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High-growth saas market brings high risks for customers

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High Risk

Insolvencies among ICT companies in the UK rose by 22% in 2014, a year in which the SaaS market grew particularly rapidly. The risk of business failure is downplayed by SaaS vendors but many are loss-making start-ups with little financial experience. Even those that are apparently successful can fail if they try to expand too fast. So, potential customers should use a SaaS escrow contract to protect against the risk of vendor failure.

The UK’s entrepreneurial culture coupled with robust economic growth create ideal conditions for the UK’s Software-as-a-Service industry to grow rapidly. But, as with every new technology, the SaaS industry’s ambitious growth plans can and do backfire, leaving customers in serious trouble if they have not made contingency plans to minimise the risk of their SaaS vendor failing.
According to the latest Exaro Insolvency Index, the number of UK companies filing for insolvency rose by 30 percent during the last year.

Insolvencies among information and communication companies rose by 22 percent to 765 in the last quarter of 2014 compared to the year-earlier same period. It might seem paradoxical that business failures increase during a period in which the UK economy rebounded strongly after a lengthy recession.

But small businesses that have survived the recession often struggle to adapt to the different conditions of an economic upturn. Cash flow can become a big problem and they may not have sufficient working capital to finance expansion. Lenders that were unwilling to crystallise losses during the bad times may feel more inclined to do so once the economy starts to improve and so pull the plug on financing.

These risks are especially pronounced for the many start-ups that have entered the SaaS market, attracted by its high-growth potential. The SME segment of the SaaS market is growing particularly rapidly, around 30 percent a year, according to Pierre Audoin Consultants, an analyst firm.

But high-growth market conditions hold pitfalls for inexperienced SaaS start-ups, which are often loss-making and face the additional challenges of untried business models and the rapid obsolescence inherent in any new technology.

One of the benefits often claimed for SaaS is that you can easily switch supplier, so avoiding the vendor “lock-in” that characterises traditional software products. To a certain extent that’s true, but what assurances do you have that, if your SaaS vendor fails, you will be able to access your data and transfer it to a rival?

So, before choosing a SaaS supplier, every potential customer needs to ask the question: What would we do if our SaaS supplier became insolvent? If you don’t have a contingency plan in place, then you should insist on a SaaS escrow agreement.

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