Saa S Valuation Criteria


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Saa S Valuation Criteria

  1. 1. Making Leaders Successful Every Day February 22, 2010 SaaS Valuation Criteria by Liz Herbert for Sourcing & Vendor Management Professionals
  2. 2. © 2010, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester®, Technographics®, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. To purchase reprints of this document, please email For additional information, go to For Sourcing & Vendor Management Professionals Executive Summary Firms are increasingly sourcing SaaS strategically for enterprisewide deployments that span mission- critical deployments — email, customer support, and financial applications. Firms making SaaS decisions of this magnitude should scrutinize vendors carefully across key dimensions relevant to SaaS and cloud — security, privacy, backup, vendor viability, product road map — but also weigh the tradeoffs versus finding a nimble, flexible, full-featured, fast deployment option that meets their needs. table of Contents SaaS Continues To Appeal To Buyers — Across Applications And Geographies SaaS Buyers Are Concerned With TCO And Risk Why SaaS Requires Unique Buying Considerations Key Criteria That Matter When Selecting A SaaS Solution recommendations For Smaller SaaS Vendors, Weight The Potential Value To Be Gained Supplemental Material NOTES & RESOURCES Forrester interviewed vendor and user companies, including Google, Hubspan, IBM (LotusLive), McAfee, NetSuite, and Workday. Related Research Documents “Status, Challenges, And Near-Term Tactics For Cloud Services In Enterprise Outsourcing Deals” November 18, 2009 “The ROI Of Software-As-A-Service” July 13, 2009 “TechRadar™ For Sourcing & Vendor Management Professionals: Software-As-A- Service” March 12, 2009 February 22, 2010 SaaS Valuation Criteria Key Considerations For Sourcing SaaS Strategically by Liz Herbert with Christine Ferrusi Ross, Elizabeth Rose, and Philipp Karcher 2 7 10 11
  3. 3. © 2010, Forrester Research, Inc. Reproduction ProhibitedFebruary 22, 2010 SaaS Valuation Criteria For Sourcing & Vendor Management Professionals 2 Saas continues to appeal to buyers — across applications and geographies SaaS adoption is still on the rise. Nearly a decade since the early roots of then-infant companies like and NetSuite, SaaS is now becoming a mainstream choice in most categories. In 2009 Forrester surveys showed: · Increased adoption and expansion of existing deployments. Forrester has seen a steady upward tick in SaaS adoption over the past several years since introducing the question in its Business Data Services market surveys. Currently, approximately one-fifth of IT services buyers tell Forrester they use SaaS (see Figure 1). Of these, nearly one-half told us they were expanding their deployment in 2009. An additional 26% of respondents were considering or piloting SaaS. Perhaps most notably, very few firms are reducing or removing SaaS investments: only 2%. · Growth on a worldwide scale. SaaS adoption has now spread throughout the globe (see Figure 2). Although its early roots were heavily in the US, UK, and Australia, in part due to the English-only offerings as well as connectivity issues in some parts of the world, SaaS is now a key deployment model across Latin America, China, India, the Middle East, and Africa — as well as North America, Europe, and Asia Pacific. Although connectivity and localization issues have hindered its adoption in some emerging regions, its low upfront costs, ability to scale, and reduced need for infrastructure make it a strong choice over on-premise investments. · SaaS use across a wide range of business and IT applications. SaaS continues to break down barriers — appealing to buyers across a wide range of solutions. Notably, despite the long run that sales automation had at the top of the SaaS popularity list, categories like enterprise resource planning (ERP), content management, collaboration (which includes email), project- based solutions, and supply chain software have all surpassed it in 2009 (see Figure 3). This shows that SaaS has matured significantly — not only are SaaS offerings available in these categories, but firms consider them viable alternatives to on-premise choices (see Figure 4).
  4. 4. © 2010, Forrester Research, Inc. Reproduction Prohibited February 22, 2010 SaaS Valuation Criteria For Sourcing & Vendor Management Professionals 3 Figure 1 Firms Are Expanding Their Use Of SaaS Source: Forrester Research, Inc.55950 9% 11% 26% 2% 52%Not interested or don’t know Decreasing or removing Considering or piloting Implementing or implemented Expand or upgrade existing implementation “What are your firms plans to implement or expand your use software-as-a-service (SaaS) in the next 12 months? SaaS is an application which you don’t own, it is hosted remotely, and a monthly usage fee is paid.” Source: Enterprise Global Technology Adoption Survey, Asia Pacific, Latin America, Middle East, And Africa, Q1 2009 Base: 370 IT services decision-makers Source: Forrester Research, Inc.55950 3% 7% 5% 7% 7% 4% 23% 19% 24% 25% 25% 36% 33% 33% 31% 29% 33% 28% 42% 41% 39% 39% 35% 32%North America Asia Pacific (Japan, South Korea, Singapore, Australia/New Zealand) Europe (excluding Russia) MEA/Russia (Russia, UAE, South Africa) Emerging Asia (China, India) Latin America Critical/high priority Low priority Not on our agenda Don’t know “Which of the following initiatives are likely to be your IT organization’s major technology-related themes for 2009?” Adopting or increasing your use of software-as-a-service Base: Global enterprise and SMB budget decision-makers (percentages may not total 100 because of rounding) Source: Enterprise And SMB Global IT Budgets And Spending Survey, Q2 2009 N = 262 N = 259 N = 329 N = 717 N = 370 N = 1,560 Figure 2 SaaS Adoption Is Growing Worldwide
  5. 5. © 2010, Forrester Research, Inc. Reproduction ProhibitedFebruary 22, 2010 SaaS Valuation Criteria For Sourcing & Vendor Management Professionals 4 Figure 3 Firms Use SaaS Across A Broad Range Of Applications Source: Forrester Research, Inc.55950 Other software Software that supports an industry-specific process Marketing automation software Sales force automation (SFA) software Product life-cycle management (PLM) software Web 2.0 technologies such as blogs, wikis, and RSS Supply chain management (SCM) software Project-based solutions (PBS) software Collaboration software Spend management or supplier relationship management (SRM) software Order management software Human capital management (HCM) software Content management software Customer service and support software, field service, help desk, eService, and contact center management) Enterprise resource planning (ERP) software Yes No Don’t know “For which of the following software applications is your firm using software-as-a-service (SaaS)?” Base: 176 global IT services decision-makers (percentages may not total 100 because of rounding) Source: Enterprise Global Technology Adoption Survey, Asia Pacific, Latin America, Middle East, And Africa, Q1 2009 42% 52% 6% 42% 52% 6% 41% 53% 6% 40% 54% 6% 40% 54% 6% 37% 57% 6% 37% 57% 6% 33% 61% 6% 31% 63% 6% 26% 68% 6% 25% 69% 6% 23% 70% 6% 20% 74% 6% 14% 80% 6% 8% 86% 6%
  6. 6. © 2010, Forrester Research, Inc. Reproduction Prohibited February 22, 2010 SaaS Valuation Criteria For Sourcing & Vendor Management Professionals 5 Figure 4 SaaS Buyers Have Many Choices Across Leading Categories Source: Forrester Research, Inc.55950 ERP, Glovia, Coda, Workday, Intacct, NetSuite HCM Ultimate Software, Workday, Plateau CRM RightNow Technologies,, SAP, NetSuite, Oracle Siebel CRM OnDemand, Microsoft Collaboration (including email) Google, Microsoft, IBM’s LotusLive, Cisco’s Webex, Citrix Sales performance management Xactly (and Centiv, which it acquired), Callidus On Demand IT service management HP, service-now, CA, BMC McAfee, Symantec, Google, Microsoft, HP, IBM, Websense, Scansafe, Zscalar SaaS integration Hubspan, Castiron, Informatica, Sterling Commerce Security Category Example SaaS vendors Other Concur (travel and expense), Daptiv (project management) SaaS Buyers Are Concerned With TCO And Risk SaaS buyers like the appeal of fast deployment, ability to substitute monthly costs for upfront costs (opex versus capex), and reduced dependence on internal IT resources (see Figure 5). They like that SaaS, with its automatic upgrades, can quickly deliver features that on-premise solutions lack. And many firms believe that SaaS offers a lower overall cost. But some SaaS skeptics raise serious concerns about SaaS’ total cost of ownership (TCO), security, privacy, performance, integration, and finding the solution they seek.(see Figure 6).
  7. 7. © 2010, Forrester Research, Inc. Reproduction ProhibitedFebruary 22, 2010 SaaS Valuation Criteria For Sourcing & Vendor Management Professionals 6 Figure 5 Deployment Speed And TCO Drive SaaS Purchasing Decisions Source: Forrester Research, Inc.55950 “How important were the following in your firm’s decision to adopt software-as-a-service?” Base: 176 IT services decision-makers (percentages may not total 100 because of rounding) Source: Enterprise Global Technology Adoption Survey, Asia Pacific, Latin America, Middle East, And Africa, Q1 2009 Lower overall costs Speed of implementation and deployment Lack of in-house IT staff to maintain a traditional software solution Gaining a feature or functionality that is not available in a traditional, licensed software package To support a large number of mobile and remote users Ability to substitute upfront costs with regular monthly payments 2% 10% 19% 27% 36% 3% 8% 28% 24% 34% 2% 8% 22% 31% 25% 2% 8% 13% 27% 24% 26% 2% 13% 13% 11% 26% 26% 22% 3% 13% 10% 28% 24% 22% 6% 3% 2 3Don’t know or n/a 1: Not at all important 4 5: Very important Source: Forrester Research, Inc.55950 36% 30%Security or privacy concerns 23%We can’t find the specific application we need 23%Integration issues 20%Complicated pricing models 19%We’re locked in with our current vendor 18%Network latency issues 18%Lack of customization 16%Application performance Other reason 19% Total cost concerns “Why aren’t you interested in software-as-a-service?” Source: Enterprise Global Technology Adoption Survey, Asia Pacific, Latin America, Middle East, And Africa, Q1 2009 Base: 194 IT services decision-makers (multiple responses accepted) Figure 6 SaaS Skeptics Are Concerned With TCO, Security, And Privacy
  8. 8. © 2010, Forrester Research, Inc. Reproduction Prohibited February 22, 2010 SaaS Valuation Criteria For Sourcing & Vendor Management Professionals 7 why saas requires unique buying considerations Many clients ask Forrester what’s different about SaaS versus other software or services purchases. Typical software buyers tell Forrester that criteria such as functionality, cost, service and support, and integration top their list of buying criteria (see Figure 7). While these criteria are still highly important for SaaS purchasing, SaaS differs from tradition software in key ways such as: · Greater dependency on a large customer base for survival and profitability. SaaS is built on the concept of multitenancy and economies of scale; as the client base of the SaaS provider grows, its cost to serve the next customer decreases (in theory). Therefore, a true SaaS model is more dependent than single-tenant models on a large subscriber base to succeed and to have funds available to reinvest in R&D to sustain the automatic upgrades clients have come to expect. · Unlikely to be easily, cost-effectively run on-premise single instance. Software escrow has long been a tactic that firms have relied on to protect themselves from software vendor risk. However, because SaaS is typically built to run in a multiclient environment it would be much less practical to migrate a SaaS solution than a single-instance hosted solution to an on-premise or alternate provider environment. This means that SaaS escrow has limited practicality. While some may question the practicality of software escrow generally, SaaS escrow has much less chance of utility than software escrow in non-SaaS situations. · Central point of attack for hackers. The multitenant nature of SaaS solutions means there is a central point of attack for security hacks to steal crucial information about bank accounts, customers, and more. However, while some potential SaaS buyers immediately perceive this as a negative it can sometimes be a positive because it forces SaaS providers to place extra emphasis on security. Some SaaS providers, like Google and, are the targets of countless attacks and security audits, which have resulted in stronger security than most on-premise solutions. · Immaturity of the market — shakeout and consolidation create risk. Despite SaaS’ nearly 10-year existence, the overall market is still plagued with growing pains. Vendor shakeout and consolidation run rampant, and there have even been a few failures. Many vendors are still small; only recently have larger companies like IBM, Microsoft, SAP, and Oracle entered the mix. And even within these larger firms SaaS has been plagued by stalled attempts and limited executive attention compared to on-premise alternatives. · Lack of SaaS skills — in IT talent pool and at service providers. SaaS surpassed early markers of maturity — custom fields, custom tabs, custom objects — in the earlier part of the decade, but IT skill sets and related training and certification programs have (expectedly) lagged. Firms taking advantage of enterprise caliber, Google, or Workday deployments will find they likely don’t have staff in-house that have familiarity with these tools. Fortunately, a growing group of service providers do, and training programs will likely evolve.1
  9. 9. © 2010, Forrester Research, Inc. Reproduction ProhibitedFebruary 22, 2010 SaaS Valuation Criteria For Sourcing & Vendor Management Professionals 8 Figure 7 Functionality And Cost Reign King Across Software Buy Decisions Source: Forrester Research, Inc.55950 Base: 1,900 global IT services decision-makers (percentages may not total 100 because of rounding) Source: Enterprise Global Technology Adoption Survey, Asia Pacific, Latin America, Middle East, And Africa, Q1 2009 Software pricing/licensing model Availability of service and support Ability to integrate with your firm’s other systems Overall system cost Overall functionality Ability to integrate with customers’, partners’, and suppliers’systems References from other companies Software brand Availability as software-as-a-service 3% 3% 1% 1% 1% “How important are the following criteria to your firm when selecting software?” 2 3Don’t know or n/a 1: Not at all important 4 5: Very important 9% 38% 51% 25% 71% 5% 28% 66% 9% 36% 53% 1% 14% 38% 44% 2% 11% 32% 39% 16% 6% 15% 35% 33% 11% 1% 6% 17% 29% 30% 18% 5% 22% 26% 29% 13% 5% Key Criteria That Matter When Selecting A SaaS Solution Because of the dependence on a SaaS provider and its customer base for survival, economies of scale, and crucial product investments key to the value most SaaS buyers expect, crucial factors in a SaaS solution selection include: · Vendor finances: profitability, cash, and investors. Many of today’s leading SaaS vendors are small, but firms shouldn’t disregard them outright based on that. They are also often unprofitable initially; SaaS’ subscription-based pricing model contributes to this. But buyers should be cautious to consider key factors: How much revenue does the provider generate annually? Is the provider particularly susceptible to currency fluctuation? If so, which currencies and why? If privately owned, who are the provider’s investors? What are their ties and backgrounds? · Dedication to SaaS. Some SaaS vendors — like, NetSuite, Google, and Workday — are 100% dedicated to SaaS. Others — like Microsoft, IBM, SAP, Oracle, and RightNow Technologies — offer multiple deployment options: SaaS, hosted, and/or on-premise. Like many
  10. 10. © 2010, Forrester Research, Inc. Reproduction Prohibited February 22, 2010 SaaS Valuation Criteria For Sourcing & Vendor Management Professionals 9 considerations, this is a tradeoff. Having a 100% SaaS focus means dedication of resources and typically more frequent product releases. These firms are also usually more nimble, more easily able to respond to market demand. However, firms with multiple deployment options offer flexibility to migrate between options, hybrid deployments, and sometimes options like Oracle’s private tenancy — which is an ability to have a SaaS-like option yet retain higher degrees of control around certain key infrastructure elements. · Customer base/subscriber base. An obvious question is how many SaaS customers the vendor has. This is particularly crucial since the economies of scale are a key part of SaaS survival. For most SaaS vendors, a few large SaaS customers are just as good for their economies of scales as several smaller ones — as long as the end number of “tenants” or “subscribers” is similar. But dependence on a few large customers can be risky since losing one or more could be detrimental to profitability and ultimately survival. Also important is who or what kind of customers are on the application. Because a SaaS solution is typically designed with the idea of load balancing across peaks, an optimal capacity solution has a customer mix that taxes the solution at different peak times — for example, some retail customers heavily using it on weekends and in holiday months and some services firms using it heavily during 9-to-5 hours. Otherwise, the system could be slow at peak times if all customers are on at the same time and capacity gets overloaded. · Architecture. SaaS buyers often say that SaaS’ ability to get started quickly, excess capacity, and ability to tap into resources are high on the value drivers for investing in SaaS. This means that the underlying architecture — and specifically a truly cloud-based architecture — is crucial. A strong architecture allows firms to invest slowly with small pilots and grow incrementally over time. Poorly designed architectures can often be detected because vendors have minimum commitments that are high — like 100 user minimums or higher. This can be a sign of a single tenancy design, which will reduce the resource flexibility and economy of scale benefits throughout the solution life cycle. · Security and privacy. For security and privacy, companies must consider: data protection, identity management, vulnerability management, physical and personnel security, application security, incident response, and privacy measures.2 Firms should review the vendor’s data protection techniques for both data at rest and data in motion. Firms should ensure that the provider has adequate documentation for auditors and has achieved applicable certifications such as SAS 70 Type II. Firms should review the vendor’s authentication and access control procedure and ask if any third party (e.g., third-party service provider) may have access to the data or infrastructure and how. Firms should review the vendor’s architecture to ensure proper data segregation. · Backup/redundancy. Firms should find out where their SaaS solution is hosted, where and how it is backed up. They should ask their provider about recovery time objective (RTO)— the time
  11. 11. © 2010, Forrester Research, Inc. Reproduction ProhibitedFebruary 22, 2010 SaaS Valuation Criteria For Sourcing & Vendor Management Professionals 10 to get data back after a failure — and recovery point objective (RPO)— time between backups, which translates into risk of data loss. Firms should also find out if there are partners that can offer additional backup and recovery options if they are not satisfied with what their provider offers. · Road map for new functionality. One of the key drivers for SaaS investment is the upgrades. Firms frustrated with traditional on-premise upgrades — usually costly, time-consuming, and disruptive to users — find that the more incremental SaaS upgrades deliver new features and functions multiple times per year with less disruption to users. Firms should find out how frequently they should expect upgrades, how they take advantage of them (mandatory versus at their convenience), and general categories where their SaaS provider plans enhancements. Many SaaS vendors are still working to catch up to established on-premise vendors in core areas but are also moving into new areas at the same time ( continues to beef up sales force automation [SFA] while moving into content management; Workday continues to build out human capital management [HCM] while moving into financials). · Implementation and support partners; plan to attract talent. Larger projects will require talent skilled in the SaaS solution. The skills are different than large on-premise projects: a lot less BASIS, Java, and SQL programming in favor of more point-and-click and business analyst work. But business process design, some programming, and integration work is still crucial to success. Some integrators are already building practices around leading SaaS applications — Accenture, Deloitte, CSC, Capgemini, IBM, Infosys, Wipro, UST Global as well as SaaS specialists like Bluewolf, Astadia, Appirio, CoreMatrix Systems, and ModelMetrics. Beyond third-party skills, many firms seek to build their own talent. They should evaluate training and certification available from the providers as well as partners. Few providers have well-established programs in place today; some exist, and firms should expect to see more as SaaS continues to mature. Rec o mme n d a t i o n s for smaller saas vendors, weigh the potential value to be gained Software giants like SAP, Oracle, Microsoft, IBM, and CA now offer software-as-a-service in some categories of their portfolio, but many of today’s leading SaaS applications come from smaller, newer entrants. While sourcing executives should help their firms consider the tradeoffs as well as set minimum requirements in key areas like security, they should also consider the potential benefits of smaller providers: · Good deals for being an early (and possibly strategic) customer. Early customers have an opportunity to lock in good pricing. They can typically get extra discounts for paying their full subscription upfront; smaller providers can take advantage of the cash to invest in R&D and sales and marketing efforts.
  12. 12. © 2010, Forrester Research, Inc. Reproduction Prohibited February 22, 2010 SaaS Valuation Criteria For Sourcing & Vendor Management Professionals 11 · Nimble, flexible, start-up mentality. While SaaS initiatives inside large companies are often subject to typical enterprise politics and therefore can move more slowly as a result, smaller SaaS vendors are usually able to quickly roll out new features, respond to customer demand, and innovate on product and services offerings. · Chance to drive future product direction. Early clients will have the chance to influence product direction in multiple ways. They can participate explicitly in various user groups and forums where they interact with the vendor. Often the vendor is small enough that feedback to an account manager is actually heard or they may even have interactions with upper management including the executive team. And finally, because the solution is SaaS, the way their users interact with the product may drive road map decisions; SaaS vendors often collect data on product usage and use it to drive development decisions. Supplemental MATERIAL Companies Interviewed For This Document Google Hubspan IBM McAfee NetSuite Workday Endnotes 1 SaaS solutions are entering a new phase in their evolution, one in which companies view them as a strategic part of the software landscape and as increasingly pervasive across most application categories. No longer plain-vanilla solutions lacking customization, SaaS solutions are increasingly built on extensible platforms that allow firms to fit them to their specific business process needs (à la’s and NetSuite’s NSBOS). With this growing sophistication, sourcing executives increasingly seek help from third- party services firms to navigate the SaaS landscape, technical implementation services, and ongoing service provider management. See the January 5, 2010, “Understanding SaaS Systems Integrator Option” report. 2 Amid a downturn economy, organizations increasingly look to cloud computing to improve operational efficiency, reduce headcounts, and help with the bottom line. But security and privacy concerns present a strong barrier-to-entry. In an age when the consequences and potential costs of mistakes are rising fast for companies that handle confidential and private customer data, IT security professionals must develop better ways of evaluating the security and privacy practices of the cloud services. An effective assessment strategy must cover data protection, compliance, privacy, identity management, secure operations, and other related security and legal issues. The ultimate goal: Make the cloud service work like your own IT security department and find ways to secure and optimize your investments in the cloud. See the May 8, 2009, “How Secure Is Your Cloud?” report.
  13. 13. Forrester Research, Inc. (Nasdaq: FORR) is an independent research company that provides pragmatic and forward- thinking advice to global leaders in business and technology. Forrester works with professionals in 20 key roles at major companies providing proprietary research, customer insight, consulting, events, and peer-to-peer executive programs. For more than 26 years, Forrester has been making IT, marketing, and technology industry leaders successful every day. For more information, visit Headquarters Forrester Research, Inc. 400 Technology Square Cambridge, MA 02139 USA Tel: +1 617.613.6000 Fax: +1 617.613.5000 Email: Nasdaq symbol: FORR M a k i n g L e a d e r s S u c c e s s f u l E v e r y D a y 55950 For information on hard-copy or electronic reprints, please contact Client Support at +1 866.367.7378, +1 617.613.5730, or We offer quantity discounts and special pricing for academic and nonprofit institutions. For a complete list of worldwide locations visit Research and Sales Offices Forrester has research centers and sales offices in more than 27 cities internationally, including Amsterdam; Cambridge, Mass.; Dallas; Dubai; Foster City, Calif.; Frankfurt; London; Madrid; Sydney; Tel Aviv; and Toronto.