The end of 2007, at least in the space that I cover, has certainly been “the most wonderful time of the year” for one vendor - NetSuite. True, prior to that, Deltek had a decent initial public offering (IPO) , and possibly even more important, a stellar Q3 2007 quarterly report thereafter.
However, on December 20, 2007 NetSuite Inc., a vendor of on-demand, integrated business management application suites for small and medium-sized businesses [evaluate this product], opened for trading on the New York Stock Exchange (NYSE) under the ticker symbol “N” (NYSE: N) after its more than successful IPO in which it raised $161.2 million. Various bloggers have duly covered the well-orchestrated IPO Dutch auction proceedings, such as AccManPro, BloggingStocks and ZDnet to name only a few.
Prior to that, Ray Wang of Forrester Research reported on NetSuite’s S-1 filing with the US Securities and Exchange Commission (SEC), at his Software Insider Point of View blog. While NetSuite is yet to achieve profitable operations, still, as an innovative software company, the current $1.5 market valuation is expected to provide it with improved market quality, liquidity and brand visibility associated with listing on NYSE Euronext markets.
The company’s IPO is to position it for the next phase of its growth, providing the means to invest in further product development, sales and marketing, and partner development activities. To celebrate the special occasion, NetSuite’s Chief Executive Officer (CEO) Zach Nelson rang the day’s opening bell, joined by NetSuite Founder and Chief Technology Officer (CTO) and Chairman of the Board, Evan Goldberg, and NetSuite chief financial officer (CFO) Jim McGeever.
The IPO, which turned out to have garnered $50 million more than that of Salesforce.com of a few years ago, is certainly another indicator of how mainstream the software as a service (SaaS) model has become and what might be in the store for 2008.
Still, it remains to be seen how much this future visibility will help NetSuite overshadow its abovementioned nemesis with more mind and market share. Indeed, so far, virtually any aspiring player in the on-demand/SaaS sector has looked pale in comparison with Salesforce.com (in terms of the current install base, number of subscribes, revenue, global coverage, brand recognition, etc.), no matter what technical achievements the aspiring company might have also delivered.
NetSuite’s main premise has been that Salesforce.com Enterprise Edition [evaluate this product], RightNow (and even Microsoft Dynamics CRM Live [evaluate this product]) have a fundamental flaw, which once also plagued (and fatally wounded) former Siebel (now part of Oracle [evaluate this product]). Namely, these are all point Customer Relationship Management (CRM) solutions without an organic transactional system of record (e.g., an accounting back-office system). In other words, they tend to focus on managing sales contacts, pipeline, forecasts, etc., rater than on managing the customer interactions and transactions history.
Conversely, NetSuite enables small and medium-sized companies with fewer than 500 employees to manage core business operations in a single system, which includes Enterprise Resource Planning (ERP), CRM, and E-commerce. In fact, NetSuite believes that it is in a much better position to run customers’ entire businesses than Salesforce.com with its customer- and field- facing edge applications.
Therefore, it must have been frustrating for NetSuite to, time and again, see Salesforce.com get all the press and analysts’ attention and accolades for each SaaS move, and for marketing gimmicks such as its AppExchange on-line store of on-demand applications (so-called “eBay of applications”), Apex programming language or Force.com development platform. In fact, NetSuite is a far cry from being a laggard when it comes to technology development, as can be seen in its current product release, NetSuite 11, which is targeting mid-market enterprises within some vertical sectors (e.g., wholesale distribution).
Yet, in great part due to being private until recently, having focused on smaller enterprises (as opposed to Salesforce.com’s so many mega-user deployments) and for not having global presence and multi-national capabilities within the product, NetSuite hardly ever comes to mind as the on-demand thought leader. This coveted entitlement is almost always attributed to Salesforce.com even though some analysts have taken their hats off to the showmanship (if not even vision) of Salesforce.com, whereas the substance is typically still only in the making.
NetSuite, together with some bloggers, sees AppExchange as a disjointed concoction of various niche on-demand vendors and their stovepipe applications that just proves the point of how much might still be missing in the Saleforce.com’s functional footprint. Not to mention that this application directory model has thus far financially been working mainly for Salesforce.com, and hardly at all for its typically small upstart partners yet.
NetSuite’s ecosystem approach is thus much more selective and with the idea of working with value added resellers (VARs) that can harness NetFlex to develop complete solutions for certain vertical industries. NetSuite currently generates about 20 percent of revenues through the channel.
In fact, SuiteFlex is more of a configuration platform than a development platform, since it does not grant third parties the right to alter the underlying logic (source code) of the applications, but to rather build atop it. Again, NetSuite points out that Salesforce.com’s core product is a best-of-breed CRM application, and to be integrated into transactional systems it requires the kind of code-level programmability that Apex allows.
Conversely, NetSuite’s product is the transactional system itself, and as indicated earlier on, NetSuite believes that the application that owns the business transaction becomes the brain. Indeed, NetSuite has the potential to use its existing suite as the base for an extended set of applications. The one-system architecture is in place to enable relevant applications to be grafted on.
So, instead of emulating the AppExchange-like community of peripheral applications, NetSuite is courting VARs and system integrators to tailor its product for as many vertical industries as possible. NetSuite’s view is that companies buy products according to the industry they are in. Whereas the community Salesforce.com has built around its products consists of software developers building specific functionalities, NetSuite appeals through SuiteFlex to the services providers that know particular industries. SuiteBuilder, part of SuiteFlex, allows resellers to build their business process and industry knowledge into an application, and then sell it time and again. Furthermore, even for end-users, SuiteFlex will allow for more advanced workflow, role-based dashboards and business process management (BPM) functionality, which has usually been quite limited within SaaS products.
As a public company, NetSuite will also be eligible for selection by more organizations, as it will meet the criteria of those cautious prospects who will only buy from public companies whose financials are transparent. The acquisition potential is also there, and acquisitions should enable NetSuite to fill some gaps in its footprint (e.g., human capital management [HCM] and manufacturing) and more rapidly grow its customer base. In case of successful up- and cross-sales, acquisitions could even help NetSuite turn from its loss-making financial position to one of profit.
Of course, in that expansion, NetSuite should address some product quality, performance and functionality issues it might have experienced at certain customer sites. Recently, during a train ride from New York City, I coincidentaly ended up talking to another unhappy (over-promised) NetSuite user (IT manager), who was pondering the options, including switching the system. While every vendor has its share of both happy and less happy customers, it appears that NetSuite might have gone a bit ahead of itself (i.e., by developing some trendy/cool/sexy features at the expense of some more basic/dull, and yet critical capabilities that customers, nonetheless need).
Time will only tell, however, whether NetSuite will also be able to target larger organizations than it has traditionally been able to (its sweet spot are organizations with up to 250 employees). Namely, a complete application suite is a tough sell for larger enterprises, which are not necessarily that loath to the best-of-breed concept. In fact, SAP and Oracle had huge global user bases well before former Siebel started out and eventually penetrated them with its CRM offering. Also, there are many pundits who will say that the ability to add new code or services is increasingly important in modern, open and standard-based software. That is the belief of Mike Braun, the CEO of Intacct, an on-demand ERP/accounting vendor [evaluate this product], who believes that
“…the Internet and the SaaS model make the concept of an all-in-one suite as outdated as the client/server computing model that spawned it in the early ’90s… In the 21st century, the Internet’s technology standards and SaaS delivery model have made integration a snap and moved the burden from the customer to the vendors…”
Also, unfavorably for NetSuite, most big companies will have already made significant investments in their transactional (ERP) systems, and very few are likely to rip-and-replace them any time soon. Indeed, it is exactly Salesforce.com’s tangential nature (bundled with its good customization, integration, global capabilities and a data sharing model) that has allowed it to penetrate the large enterprises as much as it has, in some cases through the back door of departmental/line of business (LoB) deployment.
There have always been large markets for both “best-of-breed” players and “packaged suite” players. As the only SaaS provider offering an integrated business suite covering the core operational needs of businesses (well , at least until SAP Business ByDesign becomes generally available and while the on-demand ERP solutions from Glovia (GSinnovate) or Datasul stay relatively unknown), NetSuite is in a good position to act on the all-in-one-suite need. We will have to wait and see how this business case will further be explored by NetSuite.
Your views, comments and opinions, etc. are customarily welcome in the meantime.
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