Is the SAAS delivery model dying?

October 12, 2010

Recent research from Bloomberg Business Week Research Services suggests that SAAS adoption may be declining. Their research results include:

  • A year-over-year (2010 vs. 2009) decline in mid-sized company adoption of SAAS for critical applications from 14% to 8%
  • A year-over-year (2010 vs. 2009) decline in large company adoption of SAAS for non-critical applications from 8% to 5%

Certainly, noise exists in the research data, but what could these declines suggest? One interpretation implies that SAAS is moving downward from the top of the (Gartner) hype cycle curve as the market shifts from hype to pragmatism.

This dynamic reflects what I experienced working with many SAAS companies over the last 6+ years. Early in their development, SAAS companies tend to focus on acquiring new customers with annual subscriptions while they neglect to apply enough effort into making each customer successful. Only after one to two years (sometimes even three to four!), the companies finally notice customers are not renewing and growing the way they would like. At this point, they start applying more effort to customer success to increase their renewal and upsell rate, which, when successful, also leads to more word-of-mouth referrals making new customer acquisition easier.

Perhaps with all the new SAAS companies emerging over the last three years, some good original customer adoption surfaced. But unfortunately the customers did not achieve success with the products they originally anticipated would succeed and they also did not renew, which led to a decline in overall adoption.

Another interpretation suggests the SAAS delivery model is flawed, installed software is a better model, and the SAAS delivery model is dying. Our experience at OpenView Venture Partners using SAAS products such as ExactTarget, VersionOne, Central Desktop, and has been remarkably good and I can’t imagine returning to installed software, which is why I have a difficult time wrapping my mind around this idea. Also, our entire portfolio of SAAS companies is growing nicely and my sense is that the industry-wide SAAS delivery model is expanding nicely as well. As a result, I strongly believe the SAAS model is a winning model rather than a dying one.

If the percentage of companies adopting SAAS is small, why is SAAS growing overall? A strong possibility exists that SAAS may be penetrating some companies very quickly. It will be interesting to see if this notion is supported and how it works out for them. Could they be using SAAS as one of their company development strategies and/or using it to help them to create a competitive advantage against the companies not using SAAS?

A final interpretation of the data suggests something is wrong with the data. After viewing evidence from all of the other figures, I perceive the SAAS model is alive and I have got to believe the reach of the SAAS delivery model into businesses is increasing rather than declining.

Of course, if you are a SAAS provider, the data and implications signify a good opportunity to consider the idea that you are not delivering the value your customers thought they were purchasing. This scenario could force you to work on your post-sale customer success program which could denote a great opportunity to make your customers happier and more successful, leading to more customer growth from renewals, upsells, and new customer acquisitions. This represents a great business growth strategy and could also characterize an approach to help you with creating competitive advantage, particularly for expansion stage companies.

I am interested in hearing what you are seeing…does this research data fit your experience? Do any of my interpretations ring true?

Founder & Partner

As the founder of OpenView, Scott focuses on distinctive business models and products that uniquely address a meaningful market pain point. This includes a broad interest in application and infrastructure companies, and businesses that are addressing the next generation of technology, including SaaS, cloud computing, mobile platforms, storage, networking, IT tools, and development tools.