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12/11/2007
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SaaS -- Smaller Businesses Should Proceed With Caution

A recent report indicates that software-as-a-service firms could be vulnerable in the next economic slowdown. Small and midsize businesses, who are attracted by SaaS's frequently low, or free, rates and ease of use, should be careful.

A recent report indicates that software-as-a-service firms could be vulnerable in the next economic slowdown. Small and midsize businesses, who are attracted by SaaS's frequently low, or free, rates and ease of use, should be careful.Tech analytics firm MGI Research notes that, whether there will be a real recession or even if the economy just slows its pace of growth, all software companies will be negatively affected.

But SaaS vendors are more susceptible in a weak economy because of the way their businesses are structured. "In a declining economy, SaaS companies may take a triple hit as they will see their initial transaction sizes trimmed, upsell opportunities reduced or eliminated, and then there is a possibility that users will aim to reduce the number of subscribed seats," writes MGI research analysts.

Of course, smaller businesses don't have the economic cushion of their larger counterparts and cannot afford to take a hit if their SaaS vendor goes under. But this does not mean smaller businesses shouldn't consider SaaS for their apps. The cost savings and convenience of SaaS are frequently a godsend to small and midsize companies. Smaller businesses looking into signing on with a SaaS vendor just need to proceed with lots of caution and should choose their vendor carefully.

MGI's research analysts note that "When it comes to software company performance in a recession, the results will stem from management experience and economic efficiency of the business model. Some of the early SaaS companies were "christened by fire" in the technology meltdown of 2000-2002. The few of these early SaaS adopters that are still run by the original management team are likely to do well if the economy takes a dip. On the other hand, the bulk of the pure-play SaaS vendors were funded between 2004 and 2007, and their management teams will have a steep learning curve when it comes to adjusting their business model to deal effectively with an economic downturn."

As InformationWeek clarifies, "Untested in a slowing market, later arrivals could face more severe tests."

Salesforce.com is one of those early entrants. MGI's analysts note that another good example of a "well-managed software company with a SaaS/On-demand model is Vocus."

Smaller businesses owe it their bottom line to look into SaaS -- especially when they can't afford to plunk down a chunk of money for software purchasing and licensing fees. But smaller businesses also need to find out all they can about what they're getting into when they enter the world of SaaS.

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