Software-as-a-service — The next big opportunity in India
After immersing myself in understanding consumer tech businesses in my previous job, I have recently started studying the software-as-a-service industry. Honestly, I had a lot of preconceived notions about the space such as Indian companies aren’t equipped enough to build world-class SaaS product, Indian companies won’t buy SaaS products owning to the cost of manpower which is quite low in the country, among other things and I’m glad after starting to study the space, most of these notions have been put to rest, not to forget the impact that COVID-19 has itself created on the entire world in terms of remote working, etc.
Here are a few of the factors that I believe are shaping the SaaS industry globally (please note that this isn’t an exhaustive list of factors and feel free to add more points in the comments below) –
1. Investments — The investors’ interest in enterprise software is growing. According to a report, venture capital and private equity investments have more than doubled, to USD 145 billion in 2018. Over the same time, a conservative estimate of the additional capital available for new investments in 2018 in enterprise software was close to double, to USD 150 billion, thanks in part to late-stage venture capital and private-equity investing mega-rounds. However, in 2016, enterprise software IPOs dropped to a four-year low before recovering in 2018.
While investors have been amassing more capital, they’ve also been doubling down on investments in some specific emerging technologies. According to BCG analysis, from 2014 through 2018, the share of industry investment increased relative to overall funding growth in startups that were pursuing such technologies as blockchain, fintech, cybersecurity, and AI while declining in relation to the average in areas such as cloud and digital marketing.
2. Integration through APIs — Demand among SaaS users for flexible and seamless integrations of software products, databases and information streams has fueled Integration Platform-as-a-Service
3. Vertical SaaS > Horizontal SaaS — Vertical SaaS models allows the SaaS to go deep, and offer full-featured solutions to problems of an individual vertical
4. Early adopters of AI — Early adopters are using AI and data as strategic assets to power digital transformation. According to a survey, most companies agreed that the pace of their AI and big data initiatives is increasing and that there is a sense of urgency to their AI investments. Expectations for AI are highest in industries such as technology, media and telecommunications, consumer goods, financial services, and health care. That mix includes both regulated and unregulated industries, more proof of the corporate appetite for AI in business transformation.
For companies that haven’t put the use of AI as a strategic initiative on the to-do list, the biggest challenges for them are unclear business cases for using AI, a lack of leadership support for it, and minimal or no technology capability in the area.
5. End-user — Software purchasing is also changing as millennials who grew up on social media, video, and other digital ways of engaging make up a larger portion of the B2B buyer base. Today, millennials constitute close to half of the decision-makers researching B2B software purchases, an equal number use a mobile device to look up information during a B2B purchase decision, and nearly two-thirds are on LinkedIn. Evolving enterprise software buying behaviors are changing the role of the CIO, who must collaborate and cooperate with business units to layout a unified digital foundation and shape the company’s digital agenda.
6. Tech talent — Enterprise software growth has created a surge in jobs for people with in-demand digital skills. According to a LinkedIn report, the need is highest in job categories such as blockchain, machine learning, and data science. By the end of 2018, blockchain developer job openings were 33 times more numerous than the previous year, and openings for machine-learning engineers were 12 times higher. Although demand for tech jobs continues to grow in traditional tech hubs such as the Bay Area and Seattle, cities that have not been traditional tech strongholds are witnessing an uptick as well.
The global software & services market is estimated to reach USD 1.7T by 2022 from USD 1.4T in 2018; SaaS projected to contribute USD 129B (7%) of the total by 2022. However, the Indian software & services market is forecasted to reach USD 37B by 2022 from USD 28B in 2018; SaaS to contribute USD 3.4B (9%) of the total by 2022. Interestingly, India is one of the fastest-growing SaaS market in the world, estimated to grow at CAGR ~36% (2018–22)
The Indian context
A few of the factors driving SaaS demand in the Indian market in my opinion are increasing adoption by Start-ups and SMB’s (triggered by COVID-19) due to cost savings and increased efficiency potential and availability of customized solutions. Increased SaaS adoption is currently being experienced in sectors such as retail, media, e-commerce in India. However sectors such as BFSI, Healthcare are yet to follow adoption due to data privacy and security concerns, which still remains a challenge globally owing to a significant number of data thefts/breach.
On the revenues front, ~70% of the total SaaS revenues earned by Indian players are contributed by other geographies, the US being the highest contributor. However, as the market opens up in the post-COVID environment, I’m pretty confident that the share of the Indian companies and those in emerging markets will improve significantly.
The good news for the entrepreneurs in India in this industry is that India has become a strong supplier market for software and SaaS owing to cost advantage, skilled talent availability, mature Inside sales eco-system, and increased investments in SaaS start-ups. We are sure to see a surge in SaaS companies being formed in the post-COVID world.
Although SaaS Market in India is on the growth trajectory, few challenges still exist like limited understanding of SaaS benefits, under-penetrated SMB segment, & talent limitation in specific areas. To further drive the growth of the SaaS market in India initiatives like re-skilling for relevant skills, leveraging new-age technology for product development and partnerships shall be undertaken.
These are some of the initial thoughts on the SaaS industry that I have been able to gather basis a couple of weeks of research on the industry. Feel free to drop me a line on LinkedIn or on my email ID, and I’ll be more than happy to chat.
· BCG Article on factors driving change in the SaaS industry
· NASSCOM Report on new growth trends in India