After a decade winning approval from the market, software as a service (SaaS) is set to grow rapidly in 2010. Vendors cannot delay if they want to benefit from the predicted explosive growth – not forgetting that Salesforce.com is now the 34th largest software company in the world.
Market analyst IDC estimates SaaS will grow 35 per cent a year until 2013, then representing 20 per cent of all IT spend worldwide. Yet many are postponing SaaS adoption – because funding remains the single biggest roadblock.
Vendors moving to SaaS today may win first mover advantage, offering their products through SaaS ahead of their rivals.
Shaking up the software business
Marketing a web-based software system is a far cry from selling, shipping and supporting license-based software and so the move to SaaS will undoubtedly bring with it considerable challenges as well as advantages for vendors, although delivery over the web doesn’t have to be the only way forward.
Small and mid-sized vendors believe mistakenly that they cannot overcome these challenges to compete with the major SaaS players on SaaS and are giving up too easily.
They are uncertain how they can cover the cost of the transition, such as the cost of new billing and sales systems, as well as the considerable hit their cash flow could take through the transitional period -- particularly after sluggish or falling sales through the downturn.
Funding will not only cover the cost of the transition but carry vendors through from the substantial, one-off payments they currently receive from their customers to the smaller monthly subscription fees they will begin to receive through SaaS -- and through to the longer term whole-of-life income they could expect to achieve.
Cautious vendors may argue that bank funding remains thin on the ground. Recent suggestions that vendors may even need to issue equity to raise funding for SaaS would be rather unpalatable to vendors and impractical in the current economic climate.
But there is an alternative solution that will enable vendors to both cover the cost of the transition as well as the associated pressures on vendors’ cash flow, without having to jump through hoops to secure bank funding or give up a slice of their business.
Independent finance provision can help
The solution lies in partnering an independent finance provider with a clear understanding of the market and close ties with lenders. Such ties make it far easier for them to secure bank funding than it would be for the vast majority of vendors.
For example, we are having growing success in attracting new bank funding into our vendor financing programmes. Partners that are software financing specialists can provide vendors with the support they need and, unlike with bank funding, can provide finance tailored exactly to the requirements of software firms.
This both manages the transition and cushions vendors from the overnight hit to their cash flow that would usually follow the adoption of SaaS.
The way customers view software is changing rapidly and vendors must ensure they are keeping pace with their customers’ needs. If they don’t they may pay a heavy price in the long run.
Buyers are finding that there is a strong business case against purchasing a perpetual software licence up-front. In the wake of the recession, organisations will be increasingly drawn to the SaaS concept because it allows them to make that much-needed investment without eating into their capital reserves, which are likely to have shrunk severely over the course of the recession.
The ability to buy software without bearing the up-front expenditure is viewed as too valuable to pass up, and as a result businesses are prepared to pay more for their software over time.
This can be great news for vendors who will see a boost in their revenue -- but bad news for those who fail to offer this service. Recurring revenues will help vendors gain a better understanding of their customers, better tailor their products, and build or maintain strong, long-term strategic relationships that a competitor will struggle to dissolve.
Mass-market acceptance of SaaS is fast approaching and presents vendors with
a golden opportunity if they move quickly enough. A bespoke vendor finance
programme offers a low risk, cheap way for providers to benefit from SaaS.
Philip White is chief executive officer at independent finance provider Syscap
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