NetSuite CEO on installing new releases, SAP and IPOs

Salesforce.com typically rolls out a new version of its software all at once.
Written by Larry Dignan, Contributor

Salesforce.com typically rolls out a new version of its software all at once. On Friday night Salesforce.com had a planned outage to roll out its "Spring '07 pre-release work."

Judging from Salesforce.com's service level dashboard there were no incidents. But is the "roll out a new SaaS release all at once" strategy risky? NetSuite CEO Zach Nelson thinks so. Nelson was on a conference call put on by Citigroup Friday and talked about many topics including software as a service (SaaS) implementations. I listened to the replay of Nelson's talk.

Comparing NetSuite and Salesforce.com implementations and upgrades are apples and oranges in many ways. NetSuite is an ERP suite that is more complicated to roll out than CRM. You simply can't retool your ERP system without reworking business processes for things like accounts payable and receivable, order to cash and inventory replenishment.

However, Nelson raises an interesting point and one that will be considered as on-demand software becomes more popular. Will customers want a big bang release or one that's phased in during a set period? Nelson gave some color on NetSuite's upgrade process. "We do phased releases. Salesforce.com does a big bang all at once. When do problems occur? When you release new software," said Nelson. He added that NetSuite's 2007 release will be spread over five months to minimize risk. Another reason: Customers can plan better for the upgrade and consult with NetSuite about the proper timing.

Nelson also noted there are benefits for NetSuite if it phases in a new release. One perk: NetSuite doesn't get bombarded with support calls since "customers can pick when they want to go" with the new release.

On other notable topics in Nelson's talk:

Netsuite's infrastructure: The company has a data center in Sunnyvale, Calif. and it runs on Oracle and Red Hat. "We've chosen a grid like environment," said Nelson. "When something does fail it only affects 50 customers."

The target market: Nelson says "the last great untapped market is the small and mid-enterprise space." Here's how he views the software market. At the high end Oracle and SAP have ERP software locked up. On the low end it's Intuit's Quickbooks that dominates. But the market between SAP and Quickbooks is vast and no player such as Microsoft's Great Plains, now Microsoft Dynamics GP, dominates.

The long-term competition: Nelson says NetSuite wants to be "the SAP of the midmarket." The issue: SAP also plans to be the SAP of the midmarket. The software giant has also announced a suite called A1S to court that market with a release later this year. The challenge for SAP: Thwart NetSuite early with either an on-demand or hybrid strategy. The challenge for NetSuite: Don't get run over by SAPk which has more resources and an entrenched customer base. Echoing previous comments Nelson reckons he has a nine year head start for on-demand ERP. "ERP is very complicated to build--it's a feature based sale. It becomes very industry specific. If you sell to distributor you need demand based inventory replenishment. It took us eight years to build demand based inventory management," said Nelson. "They will not be able to move any faster than we have moved."

Vertical markets: NetSuite is focused on industry specific verticals for on-demand software. And these customers are increasingly considering SaaS as an option along with traditional ERP implementations. Many NetSuite customers are wholesale distributors, e-tailers, services firms and software. The core similarity with those companies: They are distributed. These companies want their information available on the Web readily.

Implementing SaaS ERP: Nelson notes that the implementation periods to implement NetSuite range from two weeks for a small e-commerce site to six months for a larger company looking to move 2 terabytes of data to SaaS. Why isn't it just plug and play? New ERP systems mean process changes. That usually means more time. Netsuite charges per month and based on functionality features used.

The cost of implementing SaaS ERP: While large customers expect consultants and pricey installations of traditional ERP software there is no such expectation among those interested in SaaS. Nelson noted that the license for Great Plains is equivalent to a three-year NetSuite subscription. But the implementation costs range anywhere from 1 to 3 times that perpetual license. "With SAAS the customer has a real hard time paying more than 1x first year of service to implement," said Nelson. "That's the real challenge for the Microsoft and SAP (as they enter the SaaS market). Customers just won't pay 6 times."

NetSuite says its services group can keep implementation costs low, but there's a real opportunity for a company that can install SaaS on the cheap and consolidate a mid-market that's currently needs value added resellers (VARs) to get anything done. "If we're going to be the SAP of the midmarket somebody will be the Accenture of the midmarket," said Nelson. "The challenge is that whoever does it has to lower the cost of delivery dramatically."

On worries about data loss in the SaaS model: "In the early days (2002) the whole notion of data off site was a big question. Now it's not much of an issue anymore," said Nelson. He noted that worries about data loss depend on the industry. In health care data questions are raised. A distributor wants information on the Web.  It depends on the industry. "There's always somebody that wants to hug the server, but it loses its meaning once a company is distributed. We guarantee an SLA. At the end of the day customers see us as being more efficient than they are internally."

On going public. "Our focus has been in building a great software company. We don't have a need to raise money," said Nelson. It also helps that Oracle CEO Larry Ellison owns the majority of NetSuite shares and doesn't have to cash out. "With Larry as a core shareholder the need and pressure to IPO is far less. We've been able to focus on a great software company instead of an IPO time frame." 

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