Software-as-a-service coming on strong in public sector

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.

Successful vendors are targeting smaller government entities

INPUT’s Sajko noted that several SaaS sweet spots are developing in the state and local and education technology market:

• Successful vendors are targeting smaller agencies, cities, counties and special districts with small budgets that are tightening daily. These governments often have a sophisticated citizenry with high expectations of electronic government.
• Vertical markets, especially education, are emerging as SaaS niches. Educational institutions do not pose some of the traditional organizational obstacles as state and local governments and therefore have experienced quicker adoption of the SaaS model.
• Savvy SaaS vendors are providing secure solutions tailored to governments’ unique needs with a variety of basic hosting and customization options to meet most clients’ comfort levels. A one-size-fits-all or rewrapped commercial solution will lag as competition grows.

How does INPUT define “smaller agencies, cities, counties and special districts”?

“When we talked about ‘smaller agencies, cities, counties and special districts,’ we were talking generally about local governments with under $100 million in annual expenditures,” Sajko told GovPro.com. “The real point was that organizations with fewer decision-makers are proving to be the early adopters in the government market space.

“Hang-ups with SaaS, or any new technology or methodology, are more prevalent in situations of large IT enterprises and technology oversight boards. IT organizations want to protect their turf, and IT boards are often very risk-averse. Localities with more autonomy and fewer stakeholders are proving more agile in dealing with tight budgets by investigating SaaS than their state-level counterparts.”

These findings and more on the government market are in INPUT’s report, “SaaS to Carve out a $635 Million Slice of the State & Local Government Software Market.” For more details, click here.