YOUR COMPLIMENTARY CHAPTER CHAPTER 1: SaaS and the Power of Communities SaaS Entrepreneur: The Definitive Guide to Succeeding in Your Cloud Application Business by Merrill R. Chapman www.progress.com Foreword: An interview with Zach Nelson, CEO of NetSuite Zach Nelson is an accomplished soft ware in- dustry executive and visionary with more than 20 years of leadership experience. He has held a variety of executive positions spanning mar- keting, sales, product development and business strategy with leading companies such as Oracle, Sun Microsystems, and McAfee/Network As- sociates. In 2002 he took the helm of NetSuite and grew the firm exponentially to its current position as one of the industry’s leading SaaS companies, with 2011 revenues of $236.3M, a 22% increase over 2010. NetSuite is a publicly held company, with 1.3K employees and a market cap currently hovering in the range of $3B. Th e company’s principle stockholder is Larry Ellison of Oracle. Both NetSuite and Salesforce.com were founded on investments by Ellison, which is why we find it very funny when various industry pundits proclaim that Oracle does not ‘get’ SaaS. Really. As the primary driver of NetSuite’s vision and market direction, Zach led the company’s successful IPO in December 2007. In early 2008 he provided the keynote presentation at our first SaaS University conference in Atlanta, and once again in 2012 at the session in Austin, TX. Zach holds a patent in the field of application integration, and has several other applications pending approval. He holds B.S. and M.A. degrees from Stanford University. Th is interview was conducted immediately aft er NetSuite’s annual user conference, SuiteWorld 2012, which we attended on a media pass. 1 Th e five-day show, which drew over 3K attendees, is dedicated to the NetSuite platform and the development and business ecosystem that has grown up around it. Th e 2012 show featured numerous breakout sessions, keynotes by Zach Nelson and other NetSuite executives and partners, and a substantial exhibit floor featuring diff erent companies that have built applications that integrate with NetSuite or are built around the NetSuite PaaS. Th e tone and energy of the event reminded us of the soft ware industry’s early COMDEX conventions in the 1980s, where attendees walking the vast, cavernous aisles of the Las Vegas con- vention center knew they were participating in a business movement that would change every aspect of society. Th ey were right, but not even those foot-weary pilgrims foresaw how much would change over the next 30 years. We suspect much the same dynamic is taking place right now in SaaS and mobile applications. NetSuite (originally NetLedger, then later Oracle Small Business Suite, then finally NetSuite) was built around the concept of layer- ing functionality onto a back office, ERP-style architecture. Th is is in contrast to Salesforce.com, whose roots stretch back to the 1980s and the sales and contact management soft ware of that era, including products such as Telemagic, Act! and Goldmine. Salesforce.com has grown by expanding beyond its CRM roots into new markets, while NetSuite has moved out of its position in the back office into CRM and other markets. As exemplified by its name, core to the company’s business model is the ‘suite,’ a tight coupling of applications with an underlying single data model. Zach, we listened to your keynote at SuiteWorld and have read and listened to your other writings on SaaS suites. You are a strong advocate of the future of the suite concept in SaaS and believe it will ultimately triumph. Th e industry has been here before with the desktop soft ware battles of the ‘90s, where the best of breed philosophy championed by companies such as Borland and WordPerfect took on Microsoft Office. “Yes, and we all know who won. And don’t forget that in the client server markets there was a similar battle. I think one of the best ex- amples was Siebel vs. SAP. Siebel certainly made the claim that their CRM was best of breed, but SAP won that skirmish as well. I think it’s important to remember that the early desktop wars 2 SaaS Entrepreneur were driven by pricing and the desire for vendor reduction. Th e first several iterations of Microsoft Office were not very ‘integrated’ at all, but they were a good deal. I don’t think Microsoft Office Model could be regarded as integrated until the release of the 1997 version, and Microsoft has been working on increasing integration between the applications since then.” Th at is true. Th e desktop suite wars are described in “In Search of Stupidity: Over 20 Years of High-Tech Marketing Disasters.” Th e Microsoft Office suite was released in 1991, and it was cre- ated as a response to and retaliation for Borland and Philippe Kahn’s ‘barbarian’ price promotions and competitive upgrades. “Well, as we see, history made its judgment. But in terms of SaaS, our philosophy is driven by our belief that the suite always wins where a tightly coupled, transactional business model is a core re- quirement. Let us take an order as an example. An order is com- prised of many diff erent details but which details and what type of reporting needs to be built around them diff ers very widely based on your place in an organization. Someone in manufacturing needs to see orders aggregated and characterized to help manage inven- tory and supply chains. A sales person needs to see orders broken down to the account level to track closes and sales pipelines. Upper management wants very high level reporting so that they can un- derstand how their organization is doing across multiple business lines, subsidiaries and countries. In NetSuite, all these views are de- rived from a single data model; this ties back to the product’s ERP and back office beginnings. “I do want to qualify this a bit. We believe the suite wins with closely coupled data, but not necessarily for situations where the data is loosely coupled. A good example of what I mean is that when you are using Quicken Online Mobile and it pops up a Google map, perhaps to show you where a potential service or business is lo- cated, the data being manipulated is not integral to any transaction. Th ere are also the various social ‘aggregator’ dashboards and view- ers; these are also examples of loosely coupled systems where the tightly coupled suite does not off er a significant advantage.” In SaaS Entrepreneur, when we discuss the reason for the SaaS Foreword 3 resurgence that began in the 2004/2005 period, we make the point that the primary reason for the rebirth was the inherent ability of the SaaS business model to open up new markets and new market segments. “Yes, NetSuite believes strongly in verticalization. SaaS allows what seem to be small markets to be aggregated into much bigger ones. For example, one of our partners is building a product that services the 8K to 10K marinas in the U.S. and the over 100K in Europe alone. Attempting to build a desktop or client/server application for such a widely distributed industry is not practical with anything but a SaaS application. Another example of this is a partner who is building a vertical for the wine distribution business; again, the aggregation eff ect transforms this into a new market opportunity. “At NetSuite, we have built a vertical product designed to run a soft ware business. We are a soft ware company, so we’ve a great deal of domain expertise on the subject. We run our soft ware business on this product and so do 750 other soft ware firms. We understand issues such as revenue recognition, always a tricky issue in soft ware, and hundreds of related issues specific to this industry.” Since we are talking about verticals and markets, which in- dustries currently dominated by client/server products do you think will come under increasing pressure from SaaS competi- tors over the next three to five years? “I think you need to look at this from a couple of diff erent perspec- tives. In terms of new markets such as the ones I have described above, I think the more relevant question is whether or not we’ll ever see desktop or client/server competition appear in these mar- kets. Th e answer is probably no. “Of course, as everyone knows, SaaS-based CRM has driven cli- ent/server out of the market. And there were always markets that were a natural fit to SaaS, such as HR, project management, talent management and so on. Th ese markets are increasingly dominated by SaaS, and the clock will never turn back. “Given our roots, ERP markets are of great interest to us, but ERP is very diff erent. Moving your HR system from client/server to SaaS can be thought of as knee surgery: it can be somewhat com- 4 SaaS Entrepreneur plex, somewhat painful, but you will be out of bed pretty soon aft er the operation. “Moving off your ERP system can be thought of as heart sur- gery: it is very complex, very painful, and if the operation fails, the patient dies. Where we are seeing the greatest opportunities in ERP are in areas of the world and industries where there is a great deal of change pressure. In Chinese and Asian markets, where manufac- turing must automate quickly, 36-month implementation periods for an ERP client/server product is simply not acceptable when you look at three months for an equivalent NetSuite installation.