Seven Questions for NetSuite CEO Zach Nelson

It’s taken about a decade for NetSuite to reach this moment, and for CEO Zach Nelson, the moment is sweet. Make that “suite.”

For years, companies resisted the idea of putting their most precious corporate data online and relied instead on more traditional software to run their business from the likes of Oracle, SAP, Microsoft and others. NetSuite survived for years selling its cloud-based business software–a suite combining enterprise resource planning, financial management, e-commerce and other functions–to small companies.

The something good happened. The economy cratered in late 2008 and into 2009. That nudged companies eager to squeeze every bit of efficiency they could from every penny of their IT budgets to embrace the cloud. Having once turned up their noses at the idea moving critical business data onto the Internet, NetSuite was suddenly among software’s cool kids in school. Sales have surged from $152 million at the end of 2008 to $193 million last year, and are on track to do $230 million in 2011. And it has recently started landing large customers like the wireless chipmaker Qualcomm, the German industrial giant Siemens, and the super-fast growing deal site Groupon.

I recently caught up with Nelson to talk about where NetSuite is going next.

All Things D: So, Zach, let’s start at the top. Suppose you were explaining what NetSuite does to my 89-year-old grandmother. What would you say?

Zach Nelson: If your grandmother runs a business she’ll get it very quickly. The big idea behind NetSuite was to bring the power of large enterprise business systems to the masses. So there were sort of two ideas to do that. One was to build a software application designed to run a business. Most applications are designed to run departments. There’s accounting applications, sales force automation applications and so on. The idea was to build a single system that could run most of a business instead of on cobbled together systems that run different parts of it. The second big idea–which was in 1998 considered radical but which today is considered the future of software–was to deliver that application over the Internet. The strategy hasn’t changed in more than a decade; the only thing that’s changed is the maturity of the application. It’s a very complex application to build and so at first you can really only serve the needs of the world’s smallest companies, because you only have the functionality to address that level of complexity. Today we’re more about serving larger companies and over the last decade we’ve built out a very rich application. That’s really been the idea, the business has just grown and grown, and the business just came off its best quarter ever.

So here’s a fundamental question. Larry Ellison was one of your earliest investors. Doesn’t NetSuite represent a long-term threat to Oracle?

Where Oracle really plays–and SAP, too–is in the corporate system of the world’s largest companies, the Fortune 50 companies. Where we’re starting to have success in those companies is not in supplanting those large $100 million implementations, but in the subsidiaries around that. While in some cases SAP may think they may be running that subsidiary, it’s really not designed for something of that size. For example, we just did an announcement with Qualcomm, where we’re starting to roll out in their subsidiaries, and the first one we’re going run for them is Mexico. And you’re also starting to see it in larger organizations, particularly in the Asia-Pacific region, because in that region they’re growing so fast. They’re saying that it’s going to take 36 months to install SAP in a new Asian subsidiary and they can’t wait that long. We can do it in three months. So those are two forces that are driving traction for us.

Where are your headwinds?

That’s what’s really changed in the last few years. We spent a decade pushing this cloud rock up a hill, and now its really starting to roll downhill for us. You look at the growth rate for billings. The downturn in the economy helped NetSuite in the sense that in 2008 and 2009 IT budgets shrank, but because of the cost reduction that the cloud offers, more money went to the cloud in that time. Now that people are coming out of the downturn, they’re seeing the cloud is really faster and cheaper and better, and they want more of it. The downturn accelerated cloud adoption and the move away from traditional client-server applications.

Generally speaking, and I know it’s going to vary, what kinds of savings do you typically see when someone moves off a traditional application to NetSuite?

They’re really massive. And it’s not just in the cost of the license up front, which is typically a third of what you pay for a traditional implementation. The more important elements are the implementation cycle. Groupon is a new client we’ve announced. They’re in the process of deploying 26 international subsidiaries on NetSuite and they are going to do it in three months. That would take five or 10 years on any other platform. You can’t even calculate the savings from something like that. That’s one of the reasons I think that NetSuite is going to win. We’re bringing the power of large businesses to small businesses, but we’re also bringing the agility of small businesses to large businesses. I have never seen a customer who hasn’t saved a lot of money after moving to NetSuite.

You announced a push into services recently. Tell me a little about that.

We announced some new service partner relationships recently. The services industry is going to change radically when you look at how the economics of the cloud. We’re now seeing some large service providers embrace it. We just announced a relationship with RSM McGladrey, which is the fifth largest mid-market accounting firm, but it’s also one of the largest mid-market technology consulting firms. Their first cloud practice is on NetSuite. And the largest technology consulting firm, Accenture, announced they were putting NetSuite into their software-as-a-service business. So what you’re going to be seeing is some of the large service organizations re-tooling their business for the cloud realities.

One thing I’ve been covering recently has been the social enterprise. Where is NetSuite on that?

You look at NetSuite, where companies run their business on it, there is a lot of social activity that takes place on a NetSuite record. We just announced something called Suite Social where we’re effectively socializing all the activity in a NetSuite record, and push it to the appropriate users within the enterprise to track it. So we announced a partnership with Yammer, basically to combine our system of record with their system of engagement around corporate ERP data.

How would you think it compares to, say, Chatter from Salesforce.com or Jive or some of the other social enterprise applications out there?

We took a long hard look at this, and in a large business there are many businesss applications. And so we asked ourselves if one business application’s proprietary social media extension is going to be the corporate-wide tool for managing social media. That’s sort of the Chatter strategy, and we concluded that is not going to happen. We’re not going to pick the winner. It could be Jive, it could be Yammer. We decided not to build that social media tool, but to effectively socialize the data and the activity happening within the NetSuite ERP system and provide that data to whatever tool the company happens to be using. For us it was a better strategy. We can socialize our feed to Jive as well, or we could socialize it to Chatter if Salesforce would open up the API.