This industry market report was prepared by Sebastian Lambert, CEO of FinancesOnline and our company’s expert on SaaS growth hacking and lead generation strategies. All information included below is based on both research of external sources as well as Sebastian’s analysis of SaaS-related data from FinancesOnline users and customers in 2016.
Gartner predicted early this year that the public cloud market would be worth $204 billion in 2016. The industry is expected to grow by 16.5% this year compared to 2015. Meanwhile, Forrester estimated that global public cloud services would register a 22% compound yearly growth towards 2020.
The figures seem on track even as we wait for SaaS industry report 2016 numbers to come in early next year (the trends have been portrayed pretty accurate thus far, you can take a look at Sebastian Lambert’s 2015 State of SaaS Market Report if you like). At worst, both Gartner’s and Forrester’s figures won’t be far off if we consider the positive trends in the industry that we’ve seen in the past twelve months. Growth isn’t everything, though. Let’s take a look at five major SaaS market trends that deserve your attention.
Key Takeaways for State of SaaS in 2016
- SaaS is more stable today with legacy software companies consolidating their hold, while customer adoption is reaching maturity.
- SaaS vertical is growing faster than horizontal SaaS, as industry-specific features are demanded by more businesses.
- Developers are taking charge again in SaaS adoption as SDKs and APIs become critical cloud features.
- Private cloud is on the rise possibly caused by cyber security scares highlighted by the Panama Papers.
- Small and medium businesses continue to drive SaaS growth fueled by CRM, business analytics, and storage solutions.
Despite Gartner’s flowery prediction on the public cloud market, the industry actually went down nearly 50% in market capitalization early this year. According to the Bessemer’s Cloud Index involving 42 vendors the cloud market hit rock bottom in February (BVP State of the Cloud 2016), following a record high in the previous month. BVP figures showed the industry reflected 9.5x revenue in January, before plunging to 3.1x revenue in the second month.
The sudden volatility, however, was checked by March, with revenue levelling at 4.9x revenue. The market dip is an isolated hiccup and does not mirror the industry’s real trend. The BVP Index, in fact, outperformed Nasdaq at twice the rate from 2011 into 2016.
Aside from the fact that the market has stabilized since March, the public cloud industry also enjoyed two positive trends in 2016 that clearly suggest stability: acquisitions and churn rate.
First, legacy software vendors are getting into the picture. Their on-premise enterprise business at stake, these companies were the last major resistance to SaaS. When they start jumping into the other side, it’s a sign that SaaS vendors are becoming mainstream.
BVP recorded that one-fourth of the public cloud market acquisition involved legacy software vendors. “[They are] finally admitting cloud is here to stay and are buying their way to catch up,” BVP noted. Looking at the big picture as well, industry M&A hit $50.4 billion this year, more than 60% increase compared to 2014. Oracle buying NetSuite N and Microsoft acquiring LinkedIn are two giant clues the industry is consolidating.
Another positive trend is a glimpse of churn rate going down, or, at least, it’s not going up. We compared two studies, one done in 2015 and another in 2016, and noted a downtrend in churn rate. It’s a random take on this metric, with both studies tapping different sets and perspectives. Still, it’s worth your attention.
Last year, Pacific Crest published its Private SaaS Company Survey Results that showed 75% of SaaS vendors had annual dollar churn of 5% or under. This year, we got hold of InsightsSquared SaaS Benchmark, which indicated a revenue churn at 3.1% based on average sales price. We can surmise that SaaS customers are becoming more comfortable with cloud computing.
The BVP study corroborates what we’ve seen started to happen in 2014: the growth of vertical SaaS solutions specific to industries, also known as Industry Cloud. SaaS started as a horizontal solution addressing general business processes, such as CRM, HR, business intelligence, and accounting. Salesforce, the SaaS pioneer, leads this type of cloud software. However, this year we see the emergence of vertical SaaS bannered by healthcare and energy. These cloud solutions feature industry-specific tools and processes that are not adaptive to other industries. For instance, HIMSS Analytics found that health information exchange and patient engagement were the two largest processes moved to the cloud this year in healthcare (34.3% and 35.2%, respectively; HIMSS Analytics 2016 Cloud Survey). This is in stark contrast to 2014 cloud priorities in the same industry, when archive data, IT disaster plan, and back office solutions–all horizontal SaaS–took the top spots.
Another way to look at this trend is to check the rapid growth of this market segment that reached the tipping point last year. Emergence Capital Partners (ECP) mapped the Industry Cloud landscape in 2015 and came up with 400 vertical SaaS vendors covering more industries, from agriculture to transportation. Here’s an image prepared by ECP (click it to see a high-res version):
Likewise, BVP noted that major Industry Cloud players led by DealerTrack and Fleetmatics have started to attract acquisitions by legacy vendors. In fact, Industry Cloud comprises 20% of SaaS acquisitions this year, according to the BVP report.
Where big software companies are putting in their money suggests confidence in vertical SaaS. The focus on the vertical is likely to continue in 2017 and maintain its position as the largest SaaS segment.
Despite the focus of many SaaS systems as enabler of end-users with little tech knowledge or coding skills–a value proposition that had starkly contrasted the industry from on-premise enterprise since the advent of cloud solutions–developers are becoming a key player in technology decision process, again. In short, the company techies seem to be wrestling back control of an area perceived as their territory.
The best indicator of this trend, according to the BVP study, is the “growth of developer-centric businesses.” Twilio and Atlassian were the two largest IPOs recently, vendors that offer solid SDK and APIs for open-source language scripting or mobile integration.
Our best guess is, as user data become more complex and huge, for instance AI-generated analytics, and as new platforms and digital channels are introduced, such as IoT (Internet of Things) and smart devices, SaaS software has to adapt fast without having to relaunch the product. SDKs and APIs provide a good option.
Another driver, perhaps, that pushes the trend towards developer-centric solutions is the growth of vertical SaaS. In the ECP map above, sectors, such as energy, government, and healthcare have traditional organizational structure that features an in-house IT department. Catering to these companies, SaaS vendors have to engage this department to position their software.
Lastly, the emergence of private cloud–our next trend–demands a hands-on tech support.
Even as enterprise cloud drives SaaS growth, large companies are directing this growth towards a parallel path: private cloud. Forrester reported last November that 44% of decision makers for enterprise solutions revealed that they are tapping private cloud. Another 25% said they are doing the same next year.
This trend came on the heels of a 2015 Forrester study indicating 31% of survey participants said they used a “hyperconverged” infrastructure for their private cloud, with 15% following suit this year. The trend towards private cloud looks steady among large enterprises going into 2017.
One contributing factor may be cyber security. This year, BVP estimated that data breaches cost $2.1 billion, four times more than last year. Perhaps none sent the most revealing security scare to the industry than the Panama Papers published last April by investigative journalists in the hunt for big tax evaders in the US. Their sleuthing revealed 11.5 million leaked financial and legal documents of client data from offshore companies. The security breach put at risk 12 former country leaders, 29 Forbes-listed billionaires, and 214,000 companies, trusts, and foundations, among others.
Private cloud providers like Microsoft, VMware vCloud, OpenStack, and Apache are also doing better in the stock market compared to public cloud. Check the graph below from BVP, which shows private cloud multiples trading above public cloud for the period 2011 to 2016. Note, however, that the two are converging towards the end of 2016 and the curves are likely to meet sometime in late 2017. This, as public cloud vendors venture into private cloud options or the other way around.
Similarly, an IDG Enterprise survey showed private cloud topped the cloud model of choice of organizations. The survey included 925 participants: 62% said they opted for private cloud; 60% selected public cloud; while 26% chose hybrid solutions.
The 2016 Report on the State of SaaS by Better Buys predicted that “there’s no going back from the cloud.” This SaaS industry report 2016 shows that 64% of small and medium companies use cloud technology to drive sales and boost efficiency.
Furthermore, 78% of these companies are planning to use more SaaS software across business processes in the next three years, said the report. This will increase the average number of cloud software used by small businesses to seven from three last year.
Fueling SaaS adoption by small and medium businesses is the need for CRM, where the focus is on retaining and satisfying customers to sustain growth. Gartner said CRM revenues has doubled since 2008 and is predicted to reach over $36 billion by next year.
Likewise, small and medium companies are part of the overall trend by organizations of adopting business analytics and cloud storage next year–two of the highest growth segments in SaaS–according to the IDG Enterprise survey.
Meantime, the same survey concluded that cloud decision-makers for small and medium companies are still led by the CEO or owner at 81%, followed by the CIO at 79%, and the CFO at 71%. For vendors, these are the three key people to pitch their software to.
With its market stabilized and customer adoption reaching maturity, the cloud industry is primed for SaaS 2.0. New features and market segments have already started this year and will gain more momentum in 2017. Here are three key movers of SaaS 2.0:
Health, energy, and utilities lead industries today for vertical SaaS markets. We expect the same business adoption in other verticals including chemicals, industrial products, social services, and retail.
The last in particular is primed for a huge disruption with the continued improvement of two consumer technologies this year: virtual reality and machine learning. Alibaba introduced a VR shopping experience on this year’s Black Friday. Chinese shoppers “visited” stores around the world without leaving their room. We can see shopping cart solutions and ecommerce builders integrating VR in their features quite soon.
Machine learning is also primed to disrupt retail and the SaaS applications it uses, primarily among CRM and help desk solution. Microsoft is already working on its third generation of chatbot that are increasingly human-like. Following the success (and controversies) of Tay chatbot to communicate with humans in 14 cycles, Microsoft recently launched Zo, its latest AI chat experiment and so-called improved Tay (Zo can shut its mouth when talking about controversies).
Machine learning or artificial intelligence isn’t only limited to retail, but can, in fact, reshape, the whole SaaS landscape. BVP predicts that enterprise SaaS solutions will start adding an AI layer to help users interact with their software. AI also presents deep learning opportunities that can be unraveled in business analytics, a timely feature to address the “breadth and depth of data,” said BVP.
With AI already driving cars and dabbling in customer support, we expect more SaaS vendors to start incorporating this technology in their software quite soon.
Enterprise mobile solutions are also believed to have a big impact on the SaaS market starting next year. Gartner said it expects more workers to receive convertible laptops next year; 75% of employees in mature economies will get at least a PC-type device. This can only lead to a bigger mobile workforce next year relying on mobile solutions to stay connected to and in sync with the office.
In the meantime, IDC reported that mobile app development platforms “are critical for businesses that are mobilizing their workforce, external marketing, customer interactions, operations, and business processes.” SaaS solutions that can offer mobile custom apps for specific users and business scenarios are a huge motivation for companies to boost their operations and efficiency, while lowering costs, suggested the IDC report.
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