Can NetSuite Surge While SAP Decelerates?

NetSuite executives stopped by our offices a few days ago to brief us on the new NetSuite for Manufacturers product. This release adds new functionality for product assembly, inventory management, bill of materials, and work orders. While not going deep into manufacturing operations or planning, it is a logical extension to the platform offered for wholesalers and distributors that also do some final assembly or kitting.

During our briefing, NetSuite executives made it clear that they were going to be more aggressive in the positioning against SAP Business ByDesign, a competing software-as-a-service (SaaS) product that also features applications for manufacturing, finance, and customer management. Earlier this year, SAP said it would "reduce its accelerated investments around SAP Business ByDesign in 2008." While SAP is still selling the product, it has tempered its plans to sell to 10,000 new customers annually. This won't happen until 2010 or so.

If you looked at the NetSuite press release, there was little subtlety: The headline read: "NetSuite Enters SAP's Core Market," a reference to the fact that most of SAP's 47,800 ERP customers are manufacturers. In the first paragraph, there were references to NetSuite's plans "to exploit the prolonged delay" of the competitor's products. The theme also carried over to the company's website: "NetSuite Takes on SAP with Manufacturing Solutions."

Smart to provoke Goliath?

While I was surprised by the boldness of the headline, press release, and website, I think this is a smart bit of positioning if NetSuite's marketing people can get the press to bite. Essentially, NetSuite wants to turn the broader SaaS application space into a two-horse race. If it is successful, any article on SAP Business ByDesign should also include an update on or quote from NetSuite. Marc Benioff did this brilliantly when he turned any CRM coverage into a Siebel versus salesforce.com debate.

I’ll bet at least one of my colleagues and several of our competitors will dismiss NetSuite's move as a gimmick. That argument is too simplistic.

Look at some of the company's recent moves. In early June, NetSuite made its first acquisition with the purchase of OpenAir for $26M in cash. OpenAir develops SaaS software for professional services automation and project portfolio management for project and time-based firms such as professional services, consulting, legal, accounting, and government contracting. OpenAir's 300 customers bring NetSuite's professional services base over the 1,000 customer mark.

OpenAir adds another entry point to new customers

This acquisition gives NetSuite a broader footprint as well as a new entry point. Like the SAP Business ByDesign team, NetSuite customers always start with a single pain point: financials, CRM, or e-commerce. Using the classic land-and-expand strategy, NetSuite will add more seats and modules in the next 12 months as customers come to see the benefits from having a single integrated system and set of dashboards as opposed to operating a spider's web of piece parts.

In April, the company launched NetSuite OneWorld, which allows customers to consolidate all global financial and customer data on a single platform. This includes support for all things multi, such as multicurrency financial consolidation, quotas, and forecasts; multilanguage; multicountry; and multibrand websites.

Ecosystem expands to 60 third-party applications and 21 industries/micro-verticals

In February, NetSuite introduced NS-BOS (NetSuite-Business Operating System), its unique entry into the platform-as-a-service market. In just four months, more than 1,000 software companies have inquired about building software on top of the NetSuite platform or creating their own micro-vertical systems based on NetSuite. To date, there are 60 third-party applications, including 4 unveiled as part of the NetSuite for Manufacturers launch.

More impressive has been the company's success in attracting third parties interested in using NetSuite's whole product line to create their own industry-specific systems. So far, developers have begun offering software across 15 sectors, including agriculture equipment dealerships, commercial floor cleaning, deep seaport marinas, government contractors, insurance, and pharmaceutical distribution.

For its part, NetSuite is targeting six core verticals that it plans to tackle on its own. These include software firms, wholesalers and distributors, services companies, IT value-added resellers (VARs), media and publishing entities, and e-commerce providers. This is a different approach from SAP which has vowed to stick with a vanilla solution - no customization, no vertical versions - at least for the near term.

Next target: HCM? SAP integration?

On the competitive front, Plexus Systems has successfully sold SaaS into hardcore discrete manufacturing sites for awhile, particularly in automotive, A&D, and other industrial firms. Lately, its success in these environments has pulled it into adjacent manufacturing environments such as food and beverage and medical device. While other vendors are fine-tuning their SaaS models, Plexus Systems has truly capitalized on SaaS ERP, leading with manufacturing execution and quality management modules and then extending that footprint into more traditional ERP functionality, including financials and HR. For its part, I'm not sure NetSuite will go much deeper than light manufacturing.

As for SAP, if you look at the SAP Business ByDesign product map, there are eight wedges in the diagram: financials, compliance, supplier relationship management, project management, supply chain management, executive management, CRM, and human capital management (HCM). Looking at the SAP wheel, NetSuite's moves would eliminate the need for most, if not all, of supply chain management and supplier management. That leaves HCM as the one major obvious gap between NetSuite and SAP. That’s the next likely acquisition or partner area.

While SAP has made it clear that it does not intend to sell SAP Business ByDesign back into its high-end base, that might make an interesting market for NetSuite. Can it position its products as a replacement for some of the aging MRP II, ERP, and/or CRM applications at smaller plants, distribution sites, or sales offices? While it would likely result in expensive and often futile sales cycles, it is intriguing nonetheless. Companies like Cast Iron Systems already provide integration appliances that link SaaS vendors like salesforce.com to SAP backbones.

Will NetSuite get to 10,000 SaaS customers before SAP?

Right now, NetSuite has about 6,000 customers, compared to just over 150 for SAP Business ByDesign. On the other hand, it is far smaller than its rival. The company expects 2008 revenue to be in the range of $156M to $159M. This compares to analyst estimates of $18.81B for SAP (source: my.yahoo).

NetSuite should get to 10,000 SaaS customers first. Given that it added 430 new customers in 4Q07 and another 400 in 1Q08, it could take two or more years to get there. SAP has opened a window, but it's unclear how long NetSuite will benefit from the breeze.

What do you think? Are manufacturers ready for SaaS, or should NetSuite focus exclusively on service industries? Is the comparison to SAP a smart marketing tactic or just a gimmick? Will NetSuite make it to 10,000 customers, or will Oracle acquire it before Zach Nelson gets his company there?

As always, I welcome your feedback and ideas. You can comment on my blog—firsthingmonday.net—or contact me at brichardson@amrresearch.com.