by Martin Veitch

Netsuite CEO Zach Nelson on his relationships with Salesforce and Larry Ellison

Nov 02, 2010
Data CenterFinancial Services IndustryIT Strategy

I’ve followed the growth of the software-as-a-service (SaaS) movement for several years but NetSuite CEO Zach Nelson’s report of the creation of two of the sector’s biggest names is new to me.

“The story of the founding was that Evan Goldberg, [Oracle CEO] Larry Ellison and Marc Benioff were sitting in a room together. Evan had just left his company [mBED, which developed a competitor to Adobe Flash] and they’d all worked at Oracle, obviously. Evan said ‘I want to do a version of Siebel but online’.”

That ‘Siebel online’ thing turned into Marc Benioff’s after Benioff decided to “pick up the ball” and went on to become the company synonymous with applications delivered over the web. Ellison had persuaded Goldberg to take another direction after discussing what had made SAP so successful, and what had made Microsoft the dominant force in desktop computing. The answer: the smell of success lay in the suite. That is, by integrating a tight-knit set of applications, users are provided with a one-stop shop, including the customer record.

“Ultimately it comes down to the same battle as was fought in the Eighties: is it going to be the suite or best of breed? It’s really hard to integrate apps that aren’t designed to work together, even for companies that own the source code. SAP can’t even consolidate separate instances of R/3. If you look at [research firms such as the] Forresters and Ovums they all say that: it’s really hard.”

That conversation led to NetLedger, a company backed by Ellison and later renamed as NetSuite with the aim of providing a set of back-office applications so companies could run their companies online rather than go to the expense of installing and maintaining a set of applications in-house or piecing together accounting, CRM, e-commerce and other components.

Nelson is a former executive of Oracle and Sun Microsystems but says he earned his cloud computing spurs at McAfee, the security software giant which owned the franchise and was, he suggests, “the first profitable SaaS company and the first SaaS IPO”.

With characteristic self-deprecating humour, the likeable Nebraskan says he set the bar high for his next move.

“I wanted a company with lots of money, customers, located close to home, with great developers and it had to be a company that was all-SaaS. NetSuite had all these and was two miles from home so my wife said you’d better go there.”

Nelson joined NetLedger in 2002, becoming CEO shortly after and has since then built the company and taken it through a successful IPO and to annual revenue of over $166m (£103m) with big customers including Carphone Warehouse, Virgin Money, Spandex America and Cartridge World.

While the subscriber model means SaaS might be quite a slow burn commercially, Nelson says it has the ability to scale so that a customer that pays $120 per year might end up paying $100,000 per year. “Once you’re successful, it rolls on,” he says, contrasting the sector with the old-school enterprise software strategy of “here’s your disk, enjoy it” that tends to court customers assiduously then ignore conquests after the relationship has been consummated… other than to ask for a yearly maintenance fee.

However, although SaaS now represents a significant chunk of business software, he acknowledges that, because data sits outside the firewall and systems are administered by suppliers, it continues to cause security and governance concerns on the part of C-level executives.

Concerns are “a little bit dependent on vertical,” Nelson argues, citing a pair of recent contract wins. “You get companies like Lloyd’s of London in the business of insuring ships for hundreds of years, and you can’t get any more risk-averse than that. Or you have Software AG with 35,000 consultants; that overrides security concerns.”

Also, as he notes, big cloud providers are going to be very aware of (and expert on) all matters pertaining to security: “You’ll get government CSOs going to [cloud providers] because they’re going to see far more attacks than the government ever would.”

Like it or loathe it, NetSuite will continue to be compared to the poster-child of the SaaS movement,, for some time yet. With over $1.3bn (£806m) in revenue, Salesforce is by far the larger company and while he obviously has a grudging respect for the company, Nelson has never been shy of having a dig at his peers.

“We’re doing mission-critical stuff; is just contact stuff,” he quips, maintaining that in the long run customers will love to suites rather than independent applications.

NetSuite has restored growth after a blip and is confident that a corner has been turned – and not just by his company, but also in the move away from client/server software.

“We said ‘oh man, the sky is falling in’ but if you compare us to SAP, Sage, Microsoft, they all shrunk in new licence sales. I think there’ll be real acceleration as economy turns. The genie is out of the bottle. This is the last great computing transition.”

That may well be so but surely the vast majority of companies are going to take a long while to shift, in the same way that mainframes have persisted decades after pundits predicted their demise.

“It’s true that finance isn’t going to sneak in an ERP system with a 9,000-staff deployment but the whole business today is based on ‘how do I make my business better now they don’t have to run all that junk’. It all depends on the companies. SAP has a huge footprint and we don’t have any fantasy of replacing them but we can surround the mothership.”

‘Surrounding the mothership’ for nelson means winning contracts for geographic regions or projects even if the customer has SAP or another ERP at its epicentre.

“You see these smaller companies who overbought and you look at how much they’re spending to keep the rest alive. With NetSuite they go from spending three percent of revenue to 0.1 per cent.”

As for the future, Nelson is optimistic about NetSuite’s chances as it narrows in on optimised versions of its software aimed at specific niches. He is shy of banging the drum too hard on mergers and acquisitions but says there are opportunities to build domain expertise, pointing to the $26m acquisition of professional services SaaS firm OpenAir in 2008 that he says is repaying itself fast.

“The future of the suite lies in verticalisation,” he says. “We want to do in professional services what SAP did in manufacturing.”

Rumours will always swirl around NetSuite because of Larry Ellison’s high-profile investment in the company. Oracle originally licensed NetSuite (under its original name of NetLedger) calling it Oracle Small Business Suite and the product is built on the Oracle RDBMS.

Those deep hooks have led to speculation that Oracle could buy NetSuite. But Nelson sees things differently. With Oracle Applications at the ERP high end and NetSuite in the SME space, the combination adds up to a “Larry Ellison sandwich for SAP,” he argues.

“Oracle has more share of wallet at the enterprise than SAP so he wants to kill them from above and use us below. Our only exit strategy was building a great company. It’s built to last, not built to flip.”

That plan to become a permanent part of the IT landscape leads him to plot the long-term fall of today’s giants.

“I can see a day when NetSuite buys Sage,” he says. “There’s an opportunity to be the big gorilla. We are already becoming the 800lb gorilla in the professional services segment.”

Going back to Larry Ellison though, how is the relationship with one of the living legends of enterprise software?

“In the old days he used to call me every month but now the table has switched,” Nelson says. “We have lunch once a year and I say ‘here’s our strategy for the year’ and he gives us his advice.”

Nelson says he learned much from Ellison, joking that he now comes up with the reverse of his logical thought progressions to second-guess the man he describes as “the ultimate in contrarian thinking”.

“I can’t tell you how many times I came up with an opinion and he said the opposite. But he’s belligerently consistent and when he gets an idea he will make it successful.”

Go on then, I prompt. What’s the secret of Ellison’s success and how does Nelson bottle that secret? He tries to follow Ellison’s example of hiring “people who listen to you and can execute, find the right guy at the right time. Usually, ninety per cent of any problem is in execution. Even if the strategy is wrong, that’s the case.”