Executive Summary: ISG Provider Lens™ Enterprise Application-as-a-Service Platforms - U.S. 2021
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Software As A Service Observed Trends
According to the Americas ISG Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, the region delivered a record $5.2 billion of cloud based as-a-service ACV in the first quarter of 2021, up 11 percent from the previous year and 10 percent over the fourth quarter. Growth was fueled by strong demand for infrastructure as a service (IaaS), which rose 14 percent from the previous year, to a new high of $3.5 billion along with 5 percent growth in software as a service (SaaS) at $1.7 billion. ISG forecasts the global market for cloud-based services (IaaS and SaaS) will grow 18 percent in 2021, down slightly from its 20 percent forecast at the start of the year. According to Todd Lavieri, vice chairman, partner and president of ISG Americas and APAC, the demand for cloud-based services is continuing to increase among enterprises.
The pandemic has served as a catalyst for growth. In the past year, companies have accelerated their cloud adoption to enable remote working and improve the digital customer experience while also striving towards efficiency and cost savings to reinvest in other areas, such as cybersecurity and data management, that are crucial for their overall digital journey. This year, ISG sees the digital transformation pace picking up considerably as global economies begin to rebound.
The pandemic and the subsequent lockdown measures had a significant impact on the U.S. economy. Organizations have realized the need for a more agile and resilient operating model that can respond timely to any disruptive events such as the pandemic, trade wars, political unrest and growing demand for local manufacturing. The outbreak has stretched the supply chain and now companies are restructuring and replanning their country production strategy to have multiple manufacturing units for sustaining such disruptions. IT spending was also hit hard with all segments witnessing negative growth, apart from cloud applications. Businesses that have made the journey to SaaS are better positioned to respond to significant economic, social and regulatory changes. They are prepared to reshape customer interactions by empowering remote employees with insights to deliver superior experiences. SaaS applications and solutions are continuing to assist businesses across industries, governments and educational institutions to adopt an agile approach right from strategy, planning to implementation, helping them to quickly react to constantly changing market dynamics and realities.
Companies in the U.S. are continuing to adopt next-generation SaaS solutions with innovative technologies that are customer centric and offer users with operational efficiency, such as artificial intelligence (AI), machine learning (ML), automation, Internet of Things (IoT), predictive analytics and edge computing. Modern SaaS solutions also offer a superior user and customer experience to remain competitive. The primary factors that drive the overall growth of SaaS in the U.S. include lower up-front capital that would ensure higher experimentation and testing, coupled with business continuity and innovative offerings with higher ROI.
Changes in buyer and user requirements have bought in a seismic shift in the design of enterprise applications, prompting SaaS providers to build platforms with cloud-native technology, intelligent user-centric designs and modern application programming interfaces (APIs) for frictionless integration. This next generation of enterprise applications with cloud-native architecture address dynamic application workload and data requirements, subsequently driving growth in the connected cloud architecture space. SaaS applications offer a common data architecture that can unify data silos. They also offer enhanced marketplaces that allow partners to extend the capabilities of core applications to address specific industry or business requirements.
Some of the trends that will further drive the adoption of SaaS in U.S. are highlighted below.
- APIs to continue facilitating easy integration: APIs have been a fundamental part of software development for years and have become more important for enabling channel partners and integrators to connect a set of applications for meeting specific customer needs. As APIs facilitate the work of channel partners, they cut the cost of acquiring new customers, reduce the go-to-market time and allow providers to focus on their core capabilities to develop a differentiated functionality.
- Vertical SaaS is the future bet: The market is witnessing a surge in demand for vertical SaaS that offers industry specific solutions. Providers have directed their investments towards creating pre-built industry integrations and KPIs to expand their presence. The manufacturing and product-centric industries are increasingly seeking vertical SaaS mainly for supply chain management (SCM) and enterprise resource planning (ERP) after the pandemic outbreak. Vertical SaaS is a cost-effective option that can fine tune specific features and offer industry specific compliance capabilities.
- Centralized data analytics and common data architecture: These leverage modern solutions such as performance dashboards. They provide unified data that allows users to remove silos, discover insights and access key information.
- New functionalities offered by AI: The use of AI optimizes business processes by automating repetitive tasks. At the same time, service providers are offering many new features such as data alerts powered by AI. Integrated with advanced AI and machine learning algorithms for pattern recognition and neural network for anomaly detection, these data alerts learn from trends and patterns to inform users about critical issues well in advance.
Thoughts on Market Consolidation
The SaaS market has an increasing number of participants, including small and niche solution providers that are dedicated to a single industry vertical in a limited geographic area. SaaS reduces cost for vendors and enables them to promote their solution to a large audience. Nearly every SaaS company assessed in this study has acquired smaller vendors over the last three years, except for Acumatica (acquired by EQT Partners) and Infor (acquired by parent company Koch Industries). SaaS is ideal for large vendors, and ISG forecasts that market consolidation will continue.
When procuring SaaS, clients should consider support options and the chances of a vendor being acquired. Some vendors opt to provide customer support directly, while others prefer to transfer the responsibility to partners. A robust ecosystem of partners and applications in a vendor’s marketplace attracts more contributors towards innovation and indicates its position in the market. Those that have qualified for this study have met these criteria, but clients should consider the ecosystem strength and support strategy while comparing these large vendors to niche or smaller ones.
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