The other week I attended a NetSuite event in London where the company introduced customers working with OpenAir, its Professional Services Automation solution. A few weeks’ prior, NetSuite launched its foray into the manufacturing space with the announcement that it is now marketing RootStock’s discrete manufacturing solution.
Several aspects of the conversations got me thinking more about NetSuite’s battle plans. After more than 10 years being known as the company that serves the SME market, it is clear NetSuite is pushing hard to go up the food chain.
Wheeling out customers like Siemens, Software AG and Lloyds Register are but the tip of an iceberg the company hopes will help seal its credentials as a player capable of serving the needs of larger organizations. It has realised that trying to grow massively in the SME market, with the economics that implies is not a route it can profitably follow. $99/month/user plus one off and implementation charges trumps $30/month/user any day.
During his prepared remarks, NetSuite CEO Zach Nelson let slip the company is looking to hit annual revenue of $200 million. The market expects $185 million for 2010. This comes from approximately 6,600 customers. That means each NetSuite customer is worth around $30,000 a year to the company through a combination of services not limited to suite usage but also implementation and data services.
This is a far cry from the $30 a month NetLedger offering with which the company started. However, we should bear in mind that there is a wide range of customer deployments in play. Lloyds Register for example is rolling out to 9,200 users making it NetSuite’s largest deployment. At the other end of the scale, M62 Visual Communications has 32 users. You get the picture. NetSuite is signalling that within a single suite it can scale from the smallest to large deployments. That is highly unusual in software businesses but gives an indication of what’s possible in cloud environments.
In the background it seems clear to me that NetSuite has its eyes on larger prizes. In an interview given to Reuters, Zach claimed that: ”I think in 10 years we’ll be bigger than SAP.” That’s a big claim but not one that is as outlandish as it sounds. Anyone remember the days when McCormack and Dodge ruled the roost? It was SAP that took them out through a technology change we call client/server. SaaS/cloud is another technology shift offering economic and other benefits.
NetSuite is Larry Ellison, CEO Oracle’s, cloud/SaaS incubator. As 65% shareholder, he is effectively the lead stockholder in the largest (by revenue) suite play in the on-demand/SaaS/cloud based suite apps market. Zach Nelson is ex-Oracle and from what I have seen, there is more of the Oracle ‘killer’ mentality inside the company when it comes to the sales effort. Zach has no qualms about pitting his wits against SAP even though the contest looks absurdly one sided. That can all change in a few years. While $200 million doesn’t come close to a third of SAP’s education revenue, let alone software sales, one exec told me that he would be ‘disappointed’ if the company was not turning $350 million in the next couple of years. That’s ambitious but the next real milestone has to be $500 million. That’s the point at which NetSuite starts to get interesting as a potential acquisition target.
We can debate who the runners and riders in that race might be all day long but in reality there are only two: Oracle and SAP. If IBM tilts at it then it signals it is back in the software game in a serious way. No-one I know truly believes that but then stranger things have happened. If Microsoft has a go then it would likely overpay for a solution where the lead personnel are not a great fit. We could tip companies like Accenture into the mix and given their recent commitment to SaaS, anything is possible. But it is an Oracle/SAP OK Corral style fight that would be one to savour since the two companies are locked in many a battle already.
A hint might come from the fact that in recent times I am hearing NetSuite’s tone change more towards referring to the company as Larry Ellison’s cloud investment. The two companies have to be close and no-one but Ellison will know what sort of numbers the company is really looking at or how they shape up.
Does NetSuite’s forays into manufacture and professional services offer it enough by way of verticals to reach those sort of revenue numbers? Hardly. Manufacture is a tough nut to crack without significant depth of expertise. Rootstock impresses as does OpenAir but even that is not enough to guarantee the big prizes. NetSuite will need to demonstrate vertical market capability across multiple fronts. To that extent it says it has solid offerings in wholesale distribution and e-commerce for companies in the 500-5,000 employee range. There are plenty of those around but even then – four verticals? I don’t see it. A dozen at least would be my target.
One real weakness is NetSuite’s failure to understand the CFO mindset. It seems content to pick off deals where it can get some functionality into a business, arguing that gives them more seats than the finance office will deliver. It’s a fair point. NetSuite really needs to dislodge those Sage, SAP BusinessOne and Microsoft Dynamics users if it is to get account control, something the others mentioned have executed against extremely well. The burning question is whether NetSuite has the will to truly show how cloud computing can deliver maximum benefit. Since every business function ends up as a financial transaction, the difficulties must be worth the effort, especially given that it opens the door to many forms of process improvement that are otherwise cut short. The problem is that I don’t see Zach attuned to that way of thinking. He gives the impression he wants to cut deals and move on rather than return and review. His lieutenants might think differently but at the end of the day, all companies march to the tune of the man in charge. Unless he is proven wrong.
The other niggling doubt comes in the service offering. Every now and again, NetSuite’s past comes back to haunt it and no amount of tweaking SEO seems to get past this problem. Having talked to customers in recent times, I am more confident that the company has adjusted. However, it needs to be a lot more visible in putting forward happy customers. The event I attended is a step in the right direction. I think we need to know more about the expertise customers brought to the table themselves in making their implementations successful before passing a final verdict. We also need to see more detail around benefit since it is possible to stack up arguments for alternatives that would achieve similar results. It is results that could not be achieved except through cloud that should be brought to the fore. The transformational example offered by M62 is one such.
Finally, there is always the spectre of SAP Business ByDesign. I could write an entire essay on this one but one thing NetSuite can no longer assert is that BYD is ‘not on the market.’ With more than 100 marquee customers and a growing channel of knowledgeable resellers, some of which are coming from NetSuite’s own stable, SAP will represent a serious threat in its own right. It will take SAP at least 12-18 months to build up a head of steam and, assuming it executes well, will give NetSuite a run for its money. Assuming of course that in the meantime NetSuite has not already been acquired and assuming NetSuite has outplayed SAP in developing a channel of its own. Plus a hundred and one other factors we don’t yet know.
