SaaS Backlash: Survey Shows Abandoned Deals

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We’re entering the next phase of the Software as a service (SaaS) hype cycle.

As famously described by Gartner many years ago, most new technologies start off with a lot of euphoria in the press and analyst worlds. Then, as the trade-offs, limitations and other negatives show up, the euphoria turns into a more pragmatic view. New survey data from Bloomberg Businessweek Research Services shows that SaaS is now moving from euphoria to pragmatism for some companies.

Specifically, surveys in August 2009 and 2010 show a decline in the number of mid-sized companies that had fully adopted SaaS as the delivery mechanism for at least one critical application during the past year.

Here are the details and the demographics of the surveys:

• 8% of mid-sized companies ($50 million-$1 billion in annual revenues) had fully adopted SaaS for at least one critical application in 2010, down from 14%+ in 2009.

• 5% of big companies (more than $1 billion in annual revenues) had fully adopted SaaS in 2010 for at least one non-critical application, down from almost 8% in 2009.

(Survey respondent details: More than 300 respondents in each survey, all from North America. Titles ranged from director to CEO, most were at least a vice president. Roughly half the respondents were from companies with more than $1 billion in revenue, the other half were from midsized companies. Wide range of industries.)

FYI, here is the definition of SaaS used by BBWRS:

Software as a Service (SaaS) is software deployment model where instead of owning and operating software applications within an organization’s data center, a vendor licenses on-demand access to the application via the Internet. The vendor manages maintenance and system upgrades.

The decline in the number of companies using SaaS for critical applications, at this early stage of the technology’s development, is an indication of the typical growing pains of a new technology. They are not a huge repudiation of the concept. Indeed, the proportion of mid-sized companies that adopted SaaS for non critical apps increased, to 12% from 7%.

Why the SaaS Backlash?

Why the switch from SaaS to an on-premise solution for critical applications?

It can’t be because the companies were unaware of the potential drawbacks before they signed on the dotted line. Concerns about the security of data in the cloud, integration of external and internal applications and data files, the viability of the nascent SaaS vendors and other issues
have been widely discussed . So it is hard to believe that a mid-sized company was ignorant of the risks.
And while a few SaaS/cloud vendors have folded over the past few years, many others have gotten much stronger. Salesforce.com, NetSuite and other SaaS pioneers have become substantial companies. And a host of startups for specific SaaS niches, like business intelligence, also have gained traction.

My bet is that the integration challenges turned out to be much bigger than the buyers anticipated. While they knew they would run into hurdles, connecting and keeping current the external SaaS files and applications with internal financial, production and customer records may have turned into a more upsetting nightmare for the pioneering mid-sized companies that had taken the SaaS leap.

And while integration of internal and external data for non critical apps may have been a concern, failed integration of crucial financial, customer or production data became a non starter.

Others say service and support and the relative immaturity of many of the SaaS providers may have led to the retrenchment. While many of the SaaS providers tout their adherence to audit and security standards imposed by regulatory organizations for critical apps, I suspect a few customers learned about some gaps after they had switched to the cloud approach.

Or maybe their auditors weren’t informed about the switch until after it had happened, and ordered the company to return to an on premise solution?

(And no, I wouldn’t want to be in those meetings….)

This backlash will go on for awhile, but don’t be fooled into thinking that SaaS is a fad and that the majority of companies will go back to relying on their own servers, applications, appdev teams, DBAs and other members of the IT infrastructure.

The survey also noted that the proportion of senior executives unfamiliar and uninterested in SaaS declined precipitously in the past year. Now they are more familiar and more interested and asking a lot more questions — and expecting better answers.