NetSuite: A Study On Cloud Computing's Potential

Will companies move their core business applications to the cloud? It's one of the great unanswered questions, and one reason NetSuite is so interesting to watch. Based on NetSuite's third-quarter financial report, the answer to this question remains partly cloudy.
Will companies move their core business applications to the cloud? It's one of the great unanswered questions, and one reason NetSuite is so interesting to watch. Based on NetSuite's third-quarter financial report, the answer to this question remains partly cloudy.NetSuite is a microcosm of what has happened and what could happen with cloud computing and ERP. It's one of few vendors offering enterprise-resource planning applications in a software-as-a-service (SaaS) model (others include Workday and a new venture running out of's headquarters). And, since it's publicly traded, it's the only one to disclose exactly how much SaaS ERP it sells.

So watching the company's performance, and listening to its execs' experience in the marketplace, provides some insight into what businesses are really thinking about cloud computing for financials and other core business apps.

First, the bad news. It's a bit disconcerting that NetSuite's quarterly revenues have been pretty much flat for five straight quarters. And after 10 years of business, it still hasn't turned a profit (it reported yesterday a loss of $8 million on sales of $41.7 million for its quarter ended Sept. 30). Consider that SaaS companies that make most of their money from primarily one type of software service ( for CRM, SuccessFactors for human capital management), rather than the ambitious ERP suite approach, are profitable and reporting strong sales growth.

Also, there's been much discussion about the potential for SaaS to gain ground against on-premises software during a tough economy, because of its low up-front costs. But that scenario hasn't always played out for NetSuite. Potential customers usually have some sort of system in place for handling core business processes. And when NetSuite loses a potential sale, it's because the prospect is "just continuing with the status quo," CEO Zach Nelson said in a call last night with analysts. "The company we lose to most is 'No Decision.'"

Still, Nelson was upbeat in the call, and I sensed that the analysts who dialed in were optimistic on such things as "stabilization" in customer churn during the quarter. And NetSuite had a "high win rate against Great Plains, Sage, and the SAPs of the world," Nelson said. While traveling the globe selling NetSuite, Nelson said he's seen a "sea change" in customer's reception to ERP in the cloud, adding that NetSuite had its "best new bookings growth in a year."

The company's core business remains small-to-midsize businesses, but NetSuite is trying to move upstream and get more big companies to choose NetSuite for its subsidiaries, for example. One new customer, global fast-food chain Jollibee, has Oracle as its core backend system, but has chosen NetSuite to replace a hodge podge of systems in divisions in China, Vietnam, and the U.S. There was no way Jollibee could afford to standardize on on-premises SAP or Oracle for its subsidiaries, Nelson said. "It would take three-to-six months to roll out an instance of Oracle. They did 40 [subsidiaries] in 1.5 months, and that would've taken three years with Oracle," Nelson said.(Oracle, meanwhile, has only been toying with SaaS for core apps, but that could change.)

Customer churn is the curse of SaaS companies--since customers pay by subscription, they can more easily get in and out of a SaaS ERP deal. Churn has been a problem for NetSuite, but it "stabilized" in the last quarter, Nelson said. Still, it's easy to see why NetSuite wants to move upstream. Small companies go in and out of business constantly, and when the blinds are pulled down, ERP is shut off. Forty percent of NetSuite's customers spend less than $10,000 a year with the company. But as proof of progress with the upstream strategy, NetSuite's average deal size in the quarter was $100,000. This was offset by fewer deals with smaller companies.

Finally, Nelson left us with an interesting tidbit on the still somewhat mysterious project at SAP known as Business ByDesign. Nelson said new customer Commco, a supplier to home-improvement stores, wanted to move off of SAP R/3, and compared NetSuite with SAP's Business ByDesign (a SaaS ERP suite that SAP has on a tightly controlled roll-out to select customers). Nelson says Commco execs told him Business ByDesign had "roughly 30 percent of the functionality of NetSuite."

It's 10 years later, and still no earth-shattering growth, or any profit, from NetSuite. Still, it's moving forward, and reported its highest quarterly revenue ever--even if it wasn't much more than previous quarters. Using NetSuite as a study in the potential for ERP in the cloud, it seems to me that the results remain inconclusive. What do others think? Would like to hear your thoughts in the comments section.

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