SaaS Market Growing by Leaps and Bounds: Gartner

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Businesses’ appetite for on-demand software applications shows no signs of dissipating in the near future, and service-oriented computing will continue to become an even larger percentage of the overall worldwide software market, according to the latest report from IT researcher Gartner.

Buoyed by lower startup and maintenance costs compared to on-premises application deployments, as well as the ability to distribute and share applications and documents through the cloud, software as a service (SaaS) is is poised for rapid growthfor at least the next four years.

“After a decade of use, adoption of SaaS continues to grow and evolve within the enterprise application markets,” Gartner analyst Sharon Mertz said in the report. “As tighter capital budgets demand leaner alternatives, familiarity with the model increases, and interest in platform as a service and cloud computing grows.”

This year, Gartner predicts worldwide SaaS sales will eclipse $8.5 billion, up 14.1 percent from 2009 sales of $7.5 billion. More telling, this rapid increase in both customers and SaaS vendors means that on-demand applications will make up a larger percentage of total enterprise software sales this year and for the foreseeable future.

SaaS apps, which accounted for a little more than 10 percent of the total enterprise software market last year, are expected to represent at least 16 percent of worldwide software sales by 2014.

For the report, Gartner defined SaaS as software that is owned, delivered and managed remotely by one or more providers.

“Adoption varies between and within markets, and 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,” Mertz added.

Gartner estimates that 75 percent of the current SaaS delivery revenue could be considered a cloud service, and that could exceed 90 percent by 2014 as the SaaS model matures and converges with cloud services models.

“The popularity of SaaS has increased significantly within the past five years and 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,” Mertz said.

While pure SaaS vendors such as Salesforce (NYSE: CRM) and NetSuite (NYSE: N) are benefitting most from this early adoption wave, traditional on-premises vendors such as Oracle (NASDAQ: ORCL), Microsoft (NASDAQ: MSFT), SAP (NYSE: SAP) and IBM (NYSE: IBM) are rapidly overhauling their business modelsto accommodate this shift in customer expectations and preferences.

Gartner’s report found this to be especially true in customer relationship management (CRM) space, where SaaS applications represented more than 24 percent of total CRM sales last year, and will account for at least 26 percent of CRM revenue in 2010.

“The market landscape for on-demand CRM continues to evolve and mature as the availability and use of SaaS solutions becomes more pervasive,” Mertz added. “Greater market competition and increased focus by the mega-vendors 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.”

Larry Barrett is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.