DCC) also continue to show rapid growth for
SaaS although starting from a smaller base, with a 31.8% CAGR and a 35.7% CAGR,
respectively. Adoption is driven by new entrants in office suites but gated by Internet
broadband availability for DCC.

The content, communications, and collaboration (CCC) market continues to show the
widest disparity of SaaS revenue generation, with SaaS representing 4% of enterprise
content management (ECM) and approximately 82% of Web conferencing.

Adoption of SaaS within ERP and supply chain management (SCM) varies based on
process complexity.

SaaS within ERP remains a relatively small proportion of the overall market (in
comparison with other software segments featured in this report) at approximately 6% in
2009.

SaaS continues to penetrate the CRM market, accounting for nearly 24% of total CRM
market revenue in 2009. SaaS in CRM exhibits more-general market adoption, ranging
between 11% and nearly 40% of total software revenue, depending on the CRM
subsegment. SaaS may exceed 26% of CRM market total revenue in 2010.

© 2010 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication in any form
without prior written permission is forbidden. The information contained herein has been obtained from sources believed to
be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although
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advice or services and its research should not be construed or used as such. Gartner shall have no liability for errors,
omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein
are subject to change without notice.
TABLE OF CONTENTS

Assumptions ................................................................................................................................ 4
Analysis ....................................................................................................................................... 4
Changes in Market Conditions ......................................................................................... 4
Forecast Overview ........................................................................................................... 5
Market Landscape ......................................................................................................... 11
CCC Markets .................................................................................................... 12
SaaS Drives CRM Market Growth Despite Leaner Budgets, While Competition
Heightens.......................................................................................................... 13
SaaS Within ERP — Penetration Varies by Submarket but Still Most Notable in
HCM ................................................................................................................. 15
Development of SaaS in the DCC Software Market Depends on Internet Capacity16
SaaS Offerings Complement and Coexist With Traditional Office Suite Products 17
PPM SaaS Alternatives Gain Favor in Difficult Times ......................................... 17
SaaS SCM Solutions Experience Double the Growth of the Traditional SCM
Market ............................................................................................................... 18
Other Markets ................................................................................................... 19
Regional Context and Outlook ....................................................................................... 19
SaaS in Asia/Pacific .......................................................................................... 19
SaaS in Europe ................................................................................................. 21
Current SaaS Adoption ......................................................................... 21
SaaS Application Use ........................................................................... 22
Future SaaS Investment ....................................................................... 24
SaaS in North America ...................................................................................... 24
Current SaaS Adoption ......................................................................... 24
SaaS Application Usage ....................................................................... 24
Future SaaS Investment ....................................................................... 25
Business and Market Drivers and Inhibitors.................................................................... 25
Factors Promoting Adoption .............................................................................. 25
Factors Limiting Adoption .................................................................................. 26
Market Model ............................................................................................................................. 26
Recommended Reading ............................................................................................................. 27

LIST OF TABLES

Table 1. Evolving Role of SaaS as Segments Mature ................................................................... 7

Table 2. Total Software Revenue Forecast for SaaS Delivery Within the Enterprise Application
Software Markets, 2007-2014 (Millions of Dollars) ........................................................................ 9
Table 3. SaaS by Enterprise Software Market, Representative Vendors ..................................... 11

LIST OF FIGURES

Figure 1. Total Software Revenue Forecast for SaaS Delivery Within the Enterprise Application
Software Markets, 2007-2014 Millions of Dollars........................................................................... 9
Figure 2. Percentage of SaaS by Enterprise Application Software Markets, 2009-2014............... 10

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© 2010 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
Figure 3. Reasons for SaaS Adoption ......................................................................................... 22
Figure 4. SaaS Adoption by Application ...................................................................................... 23

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© 2010 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
ASSUMPTIONS
Assumptions that impact the growth of SaaS include broader industry trends, changing user
preferences and consumption patterns, and factors that are germane to each of the enterprise
application markets included in this forecast. Primary assumptions include the following:

Continual cost pressures on businesses drive the search for less-capital-intensive

alternatives and opportunities to operationalize costs.

More widespread use of SaaS in companies of all sizes, and the appearance of larger
deals and expanding deployments within enterprises legitimizes the model and
broadens adoption.

Growing interest and slowly developing familiarity with cloud computing contributes to
the acceptance of SaaS as the application layer in the broader cloud stack.

Rising maintenance fees from the "megavendors," such as SAP and Oracle, can
constrain budgets and encourage buyers to entertain other options and choice of
vendors.

New expectations for time to market and more-rapid return on investment (ROI) demand
ease and speed of deployment for enterprise solutions.

The extension of SaaS to the platform creates new opportunities for developers and
independent software vendors (ISVs) and more solution choices for buyers.

Financial markets favor investments in vendors with subscription-based revenue models

due to the potential for greater margins and incremental market opportunity.

Increased availability of broadband extends the viability of Web-based service solutions

globally, though network instability remains an issue in certain countries.

Growth opportunities for vendors exist across various submarket segments, in specific
vertical industries, and within underserved niches, and within the small or midsize
business (SMB) market.

Increasing functional sophistication of some SaaS vendors and growing solution

portfolios offers a more extensive range of options to address business requirements.

ANALYSIS
This report discusses trends, market forces, and forecast estimates for SaaS in the enterprise
application markets. Gartner's forecast represents our most recent data for SaaS in the enterprise
application software markets, updating "Market Trends: Software as a Service, Worldwide, 2008-
2013, Update" published in November 2009. Market-level forecasts for the enterprise application
markets featured in this report, including detailed regional and country-specific forecasts, can be
found in "Forecast: Enterprise Software Markets, Worldwide, 2009-2014, 1Q10 Update."

Changes in Market Conditions

Adoption of the on-demand deployment model has grown for nearly a decade, but its popularity
has increased significantly within the past five years. Initial concerns about security, response
time, and service availability have diminished for many organizations as SaaS business and
computing models have matured and adoption has become more widespread. Usage and

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vendors' on-demand "ecosystems" continue to evolve to provide additional business and
technology services, more-vertical-specific functionality, and stronger communities of partners
and buyers. Although some attrition occurred during 2009 due to business workforce reduction,
nearly all SaaS vendors grew revenue during the economic downturn, as buyers continued to
confirm their acceptance of on-demand. Expect adoption of SaaS to far outpace market growth
through 2014.
The composition of the worldwide SaaS landscape is evolving as vendors continue to extend
regionally, increase penetration within existing accounts and "greenfield" opportunities, and
expand their solution offerings, either organically or through acquisition. During the past 12
months to 18 months, Gartner has observed the following shifts in how SaaS is sold, consumed
and perceived by vendors and buyers:

There is increasing involvement from executives in purchasing decisions, as well as

greater participation from IT in the purchase process due to larger deals, the expanding
footprint of SaaS in the enterprise, and higher requirement for downstream integration
as SaaS becomes incorporated in the enterprise business process.
Growing communities of professional service providers are emerging for SaaS, not only
to fulfill technical integration and deployment requirements, but also to assist buyers with
process re-engineering and change management initiatives. Firms of all sizes are
growing practices focused on SaaS, ranging from small-to midsize deployments to large
implementation efforts in the complex deals.

An increasing number of enterprises are using a variety of SaaS applications from

multiple vendors that were procured and deployed without participation from IT, creating
management issues and challenges.

SaaS deployments are becoming larger, with deals more frequently appearing in the
range of thousands to tens-of-thousands of subscriptions within large enterprises.

Social media and social software is becoming increasingly integrated with SaaS
solutions, as social platforms such as Facebook and Twitter are leveraging customer
service, sales, and marketing initiatives.

Deal structures are slowly changing to more often accommodate an actual pay-for-use
model, rather than a pay-up-front subscription model, especially in emerging markets, to
reach a wider audience and respond to customer demand.

Many buyers are facing application migrations to service-oriented architectures as

vendors rearchitect their stacks, and are entertaining SaaS alternatives for specific
functionality, particularly when the solution is not available from the incumbent vendor.

Immediate financial advantages may be outweighed by downstream costs as users

demand richer functionality and as customization or integration requirements with on-
premises applications increase.

Forecast Overview
During 2009 and 2010, the significant industry buzz surrounding SaaS and other off-premises
models shifted to cloud computing. Cloud computing is a broad concept, of which SaaS is only
one variation, representing the application layer of the overall cloud architectural stack. SaaS has
been a "lead indicator" of the cloud concept for some time. Gartner defines cloud computing as a
style of computing in which massively scalable IT-enabled capabilities are delivered as a service
to external customers using Internet technologies, where services are tracked with usage metrics

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to enable multiple deployment models. One IT-related function can be a software application. If
the software application is written in such a way that it meets the characteristics of this definition,
then SaaS is considered a form of cloud computing. Gartner defines SaaS as software that is
owned, delivered and managed remotely by one or more providers. The provider delivers an
application based on a single set of common code and data definitions, which is consumed in a
one-to-many model by all contracted customers anytime on a pay-for-use basis, or as a
subscription based on use metrics. Based on our guidance calls with hundreds of vendors,
Gartner estimates that 75% of the current SaaS delivery revenue could be considered as a cloud
service, and that could exceed 90% by 2014 as the SaaS model matures and converges with
cloud services models. For further discussion of the broader cloud service environment, refer to
"Forecast: Public Cloud Services, Worldwide and Regions, Industry Sectors, 2009-2014."
It is important to also differentiate SaaS from hosting or application management or application
outsourcing. Because SaaS and cloud are hot concepts in the market, many suppliers are
rebranding their hosting or application management or application outsourcing capabilities as
SaaS or are claiming their solutions are available "in the cloud." Much relabeling of more-
traditional application outsourcing approaches is occurring. Suppliers run the risk of confusing
and antagonizing buyers if they persist in this approach. Enterprises run the risk of getting nasty
shocks when the thing they thought they were buying turns out to be something altogether
different. Hosting and application management are not synonymous with SaaS, nor do they
necessarily comply with the definition of cloud computing.
Another complication in the difficulty of distinguishing between SaaS and hosting is that leading
SaaS vendors increasingly offer customization capabilities that allow customers (either end users
or ISV partners) to develop entirely customized versions of the core SaaS application, or also
pure custom applications. These applications are no longer strictly one-to-many, and therefore,
by definition, are more akin to being called a hosted application. On-demand vendors have
extended their services through alliances, partner offerings, and more recently by offering and
promoting user application development through platform as a service (PaaS) capabilities. The
development of custom PaaS applications is gaining momentum with ISVs that are developing
multitenant SaaS applications, and with enterprises that are shifting development resources to
create custom applications for the organization. Where a custom application is developed on
PaaS it is no longer, by definition, available to other customers and, thus, is not a SaaS
application but simply an application developed by the client and hosted by the provider. During
the market share analysis, Gartner develops estimates that recognize the difference between
revenue that is attributable to SaaS and that which represents PaaS for vendors that offer
solution and platform capabilities to their customer base. Because that revenue attributable to
PaaS is still extremely small, this issue is more a theoretical debate than a pressing practical one.
But Gartner will watch and comment on it during the next few years
Adoption of the on-demand deployment model has grown for the past decade, and as
organizations reach increasing levels of maturity and gain familiarity with the model, initial
concerns about security, response time, and service availability have diminished, and adoption
has become more widespread. Users are demanding more functionality and better contractual
terms as they expand their use of SaaS in the enterprise by extending existing on-premises
applications, building net new SaaS solutions, or replacing existing on-premises applications (see
"User Survey Analysis: Software as a Service, Enterprise Application Markets, Worldwide,
2010").
Although use and adoption continues to grow, deployment of SaaS still varies between the
enterprise application markets and within specific market segments because of buyer demand
and applicability of the solution. The value proposition of SaaS varies, depending in part on the
stage of maturity of the SaaS offering (see Table 1). For example, early in the evolution of a
market for wiki technology, SaaS enables enterprises to enable user and IT experimentation with

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that technology at minimum risk. Much later in the evolution of a market for e-mail technology,
SaaS may enable enterprises to benefit from the dramatic economies of scale that a very large
service provider may be able to achieve. The table explores the value proposition and value
magnitude variations by maturity level. Not all market segments at any particular maturity level
are equally appropriate for SaaS. There are many other factors to consider (such as degree of
dependence on, and integration with, internally developed or highly tailored systems). For
example, CRM and e-mail are mature markets, but, for many enterprises, it should be somewhat
easier to move to a SaaS e-mail offering than a SaaS CRM offering. Table 1 profiles the evolving
role of SaaS as application market segments mature.

Table 1. Evolving Role of SaaS as Segments Mature

Potential Value
SaaS Value Proposition Magnitude Examples Vendor Risk
Emerging Easy for users (and IT) to High Social software High
experiment because of low (such as
barrier to entry; early communities and
experimentation leads to earlier wikis)
exploitation for business benefit
High Growth Lessen the effect of skill Modest (a lot of Web conferencing Moderate
shortages, and make it easier to switching costs will
move away from the product, remain)
managing peak loading
Mature Exploit SaaS providers' High E-mail, CRM, Low
economies of scale to drive PPM
down cost.
Declining Lessen the effect of skill Moderate Not apparent Moderate
shortages, and make it easier to
move away from the product.
Source: Gartner (June 2010)

When considering market size or growth, all maturity levels are not equal. SaaS business volume
in emerging market segments will be far lower, and with potentially far higher growth rates, than
SaaS business volume in a mature market segment. A comparison of compound annual growth
rates and estimated SaaS revenue between markets illustrates this point.
This forecast is focused on enterprise application software and does not include the infrastructure
software markets, such as application development, data management, security software, and IT
operations software. Although Gartner sees other markets where SaaS is developing, this is a
representative view of market potential and can be used as a proxy for adoption. The major
enterprise application software markets that Gartner tracks, and that are included in this forecast,
are:

CCC
CRM

DCC
ERP

Office suites

PPM

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 SCM
The forecast also includes an estimate for a category of software referred to as "others." Other
application software represents a group of applications (such as financial governance, risk, and
compliance management; and payment services) that include SaaS offerings.
Changes to this forecast are as follows:
For the CCC segment, e-learning and enterprise instant messaging have moved to the
"Other Application Software" category and enterprise e-discovery has been added.

PPM estimates have been added to the market forecasts and have been moved from
the "Other Application Software" category.
The rapid adoption of SaaS has contributed to growth in varying degrees across the enterprise
software markets. Gartner's forecast for estimated SaaS total software revenue within the
enterprise application software markets is a 15.3% overall CAGR from 2009 through 2014, or
more than $15 billion attributed to SaaS at the end of the forecast period. This represents a lower
CAGR, down from 17.7% in the November, 2009 forecast. Declines are more reflective of lower
overall IT spending than waning interest in the SaaS deployment model. The updated forecast
represents a shift in total SaaS revenue from just over 10% of the combined markets in 2009, to
more than 16% of these combined markets in 2014. The forecast in Figure 1, Table 2 and Figure
2 cover SaaS for enterprise application software markets, aligned to estimated revenue. The
forecast is based on results from hundreds of vendors across the markets.

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Figure 1. Total Software Revenue Forecast for SaaS Delivery Within the Enterprise
Application Software Markets, 2007-2014 Millions of Dollars

Source: Gartner (June 2010)

Table 2. Total Software Revenue Forecast for SaaS Delivery Within the Enterprise
Application Software Markets, 2007-2014 (Millions of Dollars)
CAGR (%)
2007 2008 2009 2010 2011 2012 2013 2014 2009-2014
CCC 1,782 2,157 2,488 2,862 3,382 4,089 4,935 5,652 17.8
Office Suites 51 56 68 100 150 199 248 271 31.8
DCC 18 44 65 92 143 207 277 298 35.7
CRM 1,231 1,872 2,279 2,502 2,831 3,177 3,598 4,015 12.0
ERP 1,044 1,177 1,248 1,346 1,465 1,612 1,805 2,013 10.0
SCM 582 690 807 922 1,056 1,200 1,378 1,547 13.9

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 CAGR (%)
2007 2008 2009 2010 2011 2012 2013 2014 2009-2014
PPM 22 30 70 138 216 280 339 394 41
Other Application
Software 304 385 462 580 718 855 1,019 1,084 18.6
Total Enterprise
Software 5,035 6,410 7,486 8,543 9,961 11,620 13,599 15,275 15.3
Source: Gartner (June 2010)

Figure 2. Percentage of SaaS by Enterprise Application Software Markets, 2009-2014

Source: Gartner (June 2010)

Gartner defines total software revenue as revenue from new licenses, subscriptions, and software
maintenance and technical support services that include new version license sales to
update/upgrade an existing license to a new version, telephone support, and on-site remedial
support. SaaS is primarily a software delivery and management approach that exists in
established markets, such as CRM or ERP. However, a valid approach is to total vendors'

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revenue from SaaS-based delivery in these established markets to create a market size and
forecast for SaaS. The forecast is based on two base years of actual vendor revenue estimates
plus a five-year forward projection, an approach that is consistent with Gartner's market-level
forecasts for the enterprise application markets. This SaaS data, therefore, is a composite market
that consists of data sourced from other markets.

Market Landscape
The vendor listing in Table 3 is representative, but not inclusive, of each category; vendors are
listed in alphabetical order. Additional vendors may also have functionality in a software product
category, but are not identified in Table 3. For the CCC segment, e-learning and enterprise
instant messaging have moved to the "Others" category and enterprise e-discovery has been
added.

Table 3. SaaS by Enterprise Software Market, Representative Vendors

Representative Vendors
CCC ECM — Alterian, Auersoft, Clickability, Content Management AG, CrownPeak,
EpiServer, Eprise (SilkRoad Technology), Hyland, IBM, NetReach, Open Text,
PaperHost, PaperThin, SpringCM, Treeno Software, Xerox
E-discovery: AccessData, Anacomp, Autonomy, Case Central, Commvault, Epiq
Systems, FTI, Huron Consulting, Iron Mountain, KCura, LexisNexis, Renew Data,
Summation
E-mail — Cisco, Google, HP, IBM, Microsoft
Search — Atomz, SLI Systems
Team collaboration — DesignLinks International, EMC, Grove Technologies,
Huddle/Ninian Solutions, IntraLinks, Jive Software, TeamSpace
Web conferencing — Adobe, AT&T, Cisco, Citrix, IBM, InterCall (Genesys
Conferencing), Microsoft, NetViewer
CRM Sales — Access Commerce, ATG, Callidus, BigMachines, CDC Software, Demandware,
Firepond, Imano, Involve Technology, Kadient, Microsoft Dynamics CRM, NetSuite,
Oracle CRM On Demand, Sage, salesforce.com, SAP, SugarCRM,Venda, Xactly, Zoho
Marketing — Alterian, Aprimo, Assetlink, Elateral, ExactTarget, Coremetrics, Genalytics,
L-Soft, Lyris, Marketingisland, Microsoft Dynamics CRM, Neolane, NetSuite, Responsys,
RightNow Technologies, SAP, SAS Institute, Silverpop, Unica
Customer service and support — AIM Technology, Confirmit, eGain, Enkata,
HardMetrics, InStranet, InVision, Knowledge Solutions, Merced Systems, Oracle,
Parature, RightNow Technologies, salesforce.com, SAP, Teleopti, TOA Technologies
DCC Adobe, Corel, Google, Microsoft, Avid, Yahoo, Paint.NET, Serif
ERP Human capital management — CornerStpne on Demand, CyberShift, Infor (Workbrain),
Kenexa, Saba, SilkRoad, Softscape, Sonar 6, SuccessFactors, Taleo, Ultimate Software,
VirtualEdge, Workday, Workscape
Financial management systems — FinancialForce,com, Intaact, Exact Online, NetSuite,
SAP (Business ByDesign), Twinfield, Workday
Manufacturing & Operations — Plex Systems, NetSuite, SAP (Business ByDesign)
Office Suites Adobe, AdventNet, Ajax13, Approver.com, Corel, ExpressO, Google, iNetOffice,
Microsoft, Open Source Software Institute, Peepel Technology, Sheetster, Simple
Groupware Solutions, Smartsheet.com, Software Garden, Team and Concepts,
ThinkFree, TrimPath, Vyew

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 Representative Vendors
PPM @Task, Atlantic Global, Augeo, CA, Clarizen, Compuware, Daptive, Element Software,
EPM, Genis Inside, HyperOffice, Innotas, Instantis, OpenAir, Planview, PowerSteering,
Project Inverision, Project.net, ProjectPlace, Qtask, Severa, Skire.com, Tenrox and VCS
Online.
SCM Sourcing/procurement — Ariba, Emptoris, Ketera, Procuri, Quadrem
Supply and demand chain planning — E2open, Elemica, Agentrics, BetweenMarkets,
Kinaxis
Warehouse management — Accellos, SmartTurn (RedPrairie)
Transportation management — BridgePoint, Descartes, GT Nexus, Log-Net,
Management Dynamics/BridgePoint, TradeBeam
SPP — MCA Solutions, Servigistics
Others Expense management — Cerylion, Invoice Insight
Compliance management — Axentis (Wolters Kluwer), BI International, Paisley
(Thomson Reuters)
E-learning — ACS Learning Services, GeoLearning, Global Scholar, Learn.com, Mzinga,
NIIT, OutStart, Plateau Systems, Saba, SumTotal
Instant messaging — FaceTime Communications, Google, Jabber, MessageLabs
(Symantec)
Disaster management — Send Word Now
Data cleansing — HyperQuality
Business intelligence — LucidEra
Data integration — Informatica, Hubspace
Business process management — Appian, Savvion
Storage — Amazon, Google, Symantec
Retail management — DigiPoS Store Solutions
Healthcare management — TriZetto
Physical security management — CrimeReports
SPP = service parts planning
Source: Gartner (June 2010)

CCC Markets
For CCC technologies, SaaS use varies across the market segments. The projected five-year
CAGR for revenue attributed to SaaS in this market is nearly 18%, versus more than 11% CAGR
for total software revenue for all delivery models. For certain markets, such as ECM and search,
SaaS is barely used at all, while for e-learning and Web conferencing, it is the predominant form
of software access. Recent market analysis for SaaS adoption in 2009 indicates the following:

ECM — Very small adoption, approximately 4% of total software spending; early

adoption for Web content management and in related markets, such as e-mail
management, records management, and digital asset management.

E-mail — Much more focused on the consumer segment rather than the enterprise
segment; Cisco's entry in November 2009, Google's entry in February 2007 and
Microsoft's SaaS-based Exchange and Business Productivity Online Suite delivery may
drive accelerated adoption starting in 2011, but SaaS represented about 5% of the total
enterprise market spending in 2009.

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 E-discovery — Multiple actions and technologies are used as part of the e-discovery
process. The most popular use of SaaS delivery is for the processing, review, analysis
and production functions, which accounted for approximately 44% of vendor revenue in
2009.

Search and information access — Limited market impact at this time, with total market
spending of about 4% to 5%.

Team collaboration — A growing segment gaining in popularity from influences from

social software and distributed virtual teams; SaaS represents approximately 45% of
total market revenue in 2009.

Web conferencing — SaaS accounts for approximately 82% of total market revenue in
2009; on-premises offerings are increasingly taking hold and so are hybrid offerings that
combine hosted and on-premises access.

SaaS Drives CRM Market Growth Despite Leaner Budgets, While

Competition Heightens
For the past five years, SaaS has continued to represent a key driver of growth in the CRM
market. SaaS revenue grew at 19% within the CRM market during 2009, compared with slightly
positive growth of 1.2% for the CRM market overall. SaaS in 2009 represented nearly 24% of the
total CRM software market revenue, or more than $2.2 billion, nearly double the 2007 estimates.
Gartner expects growth to continue, with SaaS representing 26% to 27% of the CRM market total
software revenue in 2010.
More than half the historical SaaS revenue for CRM has come from salesforce.com in each year,
with strong double-digit growth annually, and total company revenue exceeding $1.2 billion in
January 2010. Salesforce.com continues to enhance its portfolio functionality with Sales Cloud 2,
Service Cloud 2, and the Collaboration Cloud (Chatter), introduced during Dreamforce in
November 2009. Regional business expansion continued in 2009 as salesforce.com officially
opened its first international data center in Singapore and signed its first wholesaler agreement
with software distributor Tallard Technologies, which will act as a value-added wholesaler
throughout all of Latin America except Colombia. Salesforce.com continues to actively promote
its growing PaaS solution, force.com, and claims 150,000 custom-built applications on the
platform. The rapidly growing PaaS community is evolving the nature of on-demand from its early
days of simplified, repeatable application solutions to an enterprise-specific development platform
on demand.
The market landscape for on-demand CRM continues to evolve and mature as the availability
and use of SaaS solutions becomes more pervasive. Greater market competition and increased
focus by the megavendors reinforces the legitimacy of on-demand, mitigating initial objections
about security and availability for many, as acceptance of SaaS as a viable model for enterprise
computing services grows. SaaS vendors are responding to increasing demand to incorporate
access to social software and social technologies into solutions, such as salesforce.com's
acquisition of Jigsaw in 2010, RightNow's acquisition of HiveLive in 2009, or by providing
interfaces to popular social forums such as Twitter and Facebook. The rapid adoption of SaaS
and the marketplace success of salesforce.com have compelled vendors without an on-demand
solution to acquire smaller niche SaaS providers or develop the solution internally in response to
increasing buyer demand. Acquisition activity continues, as vendors across the CRM market
acquire smaller on-demand firms to complement their product portfolios, such as CDC's
acquisition of Truition, NetSuite's acquisition of QuickArrow, and Unica's acquisition of
MakeMeTop. SAP, Microsoft, and Callidus developed their own solutions, but with varying

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degrees of success and market adoption. Despite a widening field of competitors, salesforce.com
continues to maintain its leadership position for SaaS CRM.
Recent survey data reinforces the intention to deploy more applications to an on-demand
environment. Worldwide survey results in 2010 indicate 95% of respondents expect to maintain or
increase SaaS investments (see "User Survey Analysis: Software as a Service, Enterprise
Application Markets, Worldwide, 2010"). Many pure-plays continue to perform well, and most
traditional on-premises vendors offering SaaS enjoy higher growth rates for their on-demand
offerings than for traditional software licenses. Vendors are experiencing increasing pressure to
negotiate on price and provide more-flexible contractual terms, and the competitive environment
is intensifying. For example, RightNow Technologies officially announced their Cloud Services
Agreement in March, 2010, which offers more-flexible terms and the ability to rebalance usage.
Many vendors are offering free trial periods for their solutions, and extremely competitive pricing.
Microsoft, for example, introduced an offer in late 2009 targeting salesforce.com and Oracle on-
demand users that provided the option to switch to CRM Online at no cost for the first six months,
with terms which a included a pay-as-you-go basis. This was followed by another offer in April
2010, designed to entice existing Microsoft Dynamics GP customers to adopt CRM Online at a
rate of $19 per user per month. Gartner believes that market competition within CRM for SaaS
will continue to be fierce, as vendors seek to differentiate and show value in solution offerings and
contractual arrangements to a more-astute customer base in an increasingly commoditized
environment.
Although the sales subsegment still represents the largest contributor to SaaS revenue, demand
is increasing for marketing automation and customer service and support solutions. Vendors that
offer both on-premises and on-demand solutions are shifting their customer bases and revenue
models to a greater proportion of SaaS in response to market demand and more highly
scrutinized budgets. Vertical-specific SaaS solutions are also growing for major vertical and
microvertical sectors, enabled by development efforts of enterprise service providers, small niche
players, and development organizations, such as those within the Microsoft partner channel. We
expect that growth will continue through 2010, benefiting pure-play SaaS providers and other
traditional on-premises vendors that now offer this deployment option. In 2014, SaaS within the
CRM industry is expected to exceed $4 billion in total software revenue, representing more than
32% of the overall CRM market.
Adoption of SaaS in the CRM market also varies within each subsegment. The majority of SaaS
total software revenue within the sales subsegment is represented by sales force automation,
where benefits of rapid time to deployment and ease of configuration for sales administrators
make it an attractive alternative to on-premises solutions. Interest has been growing for e-
commerce SaaS solutions in business-to-consumer environments, although some buyers
express concerns about a potential lack of differentiation, impact on the total IT portfolio,
integration challenges with on-premises applications, and uncertainty over data ownership (client
data versus aggregated data). Although they are still relatively new, SaaS solutions for incentive
compensation management have been gaining popularity, particularly among SMBs with basic or
moderate levels of complexity in their compensation structures and functional requirements. The
sales subsegment will remain the largest contributor to CRM SaaS during 2010, representing less
than 75% of SaaS revenue within the CRM market. Currently SaaS accounts for more than 40%
of overall sales subsegment revenue.
The broad categories of campaign and lead management and marketing resource management
represent the most significant use of SaaS within marketing automation. More specifically, e-mail
marketing, Web analytics, and community marketing solutions have been accepted as a SaaS
model and support overall campaign management functionality. Most deployments are still
operationally or tactically focused, emphasizing the usual benefits of ease of deployment and
use; less IT involvement; and predictable, subscription-based cost structures. SaaS in marketing

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automation is expected to exhibit the highest CAGR, but it will remain the smallest subsegment
within CRM throughout the forecast period. SaaS total software revenue represents just over 11%
of the marketing automation subsegment.
The popularity of SaaS within customer service and support is increasing with the success of
vendors such as salesforce.com and RightNow, although it still represents a relatively small
percentage of subsegment revenue. Call centers with lower call volume and limited workflow
requirements, such as B2B customer service centers, are generally better candidates for SaaS.
On-demand solutions in the call center can offer a cost-effective alternative to costly on-premises
maintenance renewals, and allow buyers to take advantage of newer technologies and
functionality. Greater demand for SaaS in areas such as knowledge management, workforce
management, quality management, and e-mail response management is expected as use
evolves and buyers evaluate alternatives as replacements for legacy applications. Gartner
expects SaaS in customer service and support to account for more than 12% of customer service
and support subsegment total software revenue during 2010.

SaaS Within ERP — Penetration Varies by Submarket but Still Most Notable
in HCM
The proportion of revenue attributed to SaaS within the ERP market remains consistent to
previous estimates at a little more than 6% of the total market with slow annual growth. For 2009
total SaaS revenue for the ERP market was estimated at $1.25 billion. By year end 2010, we are
projecting this to increase a further 8% to $1.35 billion in total software revenue.
The penetration of SaaS within ERP varies greatly between subsegment, with HCM being the
most penetrated (in terms of adoption and revenue growth) and EAM and manufacturing being
relatively unaffected by SaaS. Observations from client inquires and industry trends suggest that
SaaS as a delivery method for ERP is more readily considered than in previous years, but we
have not seen a mass switch in preference from on premise to SaaS based ERP solutions. Only
a small handful of vendors have delivered anything close to "full suite ERP functionality," but
within individual ERP domains, a number of increasingly strong vendors provide solutions only via
SaaS. However, these vendors are still small compared with the "megavendors" and so they
struggle for brand recognition outside their home regions. As SAP moves away from ramp-up
mode and closer to general availability for its ByDesign product, this will bring further attention
(and to some extent validation) to the existing SaaS-based ERP suites solutions in the
marketplace
ERP consists of four major subsegments related to SaaS:
Within EAM, the outlook for SaaS applications remains extremely conservative. This is
because of the complexities involved with EAM implementations, in which a high amount
of industry and specific process knowledge is required (such as in the manufacturing
and transportation sector). Another major inhibitor is that many industries that typically
invest in EAM, such as utilities, and oil and gas, have strict data and network security
policies that preclude the holding of business data outside of the business or systems
that are "shared with others." From a physical and information security perspective,
SaaS applications are often more secure than "hosted at home" systems in corporate
data centers, but the cultural aversion to SaaS in some of these industries remains
strong.
Within FMSs, SaaS applications are still a minor part of the overall market, and many
systems in use today are related to core accounting solutions for the small business
sector. However, this is rapidly changing with the development muscle and pedigree of
some well known vendors in the FMS space, such as FinancialForce.com (from Unit4)

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 and Workday, extending its reach beyond HR functionality to financial management as
well. SAP's ByDesign ERP suite will also feature FMS functionality at its core.

Within strategic HCM applications (such as recruitment, performance and talent

management, and expense management), SaaS-delivered applications have been
available as a high-growth area for a number of years. The double-digit growth of SaaS
HCM providers has been a distinguishing feature of the HCM software segment in
recent times. One reason for this is the horizontal applicability of strategic HCM
applications (for example, recruitment and performance management), which can be
consumed out of the box across many industries and do not require major configuration
or customization efforts. Overall, HCM SaaS applications will continue to see elevated
growth through the next few years.
Within manufacturing and operations software, SaaS is a minority component to the
market. Manufacturing organizations often require a high degree of additional
customization for their applications because they often operate in a microvertical, which
generic industry templates cannot fully satisfy. Microvertical specialization can be
achieved, but for many SaaS providers, the economics of doing this in-house (versus via
an external partner) can be prohibitive. However, some vendors, such as Plex Systems,
have managed to achieve notable momentum through their focus on a select number of
industries. Although not a major threat to the more established on premise vendors, the
progress that vendors such as Plex have achieved suggests that we will continue more
innovation and entrants in the manufacturing and operations domain.

Development of SaaS in the DCC Software Market Depends on Internet

Capacity
We expect SaaS to represent 9% of total DCC software revenue and reach total revenue of $298
million by 2014. The projected CAGR for revenue attributed to SaaS in this market is 35.7%,
versus an estimated 9% CAGR for total software revenue in the overall DCC market.
Storage costs can still be significant; companies are evaluating any kind of storage in the cloud,
recognizing that collections of images and video that vary in size and serve collaborative
purposes will prove cumbersome to manage internally. This dovetails with the general need for
partner enterprises, such as advertising agencies and their customers, sales partners and other
constituents, to access and share real-time images and video — making inside-the-firewall
models less attractive.
In addition, much application-based functionality is migrating toward browser-based capabilities.
Consumer adoption of these tools, especially among "digital natives," is significant. As these tools
evolve further, hybrid systems — browser-based tools and online storage and publishing
platforms — will enable new business opportunities beyond software sales, such as premium
subscriptions, various advertising forms and promotional services for content creators.
Although interest in premium subscriptions continues to grow and evolve within the enterprise
application markets, there will not be a big wave of full-feature DCC products using the SaaS
model through 2014. This is mainly because of the current limitation of broadband, which makes
it difficult to transfer rich digital content.
Within digital imaging (desktop painting, photo editing, drawing, and illustration), SaaS solutions
are expected to experience strong growth because of an increase in low-cost or no-charge
options for graphics tools provided through SaaS initiatives, as well as by market leaders.
In the digital video segment, the outlook for SaaS is more positive than in other segments
because of the new and exciting products within consumer markets, as well as growth of a mass

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market for individual users and media professionals. Consumer demand is accelerating as the
popularity of social networking sites grows unabated. Each of these websites provides a suite of
best-of-breed online video editing tools, enabling users to have greater control over media access
and manipulation.

SaaS Offerings Complement and Coexist With Traditional Office Suite

Products
In the best-case forecast scenario, by 2014, Google and similar Web-based freeware and SaaS
offerings are anticipated to have combined revenue of $406 million and 2.4% share of the office
suites market based on total software revenue.
Web-based office suites are not a replacement for standard office suites and should be viewed
differently. However, with the limitations in today's Web-based office offerings, some business
users will still find them appropriate for real-time collaboration or as secondary online tools for
editing docs or taking notes. In most cases, business users are looking at Google docs, Zoho,
Adobe Buzzworld and ThinkFree Office because they prove to be most-viable from the usage
point of view.
Consumers and small businesses will continue be the major forces for Web-based office suites
through 2010. Most small businesses are expected to behave similarly to consumers in Web-
based adoption, because those companies are unlikely to have restrictions on adopting Web-
based office. Also, businesses worry less about the homogeneity of office suites within their
organizations, and they tend to have multiple products in use.
Office 2010 will offer collaboration tools and a free Web version office. Once Microsoft's offerings
are available, it will push Web-based office adoption to a higher level. However, because there is
a significant functionality and performance gap between full-function, fat-client suites and Web-
based versions, no major cannibalization of office productivity markets by Web-based office
suites will occur through 2014. However, Web-based office suites could significantly boost
business revenue if their performance increases substantially and they prove attractive to
general-business users.
In a previous office SaaS forecast, we measured the Web-based office software's impact on total
office suites market (include proprietary, open source and Web-based). In this update, we define
total Web-based office software revenue as those generated from subscriptions, hosting,
technical support and maintenance. Based on these changes, there may not be continuity with
published historic reports for this market.

PPM SaaS Alternatives Gain Favor in Difficult Times

The PPM SaaS market is rapidly growing in percentage of sales and is projected to do so at a
significant pace of more than 41% during the forecast period. SaaS alternatives may help to grow
the overall PPM market again rather than cannibalizing on-premises sales; however, some SaaS
revenue growth will be at the expense of on-premises license, as several new entrants to the
market are able to provide solutions at less than the cost of maintenance on more mature
solutions.
Small budgets, potential of rapid deployment and functionality that meet immediate needs
(without requiring extensive process and behavioral changes) continue to drive the interest and
adoption of SaaS-based PPM systems. In addition to smaller IT departments (fewer than 100
employees) requiring PPM systems, larger enterprise IT departments are also considering the
SaaS option.

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SaaS-based solutions allow prospects to minimize the risk of a PPM implementation with a 12-
month financial commitment with a SaaS offering, as opposed to the exponentially higher costs
driven by licensing fees, consulting services and three-year maintenance contracts usually
associated with on-premises solution. In addition, potential customers new to PPM disciplines or
low in PPM maturity can use SaaS as a way to test organizational commitment, assess the
potential impact of adopting PPM en masse, and evaluate the organization's adaptability to PPM
in terms of people, process and technology.
As demand increases, the PPM SaaS model continues to mature. Through agile development
methods and transparent seasonal feature releases, SaaS PPM vendors are quickly advancing
solution capabilities and pushing improvements out to their customers faster than their on-
premises counterparts. In response to the emergence of SaaS PPM as a competitive threat,
several vendors offering on-premises and hosted deployment options are now transforming their
businesses to be "deployment agnostic" or "SaaS first."

SaaS SCM Solutions Experience Double the Growth of the Traditional SCM
Market
Our estimated revenue growth for SaaS within SCM markets is in line with that published in
September 2009, remaining more resilient than the overall SCM market through 2013. In a recent
report ("User Survey Analysis: Understanding Supply Chain Management Software Buyers, North
America, 2010"), supply chain practitioners indicated that twice as many supply chain solutions
would be sourced through a SaaS model than had been the sentiment in the three years prior.
This finding, coupled with the performance of many specialized vendors offering their solutions
via SaaS, provides confidences in a 13.9% five-year CAGR for growth, from 2009 revenue
estimates of $807 million. Growth takes into account businesses postponing enterprisewide
upgrades of core applications while continuing to seek more-rapid results from application
purchases that are often deployed around an enterprise application core. Greater traction from
existing vendors, more new vendors incorporating SaaS, and growing competition increase the
opportunity for supply chain solutions and are positive influences on the SaaS forecast.
Higher-growth markets are within organizations with less than $2.5 billion in annual revenue and
within e-sourcing (strategic sourcing) and global trade and transportation management. However,
the more-complex and more-customized applications within planning, or the deep execution
within the four walls of a warehouse management system, are unlikely to migrate wholly toward a
SaaS delivery model. Expect demand for SaaS solutions offered by other traditional suite vendors
to increase significantly throughout the forecast period, in an effort to capture lost opportunities.
SaaS trends in SCM market segments are as follows:
Supply chain planning (SCP) — The technology is pervasive as an on-premises
solution. The mature installed base has endured considerable customization because of
complexity in the business process and integration with other important business
processes, and this will continue to hinder adoption of SCP as a service. We estimate
that, while growth did come from emerging vendors, the market segment has low
penetration (3%) but growth of (15.6%) though 2014.

Supply chain execution (SCE) — Most traction is driven by transportation management

systems (TMSs), which are beneficial to customers without significant or complex
planning requirements. Value is gained from digital connectivity with carriers, which is a
primary reason for the adoption of TMS SaaS, but which makes it difficult for vendors to
differentiate themselves in a meaningful way. SaaS has the potential to open the TMS
market to smaller, less-complex shippers (with less than $25 million in annual freight),
which will fuel growth in this segment. With an estimate of 12% of 2009 total software

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 revenue in SCE generated as a service, we feel optimistic about continued opportunities
for SaaS in the execution market, increasing our forecast estimates to 18% of the
market in 2014.

Procurement — Strategic sourcing (e-sourcing) emerged during the late 1990s, at the
beginning of the B2B e-business bubble, and it is one of the survivors from that era. Its
survival results from the value that e-sourcing delivers to enterprises and because many
vendors have worked to offer products through the SaaS model. In 2009, we estimate
that SaaS accounted for 26% of the segment's total software revenue and will generate
33% of the market's revenue by 2014. Despite most vendors moving toward SaaS
delivery, applications such as contract management are often desired to be behind the
firewall. If this trend continues, then we could see not only more bumps in associated
revenue, but also a required shift for vendors to adjust their business to accommodate
this user need.

SPP — Specialized versions of SCP applications focus on the unique characteristics of

service parts management. It's a newer and smaller market within SCM, with several
specialized providers often partnering with larger ERP suite providers. Our 2009 total
software estimate for SPP is $147 million. The dynamics influencing the SPP market
have shifted little, but perhaps have been heightened lately because manufacturers are
selling fewer new products and they need to enhance their service capabilities as
consumers and businesses increase the life cycle of existing goods. SPP may well
emerge as one of several new post-SCP and innovation partner solutions targeted at
specific industry requirements. We continue to maintain that about 10% of the
addressable market has sourced SPP applications, with 6% of 2009 total software
revenue generated through SaaS delivery, reaching 7% of the market by 2014.

Other Markets
SaaS is also fast-penetrating a host of other markets and subsegments (as shown previously in
Table 4). Although most, if not all, of these are still small market spaces, the increasing
prevalence of SaaS demonstrates that SaaS is far from being simply a phenomenon of CRM and
associated application markets.
The idea of PaaS, which began to emerge in 2008, has continued to gain traction through 2009
and 2010, although in reality this is still more a theory than a driver of significant revenue to
leading SaaS vendors that have been touting this idea.

Regional Context and Outlook

SaaS in Asia/Pacific
Overall SaaS adoption in Asia/Pacific has been fragmented, not only by countries, but also by
vertical industries. Asia/Pacific (excluding Japan) is a combination of mature markets (such as
Australia, New Zealand, Hong Kong, Singapore, South Korea, Taiwan) and emerging markets,
including China, India, Malaysia, Thailand, Indonesia, Vietnam and the Philippines.
The following are SaaS dynamics in the region.
Current SaaS adoption:

SaaS adoption is more prominent in the more mature countries/markets in

Asia/Pacific such as Australia, New Zealand, Hong Kong, Singapore, and South
Korea because of established infrastructure (such as more-stable network), as well
as the availability of vendor sales, marketing and support services structures. In

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 many cases, the use of English as a common language in these countries
(exception South Korea) make them as attractive destinations for foreign providers
investing in the region.

SaaS adoption in emerging countries is significantly more fragmented. Although

adoption is relatively low, however, there are pockets of mature SaaS users that
have been using SaaS for long periods of time, and with high adoption among end-
user organizations, comparable to those in mature countries/regions (see "Emerging
Market Analysis: Plans for SaaS Application Software Use in China and Malaysia,
2010-2011").

Reasons to adopt SaaS in the region has been cost-effectiveness from total cost of
ownership (TCO) perspective, limited capital expense and fast/easy deployment
compared to on-premises solutions. Gartner research indicates these are the top
reasons for SaaS adoption in both emerging and mature countries in Asia/Pacific.
As the market is back in the growth mode in 2010, end users attitude is not
expected to change and the key reasons mentioned will remain critical in the
increasing competitive environment.

SaaS Use

SaaS in CRM has been significant, specifically with revenue growth contribution
from salesfore.com in key mature countries — such as Australia and Singapore.
With its continuous yearly double-digit growth, salesforce.com occupied 12.1% CRM
market share in Asia/Pacific in 2009, or the third-largest CRM vendor after SAP and
Oracle. Nevertheless, salesforce.com still has sporadic presence in this diverse
region.

Our user surveys indicate that core/basic applications such as financials

(accounting), e-mail have been the most-popular SaaS applications used among
respondents in Asia/Pacific, specifically in emerging countries. The popularity of
financials (accounting) in emerging countries are not surprising, as they are being
used to satisfy the needs of local financial reporting requirement. Mature countries in
the region have more apparent adoptions for wider range of applications in addition
to financials and e-mail. Gartner research indicates that more SaaS contracts in the
emerging markets are on a pay-as-you-go basis, which offers a more-attractive
option for SMBs that may not have an IT budget.

Future SaaS investment

End-user investment mood has been much improved to accommodate the growth
mode attitude after the economic slowdown in 2009. Our user survey indicates that
China, India and Malaysia have higher intentions to increase their SaaS investment
significantly in the next 12 months, compared with the mature countries. Yet, the
mature countries are also not conservative with notable intention to increase their
SaaS investment "slightly" during the next year. The emerging countries are
specifically interested for SaaS investment on net new solutions, and to a lesser
extent will use SaaS as extension of their on-premises solutions.

There is an increasing trend that SaaS contract renegotiation may occur, as end
users are demanding for greater functionality. This is not surprising, specifically in
emerging countries, where users are fine tuning their scope of SaaS deployments,
and growing their user base, amidst significant economy improvement. Other
reasons for contract renegotiation are to look for better financial terms due to the
rising competition.

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SaaS in Europe
SaaS adoption in Europe runs along three major trends:

Northern Europe showing adoption and acceptance levels similar to North America.

Continental and Southern Europe seeing slower adoption compared with Northern
Europe due to business acceptance, culture and specific localization issues.

Eastern Europe is relatively low in adoption, but the Czech Republic, Hungary and
Poland are showing greater potential in the near term.
For the purpose of this report, the focus of the following text is on Northern and Continental
Europe because of their current and near-term potential for SaaS adoption. For areas not
discussed, please contact Gartner.

Current SaaS Adoption

SaaS penetration and adoption is showing most in Northern Europe, which is composed of the
U.K., Ireland, Netherlands and the Nordics. This is due to a culturally open outlook toward
technology adoption, well-established and generally good Internet infrastructure within these
countries and English being the primary business language. This makes it much easier for North
American vendors to branch out into the region and for local vendors in one country to adapt and
sell their applications in other Northern European countries with less localization effort.
SaaS adoption in Continental Europe is generally lower than in Northern Europe due to reasons
of high localization requirements, such as language translation within the product, sales and
support services/resource in local language, specific data security rules in certain countries (such
as Germany) and a generally slower adoption of new technology.
Gartner recently conducted a user wants and needs study for SaaS software in France, Germany
and the U.K. to gauge adoption trends and while the results are a not a proxy for Europe overall,
they do provide insight into why SaaS is being considered or currently in production in the three
largest European country markets (collectively the three countries represent 54% of the European
software spending — see "Market Share: All Software Markets Worldwide, 2009"). The highest-
ranking reason for choosing and using SaaS were TCO, followed by ease of deployment and
limited capital expense, as shown in Figure 3. Although we lack survey data to support this, from
client interactions we believe these reasons also figure very highly across the rest of Europe
when shortlisting SaaS solutions. However, the reality of SaaS ownership may not be quite so
clear — especially when it comes to TCO. And although SaaS is easier to deploy, there will be
tradeoffs regarding areas such as integration to other systems and customization.These subjects
were commented on by our respondents when asked what their issues were after having used
SaaS in their businesses.

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Figure 3. Reasons for SaaS Adoption

Source: Gartner (June 2010)

SaaS Application Use

Similar to the trend seen in other parts of the world, SaaS adoption and use varies greatly from
application to application, with SaaS CRM being the most-popular business application, but
others such as e-mail and employee self-service for HR management also see high acceptance,
as shown in Figure 4. SaaS usually sees lower adoption in areas where complex
customization/configuration is needed, such as supply chain execution systems and
manufacturing/operations software.
In Gartner's recent user wants and needs survey for SaaS software in France, Germany and the
U.K., the findings again closely mirror the pattern above, although small business accounting
solutions also featured fairly highly in the statistics. However, categories such as employee
performance management, use in other parts of Continental and Southern Europe is likely to be
more muted than the results below suggest, simply because the major vendors behind these
applications have yet to fully localize and focus on other European markets.

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Figure 4. SaaS Adoption by Application

Source: Gartner (June 2010)

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Future SaaS Investment
In terms of the applications that European buyers will consider and shortlist in the near and
medium term, Gartner expects established SaaS solutions, such as CRM, employee self-service
and e-mail, will continue to be in high demand. However, as North American vendors further
develop their applications for the European market, other areas, such as talent management,
travel and expense management, will see greater penetration in the region. Furthermore, as SAP
begins to ramp up selling efforts around its SaaS ERP application this may help drive further
acceptance and awareness of SaaS solutions generally within Europe. However, the full impact
of this is unlikely to occur overnight, and SaaS CRM/e-mail are likely remain tops in overall
popularity and usage for many years.

SaaS in North America

North America, and specifically the U.S., represents the largest opportunity for SaaS, and is the
most mature of the regional markets. Vendors initially tested the market appetite for services-
based application solutions with an application service provider (ASP) model in the U.S. during
the late 1990s, many of which subsequently fell victim to the dot-com bust. But as broadband
availability became more pervasive, Internet technologies became more robust, and fluency with
Internet use became more widespread, the accessibility and viability of SaaS evolved, and with it,
rapidly growing adoption in North America. The majority of large SaaS vendors are also
headquartered in the U.S., and have been able to benefit from a more technologically mature
commercial user population, as well as access to less risk-averse venture capital firms and
resources.

Current SaaS Adoption

With only two countries, North America represents a reasonably homogeneous user
population, eliminating much of the diversity in regulations, language, and culture
inherent in the other regions. Widespread availability of high-speed and generally stable
Internet connectivity also reduces some of the infrastructure issues we observed in other
regions from our 2010 survey results.

Survey respondents ranked ease and speed of deployment highest among reasons for
deploying SaaS in North America, followed by lower TCO. Limited capital expense, the
third-highest category indicated, was considered more important in North America than
the other regions based on percentage of respondents.

More companies in North America have established policies governing the evaluation,
procurement and/or deployment of SaaS than in the other regions, according to survey
results. This is not surprising, given the relative maturity of SaaS among the three
regions.

SaaS Application Usage

Consistent with the other regions, CRM shows the highest use of SaaS among the
enterprise applications. Use of Web conferencing, e-learning, and travel booking was
higher in North America than in other regions. Although adoption of financials
(accounting) is lower in North America, Usage is nearly three times higher in Canada
than in the U.S. We believe this is attributable, in part, to the survey demographic, in
which Canada had a higher percentage of companies under 1,000 employees.

A higher percentage of companies in North America responded that they were using
SaaS to replace an existing on-premises solution than in the other regions, with half of
all U.S. companies indicating that replacement was the primary intention. In contrast,

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 half of the Canadian respondents were using SaaS as extensions to existing on-
premises solutions, and only about one-third were planning to replace them.

Future SaaS Investment

No organizations surveyed in North America expect use of SaaS to decrease
significantly this year, and less than 2% expected a slight decrease. Seventy-five
percent expected increases in use.

Sixty percent of North American organizations expect purchasing decisions to be made

jointly by the business and IT, which is higher than the worldwide projection of 52% and
representative of a more-mature market, as SaaS becomes more pervasive throughout
the enterprise. In addition, a higher level of executive decision-making is expected for
SaaS in North America than at the worldwide level. We attribute this to greater executive
participation based on higher levels of budget approval, larger deals, and the recognition
that widespread use of SaaS has become a more strategic, rather than tactical,
decision.

Business and Market Drivers and Inhibitors

Factors Promoting Adoption
Many factors are driving adoption of SaaS, including the following:

Business

The benefits of rapid deployment and rapid ROI, less upfront capital investment, and
a decreased reliance on limited implementation resources encourage SaaS
deployments.

With SaaS, responsibility for continuous operation, backups, updates and

infrastructure maintenance shifts risk and resource requirements from internal IT to
vendors or service providers.

A heightened awareness of and growing intolerance for misspent investments on

shelfware motivate buyers to purchase on-demand solutions.

A shortage of skilled professional resources, within internal IT departments and

system integrator organizations, contributes to adoption.

Painful reminders of lengthy, unsuccessful deployment cycles spur buyers to

investigate simpler, quicker alternatives.

Rising maintenance fees and the imperative to update to Web 2.0 technologies
contribute to legacy replacement decisions.

An increase in the number of executives as buyers or influencers also drives growth.

Market
Greater market competition and increased focus by the megavendors reinforces the
legitimacy of on-demand solutions, mitigating initial objections about security and
availability for many and driving market growth. Buyers facing costly upgrades or
platform decisions are more likely to consider on-demand solutions as an
alternative.

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 Strong market growth within the SMB sector and increasing adoption of SaaS
solutions by large enterprises exists within line-of-business applications and in
regional locations.

Vendors adding local-language capabilities to their solution portfolios fuel SaaS

growth globally.

Increasing familiarity with the Internet, improvements in security, and broader

acceptance of a service alternative reduce earlier barriers to adoption.

Factors Limiting Adoption

Certain factors can work to impede the adoption of SaaS, including the following:
Business

Concerns about data security and critical customer information continue to

encourage on-premises applications for many.

Increasing concerns about scalability and downstream integration requirements as

the number of users per company grows may limit additional installed-base
purchases.

Questions about vendor longevity and viability arise as buyers begin considering
larger deployments.

Existing investments in applications, capital, and organizational expertise limit SaaS

growth.

Buyers perceive a lack of competitive differentiation through use of common,

repeatable business services.

Complex process requirements constrain adoption of simplified, standardized

solutions.

Market

Regulations governing data privacy and protection vary by country and may restrict
adoption of some vendors' solutions in certain areas.

An inability for vendors to shift to a service-based model for architectural or cultural

reasons restricts SaaS availability.

Limited broadband availability in specific countries restricts growth.

MARKET MODEL
The SaaS forecast for each of the enterprise application markets included in this document are
developed according to Gartner's multistep forecasting methodology (see "Dataquest Guide:
Software Market Research Methodology"). The latest available market data is carefully reviewed
and compared with the most recently completed forecast. The methodology then directs the
formulation of assumptions about the future, with consideration given to factors that could cause
the forecast to stray in one direction or the other and to potential market discontinuities. These
include a range of influences, such as SaaS user adoption patterns, growth and competitive
impact of key market players, macroeconomic and regional conditions, and the relationship of
SaaS to other developing trends in the IT industry such as cloud computing.

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© 2010 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
Finally, the methodology dictates an iterative approach to a final forecast in which successive
preliminary forecasts are reviewed, critiqued and revised by all those involved in the forecast
process in Gartner's analyst community. For further discussion please contact Gartner.

RECOMMENDED READING
"Emerging Market Analysis: Plans for SaaS Application Software Use in China and Malaysia,
2010-2011"
"User Survey Analysis: Software as a Service, Enterprise Application Markets, Worldwide, 2010"
"Market Share: All Software Markets, Worldwide, 2009"
"Forecast: Enterprise Software Markets, Worldwide, 2009-2014, 1Q10 Update"
"Q&A: Top 10 Things You Need to Know About SaaS in Asia/Pacific"
"User Survey Analysis: Understanding Supply Chain Management Software Buyers, North
America, 2009"
"Essential SaaS Overview and 2010 Guide to SaaS Research"
"Forecast: Public Cloud Services, Worldwide and Regions, Industry Sectors, 2009-2014"
"Dataquest Guide: Software Market Research Methodology"
"Dataquest Guide: Software Market Research Definitions"
"Forecast Analysis: Enterprise Application Software, Worldwide, 2009-2014, 1Q10 Update"

Acronym Key and Glossary Terms

CAGR compound annual growth rate
CCC content, communications, and collaboration
DCC digital content creation
EAM enterprise asset management
ECM enterprise content management
HCM human capital management
PaaS platform as a service
PPM project and portfolio management
ROI return on investment
SaaS software as a service
SCE supply chain execution
SCM supply chain management
SCP supply chain planning
SMB small or midsize business

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© 2010 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
SPP service parts planning
TMS transportation management system

This document is published in the following Market Insights:

Software Applications Worldwide

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