NetSuite’s CEO cashes in on cloud mania

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Zach Nelson, CEO of NetSuite, thinks that reluctance has been replaced by enthusiasm for the quick deployment, continuous innovation, and low maintenance of SaaS.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 Salesforce.com; 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.

Now, of course, as the screen size changes you want to change your application to make it more functional, but I think it makes it easier to build mobile applications. I’m not dinging SAP, but they said they bought Sybase for their mobile technology, and all this mobile stuff is free, effectively, if you build your application properly.

Gallant: Zach, talk about your key objectives for 2011 and beyond. How do you see the product set expanding? What are you focusing on?

Nelson: We have three key focuses for this year — which have been our focuses for the last couple of years. One is to move our product upmarket to meet the needs of larger companies; that’s driven a lot by the OneWorld product.

The second initiative we have is the verticalization of the NetSuite product itself, because it turns out our ERP sales become very specific to the company you’re selling it to very quickly. If I go and talk to you guys, you say show me how a publisher is using NetSuite, don’t show me a John Deere dealership is using NetSuite. So the business process of the company is very important. We have been verticalizing NetSuite for about five key verticals for the last five years, so we are well down that road, but we can always get better at it.

Wholesale distributions are a big vertical. Manufacturing is a big vertical. Services companies’ time-based business processes; publishing will actually do very well. The Onion uses us. Gawker uses us — so a whole bunch of publishing.

Then e-commerce we treat as a sort of vertical. We have probably 1,000 e-tailers using NetSuite. It’s sort of an accident of our architecture. Instead of looking at the business through a Web browser and a dashboard, why not expose that same data to a customer through a website? So you basically get e-commerce for free in the way we’ve architected NetSuite. Instead of a dashboard for an inventory warehouse guy, you show a website that the customer can buy stuff on. We have a great footprint in e-commerce, and that market is wide open for a leadership platform.

The other thing that’s becoming obviously important in the cloud are platforms as a service.

Gallant: Talk about that as it relates to NetSuite.

Nelson: The SuiteCloud is our platform. It’s architecturally very similar to what Salesforce does with Force.com, but what we’re focusing on are developers that, say, build vertical versions of NetSuite, build extensions to NetSuite that enable a company to run more efficiently.

Knorr: Can you give us some sense of how successful you’ve been in the platform area? The number of apps, partners …

Nelson: We have about 4,000 developers today, and we have a little over 200 applications running on it. They run within our customers’ instance of NetSuite. It’s not running on a separate server. It’s literally running in our product. We have a bunch of companies that are building financial planning extensions to NetSuite like budgeting and forecasting, what-if budgets and that kind of stuff. But the centerpiece is a verticalization or the extensions of NetSuite in new industries — and so we now have a product in manufacturing.

We didn’t have an MRP product before. It was actually a third party that built the MRP system on top of our platform. This is the future of application development. That was a complicated product: 3,000 custom tables, 200 custom apps all part of this one app and now the manufacturing market is open for us. So we’re beginning to get that verticalization through third parties now on the platform. It’s very cool.

Knorr: On the one hand you’ve been doing this for 10 years and SaaS has matured — and you’re getting greater levels of acceptance — but it still has a way to go, doesn’t it? You’ve been addressing the customization side very well, but integration remains a problem, not only inside the enterprise, but also among different clouds. SaaS runs the risk of putting you more in a siloed architecture than you were before, because the level of integration is very often not robust.

Nelson: I agree with you 100 percent. There are a lot of myths about cloud computing, most of which have been knocked out. The myth about them not being as customized: Well, they’re far more customized than old apps ever were. They’re 1,000 times more customized. The other important thing is that the customization migrates when you upgrade the software, so you can change your business processes on the fly and not worry about it.

But I think your integration point is a good one. The issue with integration of real business apps is synchronizing data. In people’s excitement about the cloud and mashups, they thought: I can have an order made in one cloud, an invoicing system in another cloud, a shipping system in another cloud, and it will all magically work together. No, it won’t, because those are tightly coupled transactions. The Web is good for loosely coupled, and the minute you start synchronizing data, it’s tightly coupled.

Ultimately that’s why the suite wins. The suite enables tightly coupled processes. I think the battle of best-of-breed versus suite is going to be fought again in the cloud — and the suite’s going to win. And it’s because the problem with data integration is not solved by the cloud. It makes it easier to connect applications. We connect them with Web services and normal, almost human language, but connecting them isn’t the issue. Synchronizing the data is the issue, and when you run a business you want tightly synchronized data, especially across ERP kinds of processes. I think that’s the next battle. I think the suite is still going to win.

Knorr: You can’t expect everyone to just rip and replace everything they’ve got and move to NetSuite.

Nelson: They never do. Some people are still running SAP as their CRM system, but what ends up happening — even with client-server — is that the ERP system assumes more and more of the functionality. So guess what: It turns out all the important data about your business is in the ERP system. They call the systems “CRM systems,” but there is a problem with them — there is no customer data info.

All the customer data is in the ERP system, so that’s the ultimate issue. People want to get that customer data — what customers bought; how it was shipped to them; did they pay; did they return it — it’s all in the ERP system and that’s why SAP won and Siebel didn’t. At the end of the day, you need the customer data to be the real customer data.

Small companies will have to replace everything because the hairball is just too expensive for them to manage. It’s hard to integrate QuickBooks and Act as it is SAP and Siebel. They’ll never solve that problem. Midsized companies, you see them doing it with a quite a bit more frequency. If you look at some of these companies — Medidata is a great example. A public clinical solutions SaaS company, they replaced soft tracks, Great Plains, Salesforce, and whatever they used for the professional services automation solution with NetSuite because they wanted tightly integrated processes from lead to service.

I wouldn’t say it’s as hard to integrate cloud applications as it was to integrate old clients with applications. I think it’s important for people to understand that. This is what happened in the client-server world: They say, oh, can I integrate Siebel with SAP. Oh yeah, we have an API, it’s no problem and then $10 million and five years later it still didn’t work. This integration problem — no one can solve it. The only way you solve it is by having a tightly coupled application to begin with.

Gallant: Speaking of concerns for customers — particularly for larger customers — what are you doing to improve security and data protection for customers as well as reliability?

Nelson: It’s always been a big issue. The good news for us is we’ve had to address that concern for a long time. We’ve always provided a guaranteed level of service to our customers, even in the old days, so we say “availability of 99.5 percent or your money back” for every customer.

We have disaster recovery, so data is replicated and backed up and we make commitments on return to operation and data loss. Many customers don’t even have that capability, so it’s a big benefit of ours. For people who are super security focused, we have the classic ACTPS login and name and password. We even have two-factor authentication if you want to build in tokens and all those kind of things.

Gallant: What happens if there’s a loss and that loss costs the company?

Nelson: We have indemnification clauses and all those things in our contracts that address loss of data and damages related to that loss of data.

Knorr: Another aspect of security is the identity side. There may be many people in a company who have accounts with SaaS providers. They leave the company. They’re not deprovisioned. They still have access — that sort of thing still happens. What can you do to affect that and how do you see that evolving?

Nelson: We have multiple layers of options for customers. We have an option for customers where you can basically say: My employees can only log in from these IP ranges. So we may only let them log in from the office, not from home — that’s just a standard feature. At the end of the day, it’s like managing any other system, in the sense that once that employee leaves somebody is going to have to deprovision that name and that password.

The good thing about NetSuite is, because it is a suite, it’s a role-based architecture, so you have really granular control of what each individual can access inside that application.

Gallant: Zach, let me throw you a little bit of a wild card. What do you think about the concept of private cloud? Marc Benioff thinks it’s crap.

Nelson: I haven’t heard Marc say that. I wouldn’t say it’s crap, but I’m confused by the term. I guess I’m considered part of the public cloud, but when I look at my application, when my customer comes to use NetSuite, it’s a private cloud for them. It’s their application. It’s their data. So I’m very confused by the term, because I think of sort of says, “This is open to everybody and somebody’s going to get your data,” and it’s certainly not that.

The second thing I get concerned about with private cloud — and this is probably a complete misinterpretation — but I think in some ways it’s a way for IT folks within an enterprise to delay the move to the cloud. They can say, “Oh, we’ve got the cloud,” but it’s just Office in this room over here completely non-cloud enabled.

Gallant: There’s another aspect of this and that’s availability. Do you think there should be a standard among software-as-a-service companies for what they should disclose about their outages, about their availability?

Nelson: I think they should definitely tell their customers what’s going on, that’s part of the relationship with the customer, and different applications should have different standards. Our e-commerce customers’ stores are on 24 hours a day. They want our stuff to be on 24 hours a day, so 99.92 over 12 months might upset some of them.

I think it is very important to publish to customers. We do it. Personally, I think again these applications are far more available than the old-world apps ever were. I’ve never run an IT shop, but the horror stories these guys tell about what it takes to keep applications running … it’s just amazing to me that this is how people live for so long. They tell this horror story about every Friday night at 6 o’clock they’d have to turn it off for a half hour and then turn it back on for — this is craziness for their core systems. They say with NetSuite we never even think about it. I think availability is important. I think a properly engineered cloud application is going to be far more available than everybody running their own stuff. But it’s certainly important to tell you’re customers what’s going on.

Gallant: What’s the thing you want IT to know most about NetSuite?

Nelson: To me, this is the future. NetSuite is the future of cloud ERP. There really is only one safe choice in cloud ERP — and it’s called NetSuite. We’re 20 times the size of our largest competitor, so as you begin to look at transitioning your mission-critical systems to the cloud, you have to put NetSuite into the mix.

I would say generally to IT: The cloud, or the Internet if you prefer, is central to every business. It doesn’t matter if you’re a software company or if you’re making widgets. It’s all about how you leverage the Internet to be more efficient. So given how companies are retooling all of their products and how they interact with customers around this cloud, how can you possibly think you’re going to be successful if the core business applications that you’re running were designed before the Web existed? It’s just not possible.

I think we’re at the front end of an ERP replacement cycle, and people are looking around, saying the Internet is central to our business — yet the core way we run our business is pre-Internet. If they wait for five years and their competitors don’t, they’re going to be massively behind and be spending a fortune, far more money. They aren’t going to be able to invest as much. This is going to happen very quickly and you don’t want to be a late adopter on this curve.

This article, “NetSuite’s CEO cashes in on cloud mania,” was originally published at InfoWorld.com. Follow the latest developments in business technology news and get a digest of the key stories each day in the InfoWorld Daily newsletter. For the latest business technology news, follow InfoWorld.com on Twitter.