And why 2020 marks the beginning of “SaaS Everywhere”
The early years
I co-founded a SaaS company called MessageLabs in 2000. We moved the process of anti-virus and then anti-spam into the Cloud. The term SaaS didn’t even exist at the time. We just thought it made sense to address the problem closer to the source, similar to water companies filtering water long before it reaches our taps.
Back then we didn’t know what to call ourselves and people were confused about what we did. At the start we actually brought racks of servers (that we called ‘inoculation towers’) to events to show people what we installed in data centres and how we scanned their email. Customers redirected their traffic to one of our data centres, we scanned it and then passed on the clean messages to their final destination.
I can remember trying to figure out how to price our service - discussions that finally led to a per user per month model (or ‘PUPM’) and also what metric to use to measure our sales performance - this led to the concept of annualised recurring revenue (or ‘ARR’) that is now such an important part of the SaaS lexicon.
The few SaaS companies that were around at the time were calling themselves Application Service Providers (‘ASP’). I remember Marc Benioff marching up and down at a big Siebel event wearing a sandwich board with the word ‘software’ with a line through it and proclaiming that the future was in the Cloud. People thought he was crazy. Around about the same time Larry Ellison, the Founder/CEO of Oracle, was dismissing the Cloud as a ‘gibberish.’
The term SaaS emerged around 2002 and the industry started to take some shape with a number of emerging players such as Salesforce, Netsuite and WebEx. But in the context of the software industry as a whole, SaaS was still a tiny spec on the horizon.
During this time the SaaS model was mainly about moving on-premise software into the Cloud, making it available to any device or location and charging a fixed monthly fee. Adoption was limited by various challenges including the lack of portability in computing, bandwidth availability and the cost of data centres.
The Age of Mobile
Apple’s iPhone was launched in 2007 and this heralded the age of mobile as the dominant trend in computing.
There was a big move towards the smartphone and other mobile devices. This started as more of a consumer-led trend but increasingly we also expected to use our mobile devices for work.
At around the same time Amazon Web Services was launched. AWS was the first truly at scale Infrastructure-as-a-Service (‘IaaS’) provider offering lower prices together with greater capacity, coverage and functionality.
The combination of mobile devices and better infrastructure availability led to a material improvement to the SaaS proposition and a marked increase in the growth of the market.
The SaaS experience was increasingly better in terms of its speed and reliability. In addition we were now expecting to do our work with a wider range of more portable devices that the SaaS model was compatible with.
More Intelligent Software
Around 2015 we saw the emergence of a third phase of SaaS that produced a more intelligent form of software. SaaS started to increasingly tap into the power of AI.
AI had been failing to deliver on its promises for years. For AI to finally start delivering on its incredible potential it took the confluence of a number of factors including the high performance infrastructure services, vast volumes of data and ever more sophisticated AI and Machine Tools now available in the Cloud. But SaaS was the application that pulled it all together.
We started to see SaaS not just focused on productivity and collaboration but on augmenting or replacing human based processes such as legal discovery, cancer screening and more personalised marketing. In this way SaaS started to increase the size of the overall software industry by doing things that were not possible before.
More and more SaaS products now have some form of AI built into them. It is increasingly expected that SaaS products will leverage AI to deliver more value to the customer. It is starting to feel like around ten years ago when we expected SaaS products to be optimised for mobile. We now expect them to be optimised for AI.
Stepping into 2020 it was surprising to me that after twenty years, the SaaS form factor represented only 20% of the total software market.
It takes time for a new form factor to penetrate an established market and a preferred way of doing things. Companies had a great deal invested in the on-premise software model and were more resistant to change than people expected.
Then we were hit with Covid-19, probably the biggest event most of us have seen in our lifetime. The pandemic has had a devastating impact on our way of life in so many ways and will continue to do so for some time to come.
When you look at the software industry, Gartner’s research shows a sharp drop across the whole market. You would expect to see this with budgets tightening and decision making slowing down.
But Gartner forecasts that, after a few months, SaaS will bounce back strongly and indeed start growing faster than it was before. The research also shows on-premise software never recovering from the impact of Covid-19 and continuing its decline.
I believe that this acceleration of the growth in SaaS and the decline in on-premise software will be even more pronounced than Gartner is forecasting. The Gartner numbers were produced in May, at the start of the pandemic, before its full force could be understood.
When you look at previous crises and their impact on technology adoption curves they always accelerate the growth of emerging technologies.
Generally companies will see this crisis as an opportunity to make a change and no longer rely on their legacy way of doing things. Coming out of a crisis is also a time when a disproportionately high number of new companies get created and they can start with a blank slate and choose the very best products available at the time.
This is especially true of this situation. Pretty much the entire world was forced into working from home. No-one wanted this moment to happen but the SaaS form factor was built for it.
The first principles of SaaS is that it’s available from any device or location, always on and available 24x7, is easy to set up, charged as a fixed monthly fee with no upfront costs and can flex with your changing requirements. At the same time on-premise software is highly inflexible and is very difficult to access from outside the office.
This has undoubtedly been a defining moment for SaaS and the Cloud. It will act as a tipping point into the full mainstream market. No longer is SaaS the emerging player in the software industry. It is the software industry. The term SaaS will become interchangeable with software because we will take it for granted that all software is delivered in the Cloud.
I believe that the events of this year will mark a new phase in the evolution of the market that I’m calling ‘SaaS Everywhere.’
SaaS Everywhere is when the form factor takes its place as the clear market leader and dominant force across the software industry. SaaS completes its takeover of the software industry, surpassing 50% share of a market that is forecast to reach a trillion dollars by 2030.
SaaS Everywhere represents a huge market opportunity but vendors can no longer rely on being challengers and appealing to early adopters. SaaS companies will need to be better than ever to win in the mainstream market. Competition will be greater, expectations will be higher and customers will demand more and more value.
SaaS companies will also need to invest more into the underlying Cloud enabling technologies. Areas such as security, data management, integration and performance optimization will become even more important in providing a true enterprise strength and end to end customer experience.
So there is a big opportunity in front of us in the SaaS and wider Cloud industry. The pandemic is by no means over and many countries, people, companies and industries are suffering greatly. But as we go through this crisis, SaaS is well placed to help companies transform themselves to survive, compete and to serve their customers more efficiently and effectively. As a result I believe SaaS will complete its takeover of the software industry. But, as in all things, with power comes great responsibility.