NetSuite, a cloud enterprise resource planning software company, has popularized the concept of a two-tier deployment model, which is increasingly being used by large companies. The two-tier pitch goes like this: Enterprises keep their Oracle and SAP infrastructure, but subsidiaries and international units run on NetSuite.
Today, the two-tier model makes a lot of sense. Going forward, enterprises may look skeptically at their on-premise legacy software — at least that's what NetSuite is hoping.
On Tuesday, NetSuite announced that Shaw Industries, a carpet manufacturing company in the Berkshire Hathaway portfolio with more than $4 billion in annual revenue, deployed the company's cloud ERP to run a manufacturing plant in China and 10 international subsidiaries.
Roddy McKaig, chief information officer at Shaw, said his company wasn't going to touch its U.S. ERP systems, which are highly customized. However, Shaw's ERP systems only spoke English and the U.S. dollar.
McKaig's requirements for NetSuite, or any other ERP provider, went like this:
- Little investment upfront since the China plant won't be profitable for a couple of years.
- A quick installation since the 210,000 square foot China plant was announced at the end of 2011 and slated to start up in July 2013. "In January 2012 we did the review and end of June finalized contracts with NetSuite," said McKaig.
- The ability to customize somewhat even though McKaig is trying change Shaw's culture for more plain vanilla approaches. "We're a custom minded company to begin with," said McKaig. Shaw's company runs on Oracle and PeopleSoft for financials and human resources respectively.
- And the ability to use the system for international expansion. "I wasn't just looking for China. I wanted a system that could work outside the U.S.," said McKaig.
For NetSuite, Shaw represents a solid manufacturing win. NetSuite CEO Zach Nelson noted that he's fine with the two-tier ERP model. "Give me everybody's Asian subsidiaries and we'll be fine," quipped Nelson.
The big question is when this two-tier approach turns into just one. Could NetSuite ultimately supplant SAP and Oracle in larger accounts? After all, companies like Procter & Gamble are already using NetSuite along with traditional vendors. It increasingly looks like three clouds — NetSuite, Salesforce and Workday — will dominate.
At some point, the legacy portion of the two-tier ERP equation is going to face some serious questions. The timeline: Call it five to 10 years.
For instance, McKaig said Shaw is not touching his ERP systems in the U.S. Why? There's too much customization. "I'm not considering NetSuite in the U.S.," explained McKaig. "There's a cultural battle to no customize. We need things exactly the way we want it."
The biggest customization of the U.S. systems revolve around the length of carpet rolls. Shaw produces 150 foot rolls and makes 2 million feet of carpet a day. But once a roll is cut up anything that falls below 60 feet falls in value in a hurry. As a result, all of Shaw's customization for manufacturing software revolves around optimizing the size of rolls.
In larger industries, this customization would become an ERP system feature. The carpet industry is dominated by three players. There's simply no incentive for an ERP player to build in the features Shaw needs.
Nelson salivates somewhat about competing for one-tier ERP deals, but realizes that the biggest obstacle is the changes required to "undo a 10 year hairball."
"Moving to the cloud completely is really up to the customers," said Nelson. "At some point the business case for the cloud will win out."
Among the variables that will determine whether NetSuite can be the top ERP dog in large companies:
- The rate of change in the industry. The faster companies have to move the more likely they'll value cloud systems.
- Culture. Shaw isn't alone with its penchant for customization.
- The pain of changing processes.
- The ability for NetSuite to add industry specific functionality.
- And accounting reasons such as depreciation schedules.
In the end, it seems fairly clear that the two-tier ERP model has a shelf life and will ultimately become about supplanting established vendors.