Are companies ready for cloud ERP heart surgery?

Interview: NetSuite CEO Zach Nelson talks cloud...

It seems 2011 is rapidly turning into the year businesses start to take cloud seriously. Indeed, so many companies are now unveiling cloud computing services it must be slightly disconcerting to companies that have been offering software as a service (SaaS) for years to see the rest of the industry following suit.

But Zach Nelson, CEO of cloud ERP software company NetSuite, takes it in his stride. "At the end of the day it all helps us. It's a little frustrating to watch TV ads from completely cloudless companies selling the cloud," he told silicon.com in an exclusive interview.

NetSuite offers ERP, CRM and ecommerce software, and Nelson said the economic downturn has made organisations more willing to look at cloud-based applications: "What happened is that, when the downturn hit, people moved to the cloud more quickly than they would have done, and they said: 'This works, we are never buying anything else'."

The company's OneWorld software - which allows users to manage companies with multiple subsidiaries or business units from a single NetSuite account - has "catapulted" it into much larger organisations, according to Nelson.

He said NetSuite's average deal size is now $40,000, and added: "We are starting to replace large implementations."

But because the ERP system is so central to the smooth running of any organisation, companies are still cautious when it comes to change: "It's the heart of most companies and they don't want to do a heart transplant," he said.

So to reduce risk, companies are testing cloud services running alongside their existing on-premise software, which he compared to a knee replacement rather than a heart transplant. "And once they've done the knee they will want to change [the rest]," Nelson added.

"Once you've [then] done the heart transplant you don't want to do it again."

Zach Nelson says private cloud has popped up to try and obfuscate cloud - the public cloud is a private cloud
(Image credit: Shutterstock)

Nelson was also dismissive of the idea of private cloud. This approach promises the advantages of cloud computing - scalable, on-demand computing - but all tucked safely away behind the corporate firewall, rather than using the public internet.

And while CIOs have said they intend to invest in private cloud this year, Nelson is unimpressed by the term: "Large companies don't even know where their systems are any more. At the end of the day, some IT guys want to hug their servers, and they see management pushing them to the cloud. So private cloud has popped up to try and obfuscate cloud while being part of it. The public cloud is a private cloud."

Nelson is also unruffled by larger rivals beefing up their cloud offerings: "These companies are 10 years behind and you can't compress time - there is no shortcut. No traditional company has made the move to on-demand because they don't want to cannibalise their customers. They don't want to trash their business model - it's a product and a business model problem."

Nigel Montgomery, research director at analyst Gartner, said larger vendors entering the SaaS market could actually help firms such as NetSuite: "If SAP [Business ByDesign] sales grow over the next few years, far from being negative it could be positive because it will move SaaS ERP more mainstream. If SAP grows Business ByDesign that is going to help NetSuite."

Montgomery said SaaS ERP such as NetSuite is attractive to smaller companies that don't have a formal ERP system in place already: "A lot of companies at that level are very cash-sensitive, so the idea of being able to do something now without upfront costs is very attractive."

But he said while companies are looking at SaaS ERP from a cost-saving perspective, it is still early-adopter territory because many of the bigger players - Microsoft, Oracle and SAP, for example - have yet to develop their own offerings fully. But once they do, the SaaS ERP market is likely to develop rapidly.