Will Rising Tide of Hosted Solutions Lift SME Sales in 2008?

How does all the industry buzz about the coming SaaS revolution correlate with the actual response to hosted solutions in the SME market?

Hosted services are continuing to gain traction in this sector. Our 2007 data on SMEs show that for every company with an SaaS solution already in place, there are five firms looking into hosted service options. Consequently, we expect a significant uptick in demand for SaaS in 2008.

Initially many SMEs were reluctant to adopt hosted services because of security, reliability, and integration issues. Does the growing interest in SaaS stem from the technological progress that’s been made in overcoming some of these concerns?

Boggs: The continuing improvement in this generation of Web-based applications, as well as the growing use of the Internet by SMEs, has certainly helped lay the groundwork for wider adoption of SaaS. But technology evolution is only one part of the market picture. The real driving force behind the rising demand in this space is economics.

Can you elaborate on the economic forces shaping the SaaS market outlook?

Boggs: IDC’s research indicates that the rate of IT spending growth for SMEs will average about 7 percent – a lower growth rate compared to last year. Nevertheless, this projected rate is notably better than the expectations for larger firms – and high enough to make SMEs an attractive market for IT providers. How SMEs are planning to invest those IT dollars is largely a reflection of the current economy. Intensifying recessionary pressures, in the United States and arguably, in Western Europe, are driving SMEs to reduce capital expenditures, while at the same time, spiking energy prices and associated costs are taking a bite out of their bottom line.

To help offset these economic challenges, SMEs are focusing on solutions that offer a faster return on investment. As an alternative to traditional in-house software installations, on-demand services not only eliminate the need for a large upfront investment, but also shorten time-to-value because they can be faster and easier to implement.

For small businesses – companies with fewer than 100 employees – these advantages would seem to make the hosted services model the ideal choice. Is the rise in demand for SaaS highest in the small business sector?

Boggs: Paradoxically, our research shows just the opposite. In market surveys, 15 percent of midsize companies – compared to just 5 percent of small businesses – reported plans to implement SaaS solutions in the coming year.

Why do you think many smaller businesses remain hesitant to adopt SaaS?

Boggs: Hosted on-demand services may represent too radical a departure from their traditional business model. Generally speaking, small business owners prefer to purchase technology outright. For a single expenditure, they can use – and in some cases abuse – their installed systems and applications all they want. This mind-set doesn’t really take into account the ongoing costs of upgrades, system repairs, and the like. Nevertheless, getting these companies to see past the specter of recurring monthly fees to the broader implications of SaaS remains a challenge.

The long-term benefits – from financial savings to improved communication and collaboration across increasingly dispersed enterprises – are less readily apparent to very small companies. Their lack of technical expertise and limited computing resources may make it difficult to fully capitalize on the value of this delivery model. Mid-market firms are in a better position to appreciate these advantages and to adopt SaaS as a way of doing business.

What are some of the other important reasons – besides cost-effectiveness – that hosted services are gaining wider acceptance in the midsize business sector?

The scalability and flexibility of SaaS solutions are major benefits for today’s growing midsize businesses. To survive current financial and competitive pressures, midsize businesses need to find new ways to do more with less. Although mid-market firms lack the depth and breadth of resources available to world-leading corporations, they’re increasingly pressed to deliver comparable levels of quality, efficiency, and value to satisfy their customers.

Hosted services enable a midsize firm to deploy enterprise-class applications across a complex distributed computing environment and to continue adapting them to changing business demands, as well as to extend the reach of these capabilities as the company expands. The power of Web-based services to deliver critical information and applications to multiple sites, as well as to remote workers, is a key selling point in this market.

Are mid-market businesses ready to fully embrace SaaS as both an IT and business strategy?

Boggs: The potential for adopting hosted services as a business model is certainly there. At this point, however, most mid-market companies still aren’t ready to change the way they think. SaaS as a religion is still too revolutionary a concept. Likewise, the idea of SaaS as an IT strategy doesn’t really fit this market. For most SMEs, a technology purchase isn’t the result of a long-term strategic plan.

It’s a way to solve a problem. If a vendor has a mobile SaaS application that enables an SME to replace onsite customer visits with remote support, the fact that it’s a hosted solution is not the SME’s top-of-mind issue. Will the solution help reduce the SME’s transportation costs? Is it the right size and the right price for that business? Does it provide a flexible, affordable growth path? It’s the capability of a hosted Web-based solution to address those compelling concerns, rather than the details of a vendor’s SaaS philosophy, that counts in this market.

It sounds like the traditional sales wisdom about “knowing the customer” is particularly relevant here. What are the most essential points for vendors to keep in mind as they continue developing their approach this market?

Boggs: Above all, vendors should become very attentive to SME requirements. Cost, rapid ROI, scalability, and ease of implementation – these are the benefits that SMEs care about, and to succeed in this market, vendors will need to focus on these crucial selling points. Showing an SME an extremely complex, elegant SaaS solution and then trying to figure out what can be subtracted to reduce the price is the wrong approach. Rather than cannibalizing their more advanced SaaS solutions, developers should first figure out exactly what their SME customers need and then build products that are relevant for that sector from the ground up.

The right products will offer the same rich functionality of more complex solutions, but must be simpler to install and use. Success will also depend on providing smaller companies with the right level of services and support. For that reason, channel partners will play a vital role in this market. VARs, ISVs, and other partners can provide not only the technology resources and high-level expertise smaller companies will need to fully capitalize on these new Web-enabled capabilities, but also the soft skills – the “handholding,” attention to detail, and personalized service – essential to winning their trust. Strong customer relationships in turn will lead to increased opportunities to acquire a deeper knowledge of market needs, as well as to educate customers about the more strategic, far-reaching benefits of SaaS.