NetSuite bloomed this week, in part because of a very well-produced user meeting, SuiteWorld, held in San Jose. However, it also bloomed because there can no longer be any doubt that the market for ERP technology is turning to the cloud.
What was once unthinkable — that ERP could or would ever be delivered as a cloud solution — has been gaining acceptance over the last couple of years, and NetSuite has been the most aggressive of ERP vendors at promoting it. According to CEO Zach Nelson, the company’s revenues, cash flow and profits are up significantly year-over-year, and the company is projected to operate at a run rate of more than US$400 million by the end of its fiscal year.
Negative growth rates at other ERP companies, notably enterprise leader SAP — whose license revenues declined more than nine percent, according to financial analysts from Barclays — speak volumes and contributed to the overall good news for NetSuite.
Cloud based ERP is now a value proposition that competes so well that many companies are taking the plunge rather than renewing maintenance contracts with the ERP leaders.
Following CRM’s Trail
There’s nothing surprising in this. Much the same thing happened in CRM, and today all CRM vendors have some form of cloud computing solution that they can promote when seeking new business. They may say they offer hybrid approaches, but if you review a couple of my last posts on the subject — “End of the Beginning” and“The Ethics of Selling the Old vs. the New” — you might conclude that hybrids are not much more than a fig leaf for those who need to defend their on-premise virtue.
The reasons for the surge in cloud ERP can be traced to market dynamics. The early adopters and early majority buyers have spent the last dozen years buying and installing cloud ERP and now that they can prove success, there appears to be a stampede forming to bring the later adopters into the fold.
This is also not controversial. If we’re passing the inflection point of this market, the second half will happen at about twice the rate of the first. My contention is that only very specialized and conservative companies will persist with exclusively premise-based ERP roughly three years from now.
Of course this does not mean that premise-based ERP will simply go away. Companies like NetSuite and Microsoft have developed surround strategies that might keep premise-based ERP going for a while, but I would be surprised if there were many net new premise-based ERP implementations from here on. The condition will mimic mainframes. There are many still in service, but who buys one these days?
All this is not to say that NetSuite is acing the exam, though they are the smartest kids in the class. I’d prefer to see them take an approach that recognizes the importance of best-of-breed strategies for one thing. For another, their CRM stance is — to put it mildly — puzzling.
Company founder Evan Goldberg and CEO Zach Nelson both extol the virtues of SuiteCloud, but mostly as a customization vehicle. In fact it is that, but it is also a primary integration hub for partners and thus the moral equivalent of a platform in the Force.com mode. I suspect, though, that the company’s approach to SuiteCloud, plus its messaging about offering a single integrated system, is more out of respect for a customer base that consists of finance and operations people whose job is to make the trains run on time.
Leave the swashbuckling social media, best-of-breed, and customer experience messaging to the likes of Marc Benioff and Salesforce.com for the time being. We have bigger fish to fry, I think, is the unwritten assumption.
A Telling Exchange
Speaking of all things CRM, there was an interesting exchange between my esteemed friends Esteban Kolsky and Zach Nelson over NetSuite’s CRM position.
Kolsky inquired at a press conference why Nelson paid so little attention in his keynote presentation to CRM (a true statement). Nelson returned serve and opined that the ERP system is the real customer relationship management system, for the obvious reason that it contains real “customers,” i.e. mortals who have placed an order, whereas conventional CRM as we know it is really a prospect management system.
Messrs. Kolsky, Paul Greenberg, Brent Leary and myself might have begged to differ and in fact, the debate about the C in CRM was settled while Mark Zuckerberg was still in college. But let’s cut this issue in half.
Nelson has a point about customers, and given his company’s focus on e-commerce as a logical extension of ERP and its function as a customer facing solution, his argument does hold water.
However, this fails to explain how Nelson’s ERP customers handle, let us say, their protocustomers or prospects for that period of time when they are interfacing with a company on its event horizon, so to speak, but have not yet placed their first orders. For them the answer might very well be Salesforce.com, which explains the importance I attach to SuiteCloud and all the rest. I suspect it is also one reason that Accenture, Deloitte, and Cap Gemini have devoted practice areas to the cloud and NetSuite. Nice hat trick, Zach.
However, that’s small potatoes in the big schema. For now let’s say that ERP is hard to do, and this has contributed to NetSuite’s relatively slow start compared to Salesforce. Both emerged from a discussion in Larry Ellison’s office, as legend has it, but Salesforce is a multibillion dollar company today while NetSuite has a run rate of about $400 million.
ERP might be hard, but its time in the cloud is at last here. I look for more good news from Goldberg, Nelson, & Co. simply because it’s now their time, and because they’ve done the hard stuff to make their solution viable in a demanding market.DisclaimerFrom time to time I accept free travel and accommodations from vendors so that I can attend their conferences. You ought to know this by now, but it bears repeating. NetSuite paid the freight FOB Boston and covered my expenses for SuiteWorld. It was an enjoyable experience that, nevertheless, did not influence my ability to write objectively about what I saw. What kind of analyst would I be if it did?