Hosted Software Enters the Down Side of the Hype Cycle

“SMB SaaS sales robust, but holdouts remain” reads the headline on a piece from SearchSMB.com Website. (For the acronym impaired, SMB is “small and medium sized business” and SaaS is “software as a service”, a.k.a. hosted systems.) The article quotes two recent surveys, one by Saugatuck Technology and the other by Gartner. According to the article, Saugatuck found “SMB adoption rose from 9% in 2006 to 27% in 2007” among businesses under $1 billion in revenue, while Gartner reported “Only 7% of SMBs strongly believed that SaaS was suitable for their organizations, and only 17% said they would consider SaaS when its adoption became more widespread.”

These seem to be conflicting findings, although it’s impossible to know for certain without looking at the actual surveys and their audiences. But the very appearance of the piece suggests some of the bloom is off the SaaS rose. This is a normal stage in the hype cycle and frankly I’ve been anticipating it for some time. The more interesting question is why SMBs would be reluctant to adopt SaaS.

The article quotes Gartner Vice President and Research Director James Browning as blaming the fact that “SMBs are control freaks” and therefore less willing to trust their data to an outsider than larger, presumably more sophisticated entities. Maybe—although I’ve seen plenty of control freaks at big companies too. The article also mentions difficulties with customization and integration. Again, I suspect that’s a contributing factor but probably not the main one.

A more convincing insight came from an actual SMB manager, who pointed to quality of service issues and higher costs than in-house systems. I personally suspect the cost issue is the real one: whether or not they’re control freaks, SMBs are definitely penny-pinchers. That’s what happens when it’s your own money. (I say this as someone who’s run my own Very Small Business for many years.) On a more detailed financial level, SMBs have less formal capital appropriation processes than big companies, so their managers have less incentive to avoid the capital expense by purchasing SaaS products through their operating budgets.

One point the article doesn’t mention is that SaaS prices have gone up considerably, at least among the major vendors. This shifts the economics in favor of in-house systems, particularly since many SMBs can use low cost products that larger companies would not accept. This pricing shift makes sense from the vendors’ standpoint: as SaaS is accepted at larger companies with deeper pockets, it makes sense to raise prices to match. Small businesses may need to look beyond the market leaders to find pricing they can afford.