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The market for software-as-a-service (SaaS) for state and local governments will grow from about $170 million in 2008 to $640 million by 2013, producing a compound annual growth rate (CAGR) of 30.2 percent for that time frame, according to a new INPUT report.

The growth rate is far ahead of INPUT's projected overall market CAGR of 6.4 percent for the same period.

SaaS will see its market share grow from approximately 4 percent of the $6.5 billion state and local software market in 2008 to approximately 11 percent of the $8.9 billion market in 2013, according to INPUT.

While the estimate represents “aggressive growth,” the state and local market will continue to lag behind the private sector, according to Jason Sajko, senior analyst for general government services at Reston, Va.-based INPUT.

“This is partly due to cultural resistance as well as a lack of tools tailored specifically to the wide variety of government-specific business processes,” Sajko said. “That sort of tailoring will tend to come after larger vendors have begun bumping up against the limits of their private-sector market reach and begin looking for new niches.”

Sajko added: “The increased availability of Internet bandwidth has allowed a variety of hosted-software technologies to be battle-tested in the commercial and consumer markets. State and local governments have taken notice and fiscal crises are forcing agencies to at least consider SaaS for their business needs.”

SaaS is often defined as standard browser-based application services delivered over the Internet to multiple customers. By eliminating the need to install and run the application on the customer's own computer, SaaS eliminates the customer's burden of software maintenance, ongoing operation and support.

Costs to use the service become a continuous expense, rather than a single expense that occurs when software is purchased in the traditional manner. Using SaaS also can reduce the upfront expense of software purchases, through less costly, on-demand pricing.

The SaaS software vendor may host the application on its own Web server, or it may be handled by a third-party application service provider. Through SaaS, end users may reduce their investment on server hardware as well.