NetSuite aims for 'Cloud Nine'

The cloud ERP vendor is starting to move up the software as a service food chain but it will have to surmount a few hurdles before its ready for big time.

NetSuite CEO Zach Nelson is on cloud nine, and why wouldn't he be, the cloud enterprise resource planning (ERP) vendor is on a roll. Since its inception in 1998, when dial-up was a part of everyday life on the web, NetSuite took a chance on the Cloud and it's a bet that is paying off.

The company latest quarterly results have been robust enough to force even its sternest critics to reconsider their position. NetSuite reported a 32 per cent jump in revenue to $91.6 million. More importantly, its recurring revenue jumped 28 per cent to $74 million.

It was without a doubt the best quarter in NetSuite’s history and with 16000 customers and counting. Analyst firm Gartner recently named NetSuite the fastest growing financial management software vendor globally in 2012.

The great numbers and the effusive praise from Gartner all provided the perfect scene last week for Nelson to drive his message home at the company’s SuiteWorld 2013 extravaganza in San Jose.

That message is that the cloud is here to say and NetSuite is going to play a big part in the story. Nelson's confidence isn't entirely misplaced, especially under the benevolent watch of Oracle’s billionaire founder and NetSuite’s largest shareholder Larry Ellison, and the company’s ambition is palpable. While NetSuite has been the go to ERP-as-a-Service provider for many mid-level businesses it's now starting to muscle into the top-end market, and essentially trying to hit SAP where it hurts.

In fact, there was a fair bit of SuiteWorld 2013 devoted to slinging a few barbs and having few laughs at SAP’s expense. It’s a tried and tested strategy that’s been in play since the early 2000s and given SAP’s size and its grip the German giant isn’t going to lose any sleep over the antics. However, Nelson does have a knack for ruffling a few feathers at SAP and the latest round of jibes did prompt one SAP executive to put things in perspective -with 20 million cloud users, SAP's cloud run rate is more than $1.15 billion; that’s more than three times that of NetSuite's annual run-rate of $340 million.

So for all of Netsuite’s bravado its presence in the cloud is a minor annoyance at best for SAP.

Moving up the food chain

But, SAP’s annoyance is also a tacit approval of sorts for Netsuite and Nelson. The German company might be the big fish in the pond but Netsuite isn’t in a mood to back down either, especially now that it has added the NetSuite Manufacturing Edition to its toolkit. 

Billed as a “next-generation” solution for a sector that is yet to embrace the cloud, Netsuite has now managed to fill the one big gap in its arsenal. Prominent cloud computing analyst Ben Kepes told Technology Spectator that Netsuite now has the opportunity to become a solid vertical player.

“A lot of cloud vendors often get too excited about new age businesses and the knowledge economy but sometimes forget that there is a world outside that,” Kepes says.

The one glaring omission, as far as Kepes is concerned, is the lack of focus on the social marketing area. One reason for that could be that Netsuite isn’t willing to go toe to toe with Salesforce.com on that front.

According to Kepes, manufacturing is a very complex and hybridised sector and the one thing that ties all the stakeholders together isn’t financial transactions but a cohesive social stream provided by Salesforce.com.

Nelson’s response to that criticism is that conventional social CRM (customer relationship management) is merely a prospect management system and given Netsuite’s E-commerce focus, the real magic happens you have complete visibility off the total transactional relationship with the customer. So, Netsuite’s emphasis remains on end-to-end visibility rather than chasing Salesforce’s tail in social CRM, which is too focused on front-end of the customer relationship.

According to Kepes, that’s a valid point but one but that’s a touch short-sighted. Owning the transactional relationship is great but there’s definite value in targeting potential customers before they even make a purchase. One suspects, that’s where businesses do turn to Salesforce.com.

The two-tier growth engine

At the heart of Netsuite’s engine of growth is the two-tier ERP model, which allows a company’s subsidiary to use cloud ERP while the corporate headquarters continues to use an on-premise ERP from Oracle or SAP.  This strategy has so far paid handsomely for Nelson and his team and what’s interesting is that many organisations are pushing to have Netsuite across the board.

That provides a great opportunity but also throws open the potential for renewed friction with Oracle. As Netsuite pushes forward in the manufacturing space, there is a chance that it will have to cross swords with Oracle’s JDE Edwards mid-market ERP products and Oracle Fusion Financialst.

According to Forrester's Research analyst China Martens, at some point Oracle will buy Netsuite and position it as its premium mid-market ERP offering. We’ll probably to wait a while before that happens in the interim Nelson and his team will have tackle a few short-term issues.

The first item on that list is Netsuite’s continued reliance on Oracle database. According to Martens, while other ERP vendors are busy talking up their in-memory database (SAP with HANA), NetSuite has yet to articulate a strategy that looks beyond running its applications on Oracle databases.

The second area of conjecture is around NetSuite’s cloud integration strategy. Martens says that NetSuite has so far tended to rely on third-party integrators like Dell Boomi, Celigo, IBM’s Cast Iron, Informatica, and others to integrate its software with other Software as a Service (SaaS) apps and in two-tier ERP implementations. However, with both SAP and Oracle are starting to lay out their own cloud integration offerings at some point NetSuite’s going to have to think about its own cloud integration service.

Becoming truly global

The third piece of the puzzle revolves around growth, or more accurately just how global can Netsuite get? As much as Nelson like pushing SAP’s buttons it’s still a pretty small player and not quite ready to crack into the big league.

With a global growth rate of 49 per cent, Netsuite is also making inroads in the APAC region and is hoping to move up the ranks in terms of market share. That’s not exactly going to be a walk in the park.

According to Forrester Research’s Tim Sheedy, Netsuite still has plenty to do if it wants to take the lion’s share of the mid-market business in Australia. The biggest hurdle is that it’s the mid-market businesses in Australia that are perhaps the most reticent about jumping on the cloud.

“Small businesses are moving to the cloud, the very large are moving to the cloud but the middle is still in a holding pattern,” Sheedy says.

The big impediment is that cloud ERP is still not on the radar for many local companies, and Sheedy says that ERP on the cloud still doesn’t make a lot of economic sense for a lot of businesses, simply because of the massive customisation that people feel is required.

That’s not to say that Netsuite can’t surmount these hurdles. It’s just something that’s going to take time, as the benefits of cloud ERP start to seep in. In fact, it’s just the sort of challenge that a maturing business like NetSuite needs to tackle head on. It has a solid APAC team and the one thing quite apparent at SuiteWorld 2013 was that it’s starting to connect with a large cross-section of businesses.

The one consistent theme in the NetSuite story so far has been its ability to identify its deficiencies and take action. Adding the manufacturing segment to its overall toolkit is an example of that mindset and it’s a strategy that has so far served Nelson and his team well.

The next twelve months for Netsuite will undoubtedly be busier than ever as the company dubbed the “SAP for small to midsize firms” starts to think big.

Supratim Adhikari travelled to SuiteWorld 2013 as a guest of NetSuite.