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NetSuite rides 'two tier' ERP wave

3rd May 2011
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NetSuite CEO Zach Nelson drew some encouraging portents from the company's latest results, reports Stuart Lauchlan on

The NetSuite CEO is a master at turning his quarterly results press call into a ritual humiliation of his rivals. While NetSuite is still running at a loss ($7.7m for the last quarter) the underlying figures encouraged investors who took heart from Nelson's claim that ERP in the Cloud is nearing its "tipping point".

“The UK market for financial management systems actually contracted in 2010. NetSuite gobbled up market share. Our 60% growth rate in the UK was more than four times faster than SAP and sharply contrasted with the ‘in the red’ market share measurement for Sage, Unit4 and Microsoft.”

Nelson was in a bullish mood last week as he reviewed NetSuite's $7.7m net loss for the latest quarter. His optimism was greeted by a surge in NetSuite's share price as investors took cheer from  a 21% increase in revenue to $53.4m and a 30% leap in billings to to $61.8m.

Nelson says NetSuite clocked up 273 new customers in Q1 as customers looked to reduce deployments of “legacy applications such as SAP” and completely remove “pre-Web applications like Microsoft Dynamics Great Plains”. Instead, customers are looking to “two tier” ERP as an alternative, he argues.

Having sunk tens of thousands of dollars into legacy architectures such as SAP, companies are reluctant to throw out that investment. But the mistake is to throw good money after bad, Nelson argues, particularly when it comes to catering for the needs of group subsidiaries. “Two tier ERP means investment in legacy SAP is maintained or reduced, while new investment goes into new technologies such as NetSuite. This is an important driver for us now and in the future.”
It’s all part of a wider trend, argues Nelson. “We have reached this tipping point in ERP,” he suggests. “What you’re now seeing is companies moving their more complex operations to the Cloud and large companies are looking at this. Companies are looking at their internal operations and seeing how archaic these systems are that they are running their core mission critical applications on and saying ‘there has to be a better way’.

“What I see with the larger companies is that they are looking at their mid-tier ERP systems mess – and it is a mess. They’ll have some PeopleSoft and some SAP, hundreds of systems around the globe and they are trying to consolidate those. When they’re talking about consolidating at the top tier, they are talking about going from AIX to Unix. Why do it? It’s the same horror show. As they become aware they could have NetSuite instead we will see that accelerate as well.”

Much of that installed ERP base is on its last legs, he adds. “A number of ageing platforms are at end of life. They’re going to fall out of support,” he argues. “So companies are version-locked on an end of life product. It will cost them more to move to the next version of that product and less to move to NetSuite. Version-locked, end of life ERP systems are another driver of our business. There are a lot of those out there. NetSuite is their opportunity to consolidate on the future.”

Nelson cites research firm Gartner’s latest ranking of leading ERP firms as proof that the market is changing in NetSuite’s direction, especially as private equity firms buy up existing ERP firms with a view to tapping them for their maintenance and support revenues. “The Top Ten list – excluding NetSuite – reads like a ‘Who’s Who’ of dead software architectures – Sage, Deltek, Microsoft, Lawson,” he insists. “Just when the likes of Lawson and Epicor are desperate for innovation, they are going to be viewed as ATMs for private equity firms. The trend of private equity firms buying dying software firms will only serve as another ERP tipping point such as those we have benefited from over the last few quarters.”

Microsoft comes under fire for an alleged lack of innovation when it comes to Cloud ERP. “At Microsoft’s recent Convergence conference, CEO Steve Ballmer jumped in the ‘Way Back Machine’, set the dial for 1999 and announced a Cloud ERP strategy that would make any other software executive blush,” says Nelson.

“His strategy is based on hosting his ancient client server applications. This approach failed a decade ago and Microsoft is hoping its customers and resellers won’t remember that. But customers have grown too educated and smart to fall for the same failed approach twice. While Microsoft has ERP as part of its ‘all in for the Cloud’ strategy, it could be more accurately labelled ‘not at all in’.”
As for SAP’s ramped up push on its own Business ByDesign, Nelson draws an unflattering comparison. “Business ByDesign is the David Hasselhoff of software – big in Germany but we just don’t see it that much in the US,” he jokes.

“I know SAP is talking about it a lot. In the deals where we do see them, the functionality is still very nascent, very weak. It’s still a 1.0 product. Even SAP has announced they have all these features that they still have to bring out. As far as I can see we’re going to be competing with replacing existing SAP and I don’t think we’re going to see a ton of Business ByDesign.”


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Dennis Howlett
By dahowlett
03rd May 2011 13:50

Have you run the numbers?

 Zach's claims about his own business don't stand up to close scrutiny so why should anyone take notice of his wilder claims?

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