In the beginning of 2014, Forrester projected that software would have the fastest revenue growth of any tech category. Software as a service (SaaS) has been a huge driver of that growth, increasing at over 20 percent per year, according to Forrester. Meanwhile, traditional licensed software growth has slowed, leaving many software companies that have not adopted a SaaS model realizing they are behind the curve.
Transitioning to the SaaS model has been, and is likely to continue to be, a strategic move for software companies. Forrester reports that the U.S. accounts for nearly 60 percent of SaaS and analytics spending, and companies are increasingly looking to capitalize on that market. Talkin’ Cloud’s recent poll on cloud computing, for example, found that 46 percent of participants plan to invest more in SaaS, and 81 percent of respondents reported they offer SaaS to customers.
Recent statistics suggest that the days of selling software entirely on a perpetual license basis, in the manner of on-premise software, are numbered. By transitioning to a SaaS model, companies will be able to provide customers easy administration, automatic updates, compatibility, easy collaboration and global accessibility. As software companies prepare for the changing business model, they will no longer receive a large payment upfront; instead they will receive periodic payments over the period of usage. Overall the periodic payments for the use of their SaaS service exceed the payments under the traditional license model.
What’s Driving the Change
Aside from the obvious factors driving the shift to SaaS, such as easy installation, management, updates and the low initial costs, today’s mobile workforce and the need to foster a more collaborative “virtual environment” is driving the change to the cloud even faster than before. As the cloud continues to dominate the industry and more companies adopt a mobile workforce, organizations will need a structure that cultivates a collaborative workplace and offers employees easy and flexible access to their technology. In fact, according to Inc., the number of employees working from home or on the go has increased 60 percent since 2005.
Even long-established enterprise organizations, such as Microsoft, are introducing more cloud-based offerings. In a recent interview at a media event in San Francisco, Microsoft CEO Satya Nadella said the company is in the cloud computing game for the long haul and developed Office 365 and Microsoft Dynamics—both cloudhosted SaaS applications—to meet increasing consumer demand.
One particular industry that has been significantly impacted by SaaS is healthcare. Technology and healthcare reform have transformed the industry, empowering consumers and providing the opportunity for more access to information and data than ever before. Many software companies see an opportunity to help empower consumers, physicians and healthcare organizations to improve the quality of care, specifically through digital applications. According to the 2014 HIMSS Analytics Cloud Survey, 67 percent of IT healthcare organizations are running SaaS-based applications today, and 92 percent of healthcare providers see the value of cloud services for their organizations.
Key Challenges of SaaS for Business
Software companies will face numerous challenges as they make the transition to a SaaS model. As many middle market software companies wrestle with the shift to SaaS, they must be aware of how this business shift will impact their reported revenue. Equally important is that they will need to manage the expectations of the users of their financial statements. Either under existing rules or the new revenue recognition standards, their reported revenue will likely be significantly impacted.
Security concerns have become more prevalent than in years past with the growing popularity of cloud-based applications. Many customers fear unauthorized access to proprietary information and security defects. With an increasing number of mobile employees and having to store sensitive information in the cloud, organizations need to be mindful of the risk of unwanted intrusions to their cloud infrastructure and ensure they have an emergency plan in place. Companies could consider embedding a required periodic independent verification for users to maintain the system’s security. Overall, SaaS companies need to have a secure system which their customers can rely on, but building such an environment can be difficult and costly.
Moreover, software companies that offer SaaS models and cloud applications will need to ensure their infrastructure has the capability to provide automatic and frequent updates as well rapid responses to any technical issues.
Aside from the challenges, there are promising opportunities for companies in the SaaS and cloud computing space. According to IDC, public cloud computing services are forecast to grow at six times the rate of the overall information technology market over the next five years. With this surge in cloud spending, software companies may be well positioned for success by offering SaaS products rather than traditional enterprise applications.
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This article originally appeared in BDO USA, LLP’s “BDO Tech Newsletter ” newsletter (Winter 2014). Copyright © 2014 BDO USA, LLP. All rights reserved.