NetSuite's CEO cashes in on cloud mania

An exclusive interview with Zach Nelson, CEO of NetSuite, reveals the challenges and rewards of being the leading ERP-as-a-service provider

People mean a lot of things when they talk about "the cloud," but if you want to know where the revenue is going, look no further than SaaS (software as a service). Salesforce leads the SaaS pack with $2 billion in revenue for its latest fiscal year. NetSuite pulled in just a tenth of that for FY2010, but in some ways it's a more ambitious player, because it offers ERP as a service -- a core enterprise software category that, in the past, has been last on the list to trust to the cloud.

Zach Nelson, CEO of NetSuite, thinks that reluctance has been replaced by enthusiasm for the quick deployment, continuous innovation, and low maintenance of SaaS. A former executive at Oracle, Sun Microsystems, and Network Associates, Nelson joined NetSuite as CEO in 2002. Between then and now he has witnessed the industry's long, slow ramp-up to today's feverish interest in all things cloud -- an environment he sees as ripe to capture a new wave of customers.

Last month, as part of our ongoing IDGE CEO Interview Series, IDG Chief Content Officer John Gallant and InfoWorld Editor in Chief Eric Knorr sat down with Nelson to talk about the state of the cloud and NetSuite's evolution during his tenure. The conversation began by addressing the changing nature of NetSuite's customer base.

John Gallant: Tell us about NetSuite's target customers and how you serve them.

Zach Nelson: Our mission is to bring the power of traditional large enterprise applications to small, medium, and large businesses without the cost and complexity of traditional enterprise apps. That's really what we're all about. The great thing about my job at NetSuite is that I'm using the same slides I used from literally 10 years ago when we started the company. The strategy has remained the same: Bring the power of SAP and Oracle down to smaller, midsized -- and now large -- companies and deliver it in a way that they can consume and use easily and afford.

The big idea of NetSuite is that we created an application designed to run a business, not to run a department. We had to build the back office first because that's the core -- people run a business through their financials, order management, invoicing, and so on -- but then we also built the rest of the applications around it. So that was really idea number one.

Idea number two was to deliver that application as a service over the Internet to remove the complexity. We started in 1998. SaaS was not really considered the future of software back then. Now it's gone from "Will this ever happen?" to "How quickly can I get it?" to "Can we have it now?" SaaS has come full circle from denial, to running to the cloud, if you can run to a cloud.

Gallant: How do you as a company define small business?

Nelson: We define it as between 20 and 1,000 employees -- a huge range. A business under 20 employees lacks the complexity to require what we offer in most cases. It varies by vertical, but [no fewer than 20 employees] is where the business opportunity is for an ERP-based suite like NetSuite. If you look at the market, at the very low end, there's always one product that has 80 percent market share. In the U.S., it's QuickBooks; in the U.K., it's Sage 150; and in Australia it's MYOB. At the very high end are Oracle and SAP.

What we set out to do was to fill the gap between the two, because in that segment it's a very strange market -- no one product has more than 10 percent market share. Great Plains has a little piece. Sage has a little piece. Most mature software markets don't look like that. Usually in a mature software market somebody has 50, number two has 30, and everyone else fights for 20. The midmarket was not like that, so that's why we focused on it. But what's happened now is that large companies have started to pick us up. That's the big change that's happening for NetSuite.

Eric Knorr: That's because departments within those companies are using NetSuite, and they're being forced to deal with you, or are they being more proactive than that?

Nelson: It's much more proactive than that. It's really been driven by a product innovation we call NetSuite OneWorld, which enables us to do multicompany consolidation in a single instance of NetSuite. That turned out to be a very big problem for companies of all sizes.

What it really means is that you can have your U.K. company transacting in pounds and dealing with local currency as if they were the only company; then you have your Australian company doing the same thing in Australian dollars and Australian taxes, and on and on around the world. But then you can consolidate it in real time so that the CEO or the manager of Asia can look at all of his subsidiaries in a single currency in a single view.

It turns out that's a very difficult problem to solve with traditional client-server apps. In fact, SAP can't solve it. [SAP customers] use Hyperion to solve that problem, because when you break Humpty-Dumpty up, and you put an SAP server in the U.K. and an SAP server in the U.S. and an SAP server in Asia, you can't put them back together again. With NetSuite's single-data model, we never break Humpty Dumpty up. We save him at the database, but everybody comes to our physical server and runs their business.

Knorr: Are they really abandoning those systems or are they using you as kind of a de facto cloud-based integration?

Nelson: What's becoming popular now actually has a name: It's called two-tiered ERP. So maybe [a customer] invested $100 million in SAP for corporate operations, but what they're trying to do is surround that now -- running Asia Pacific with NetSuite, running Europe with NetSuite -- because it's a much better consolidation system. And so that's the new wave and ERP and the large enterprise's notion of two-tier: You can maintain that legacy, but now also deploy a far more flexible cloud-based solution to manage your subsidiaries. It's really started to take off in Asia, because Asia is growing so fast for these large companies. It would take two years to get the superexpensive infrastructure in there anyway, so they get NetSuite up and running like in three months. It's ridiculous how fast this gets up and running.

Gallant: What sort of large companies are adopting?

Nelson: We were just at this big multi-billion-dollar company -- a large SAP customer. The reason we were invited in there was they've been investing in SAP, and of course it doesn't really work all that well. So they went back to SAP and said: How much does it cost to really make this stuff work? And they said it would cost $80 million to really make it work.

These are numbers that we can't even conceive of they're so big. But big companies are apparently used to this. And the CEO of that company said: Why would we spend five years doing that, when by the time we're done with it, it will be completely obsolete? To me, that's a sea change, when the CEOs are starting to say that. I think the reason that CEOs are figuring this out about their internal infrastructure -- and why they have to move internal infrastructure, including mission-critical systems like ERP to the cloud -- is that they're starting to retool their businesses to interact with customers via the cloud. They're looking around saying, "Holy cow, that's how we do it." I think there's been a fundamental change in the mentality of the chief executives of these companies to move to the cloud.

Gallant: So you're getting pull-through into larger enterprises, but are you actively targeting them now from a sales perspective?

Nelson: We are now. This year we are investing heavily in building a sales organization that knows how to work with larger accounts. We have a great midmarket sales operation, but the enterprise is a different sales beast when you have three CIOs -- one in the U.K., one in the U.S., and one in Asia. Suddenly you have this matrixed sales thing with a whole bunch of technical selling, which we're putting in place.

I've always said that software solutions like NetSuite fundamentally change the software equation. None of the client-server guys made the transition here, so we've changed the software industry fundamentally.

What you're seeing now is that customers are rushing to embrace the cloud and I think it's demand-driven. So they had an experience with something like; it was faster and cheaper and better. And now they're saying I want more of that in my enterprise and I think you're going to see it happen more -- you are going to see the Accentures and the Wipros getting superaggressive about building cloud practices. It's a big change.

Knorr: Do you worry about Microsoft getting into the on-demand space with Office 365? The Microsoft Dynamics stuff has been sort of notoriously unsuccessful, but Office 365 provides a new opportunity for Microsoft to get in the game from the desktop apps side.

Nelson: Microsoft is a great company and they have lots of opportunities, but I see their ads about "to the cloud" and I'm like -- what applications does Microsoft have up in the cloud? Where are these guys going? Are they using NetSuite or something? Because they really have no applications in the cloud.

Obviously, they have an idea to go there. Those are pretty amazing ads, given the lack of footprint in the space. Our space is ERP and I don't believe they will ever have a Web-native ERP system. It's just too hard to build what we built and they have to choose a code base: Great Plains, Solomon, Navision, Axapta ... they have all these ancient code bases. ERP would be the last on the priority least.

Now, speaking more broadly about the cloud, I think they have an interesting conundrum with Office in particular because Office is the only reason we buy this giant operating system called Windows. The minute they move Office to the cloud, who needs this big old operating system anymore? So I think it's going to be awfully hard for them to eat their young that aggressively.

Knorr: Do you have a critique of what the plans they've laid out for Office 365?

Nelson: Microsoft is so big. Don't get me wrong -- who wouldn't want to be the world's largest software company? But it's really hard to move that ship. They've been so strong on the desktop for so long that they've tried to bring the desktop metaphor to places where it didn't belong and it really hurt them. They were the first guys out with a tablet, but it didn't work because it had to be Windows. They were the first guys with a phone -- and why didn't it work? Because it had to be Windows. While the desktop is what made them so powerful, the desktop is the most obsolete metaphor on the planet today. No kids talk about their desktop computer. It's all about their phone. So it's funny when you get these big disruptive shifts. The desktop, which made them king, is now actually their boat anchor.

Gallant: From a larger perspective, do you think anyone who has been successful in selling packaged software can make the transition?

Nelson: There's probably one example of a company that made the transition and they were much smaller: Concur. They had client-server expense reporting, and they made it to the cloud, but it took enormous pain for even a company of that size. I think the fundamental difference is that companies that don't have scale -- such as the midmarket ERP guys we compete against, the Epicors and the Lawsons -- those guys will never make a transition because they don't have the financial resources to build a product like NetSuite. The bigger guys have the wherewithal -- the Microsofts of the world, the SAPs of the world.

SAP built a NetSuite-like product called Business ByDesign. They can take $100 million and spend it and their shareholders won't hang them for it. They can do it technically. The issue really becomes one of a business model -- and this is such a different business model than the old software model, where you give a disc to the customer and dare them to install it -- and they pay for all the value before it's even working. That may be all the value you ever get from that customer.

This subscription model is completely the opposite. The only way we make money is if our customers renew their subscriptions. In fact, we changed our whole model so that instead of doing a three-year deal we did a one-year deal, so that we made sure they got up and running and were successful so they renewed. This is really all about customer success -- not that these guys don't want to make their customers successful, but the business model doesn't require that their customers be successful. Our business model requires that or else we go out of business. The business model issues are as daunting for the large companies -- more daunting, quite frankly -- than technology issues, I think.

Knorr: Does being a cloud company give you an advantage in the mobile space?

Nelson: I think it does. When the first iPod Touch came out, it had a browser on it. Early on we supported Safari. I remember when the Touch shipped, I went on our user group that morning, and all these users -- even with that little screen -- were saying, "Oh my God, NetSuite works perfectly on my iPod Touch." We hadn't done anything to build a special little app for it or anything, so when the hardware guy does the right thing and uses a browser like Safari that works on all their platforms, then you get all those platforms for free.

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