The COVID-19 pandemic continues to accelerate digital transformation in companies across the globe. Reliance on digital technology surged as companies responded to rapidly changing business conditions. Businesses large and small turned to cloud-based software as a service (SaaS) as part of business continuity strategies to weather pandemic-triggered disruptions.
The market and operational impact of the pandemic on every industry will reverberate into the next year. SaaS market and industry trends shaped by the pandemic in 2021 include rising market demand, increasing opportunity for vertical SaaS solutions, and emerging operational challenges for SaaS companies.
1. Rising market demand
A McKinsey Global Survey of executives found that companies have accelerated the digitization of customer and supply-chain interactions and of their internal operations by three to four years. The survey also revealed that the share of digital or digitally enabled products in their portfolios has accelerated by seven years. Survey respondents also indicated that they expect most of these changes to be long-lasting and are already investing to make them stick.
This warp-speed digital transformation is also accelerating demand for SaaS solutions. Gartner forecast the worldwide public cloud services market to grow 6.3% in 2020 to total $257.9 billion, up from $242.7 billion in 2019. The analyst firm noted that SaaS remains the largest market segment and is forecast to grow to $104.7 billion in 2020, attributing some of this growth to the increased need for new software collaboration tools during COVID-19. Gartner expects the SaaS market to continue to grow in 2021, reaching $120.9 billion.
Also in 2021, according to a widely referenced projection from Cisco, 75% of all cloud workloads and computing instances will come from SaaS applications.
Small and midsize businesses (SMBs) are fueling some of this growth. The 2020 State of the Cloud Report by Flexera found that nearly one-third of SMBs – up from the 20% reported last year – spent more than $1.2 million on SaaS. This spending will rise along with increasing cloud usage due to COVID-19. In the survey results, 50% of SMBs said their cloud usage will be higher than they initially planned.
Data from SaaS management company Blissfully shows a sharp upward trajectory of small business spending on SaaS. The average small business five-year SaaS spend, which was less than $55,000 in 2016, climbed to nearly $220,000 in 2019.
Usage and demand for SaaS technologies will continue to trend upward as enterprises move away from on-premises solutions to cloud-based SaaS solutions that are more accessible, reliable and scalable.
By the end of 2021, according to predictions in the IDC FutureScape 2021 report, the lessons learned from the COVID-19 pandemic will lead 80% of enterprises to put mechanisms in place to shift to cloud-centric infrastructure and applications twice as fast as before the pandemic. IDC also noted that “CIOs must accelerate the transition to a cloud-centric IT model to maintain competitive parity and to make the organization more digitally resilient.”
2. Increased opportunity for vertically focused SaaS solutions
As the shift to the cloud accelerates, businesses are searching for SaaS solutions that specifically target pain points in their industry. This opens up an opportunity for SaaS companies to develop vertical SaaS solutions that are purpose-built for specific sectors, delivering more business value and better outcomes to a narrower targeted user base. These industry-specific SaaS solutions also provide benefits in the areas of increased customer insights and improved data governance.
More and more SaaS companies are starting to leverage this market opportunity. In 2018, software review aggregator G2 covered over 34,000 SaaS products across 745 vertical SaaS categories.
COVID-19 is creating even more opportunity in the vertical SaaS space as businesses look for creative ways to deliver a better customer experience to drive revenue.
Church management software (ChMS) is an example of a vertical SaaS application that is seeing massive adoption during COVID-19. As churches closed to comply with social distancing requirements, they discovered a real need for technology that kept them connected to congregants and enabled digital giving to support financial needs without physically passing the collection plate. The technology provides a lifeline to the 40% of congregations that essentially receive their entire annual revenue from individual donations.
Vertical SaaS technologies will also continue trending toward mobile in 2021, addressing the needs of an increasingly mobile society made up of more than 260 million smartphone users in the U.S. alone. For example, SaaS technology tailored to churches is optimized to provide mobile giving and interaction experiences to their congregations.
With companies in every sector experiencing major disruptions and change over the last year, 2021 will be a good time for SaaS companies to check in with them, refresh on learning, do discovery research, and generally reacquaint themselves with customers. SaaS companies that keep pace with changes in customer needs and respond to what customers are asking for put themselves in a position to drive revenue and growth.
3. Emerging operational challenges
SaaS companies, like many tech companies, are facing operational challenges in hiring talent and supporting a remote working environment.
The war for talent in technology fields is fierce, even as the country grapples with historic unemployment. Competition for talent will continue to accelerate in 2021. The IDC FutureScape report said that companies will address the shortage of developer and data analytics talent by turning to flexible talent sources, crowdsourcing, and internal staff “to meet their development/automation and advanced analytics needs and to speed up innovation.”
In this hyper-competitive hiring environment, SaaS companies will need to reexamine their strategies for attracting talent. This includes tapping into a wider range of qualified candidates as pandemic-driven remote working norms eliminate relocation requirements, expanding an organization’s hiring pool.
To attract talent, SaaS companies will also need to adapt employee policies that allow for flexible working arrangements, including remote work. Remote work has been trending upward over the last decade, increasing 159% between 2005 and 2017, according to a study by FlexJobs. This trend is expected to continue: Global Workplace Analytics estimates that 25-30% of the workforce will be working from home multiple days a week by the end of 2021.
Work-from-home policies are attractive to employees. Nearly 43% of respondents to a getAbstract survey said they want to work remotely more of the time going forward. Further, a PwC survey of executives and office workers revealed broad support for a permanent flexible workweek (and perhaps workday): 83% of office workers want to work from home at least one day a week.
SaaS companies will need to continue to support remote work in 2021, leveraging digital tools such as Slack and Zoom to facilitate communication and collaboration. Smaller SaaS companies, by their nature, are more agile; many of them quickly made the pivot to architecting an ecosystem of digital tools to support their remote workforces.
Trends for SaaS companies in 2021 encompass market drivers such as meeting accelerated demand for products and services, developing vertical solutions to meet industry-specific needs, and tackling the emerging operational challenges in attracting top talent and supporting an increasingly remote workforce.