Saa S Valuation Criteria

Making Leaders Successful Every Day
February 22, 2010
SaaS Valuation Criteria
by Liz Herbert
for Sourcing & Vendor Management Professionals

© 2010, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available
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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
Key Considerations For Sourcing SaaS Strategically
by Liz Herbert
with Christine Ferrusi Ross, Elizabeth Rose, and Philipp Karcher
2
7
10
11

© 2010, Forrester Research, Inc. Reproduction ProhibitedFebruary 22, 2010
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
salesforce.com 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).

© 2010, Forrester Research, Inc. Reproduction Prohibited February 22, 2010
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
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

4
Figure 3 Firms Use SaaS Across A Broad Range Of Applications
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
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%

5
Figure 4 SaaS Buyers Have Many Choices Across Leading Categories
ERP FinancialForce.com, Glovia, Coda, Workday, Intacct, NetSuite
HCM Ultimate Software, Workday, Plateau
CRM RightNow Technologies, salesforce.com, 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).

6
Figure 5 Deployment Speed And TCO Drive SaaS Purchasing Decisions
“How important were the following in your firm’s decision to adopt software-as-a-service?”
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
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?”
And Africa, Q1 2009
(multiple responses accepted)
Figure 6 SaaS Skeptics Are Concerned With TCO, Security, And Privacy

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 salesforce.com, 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 salesforce.com, 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

8
Figure 7 Functionality And Cost Reign King Across Software Buy Decisions
Base: 1,900 global IT services decision-makers
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 salesforce.com, 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

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

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 (salesforce.com 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.

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 salesforce.com’s Force.com 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.

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