This week Zach Nelson, CEO of NetSuite, a.k.a. Larry’s other company, took over the Marc Benioff chair as guest antagonist but given the relationship between the companies the vibe was more sedate. For instance, no one went to the talk at the Lam Theater in Yerba Buena Gardens wondering if Nelson would be controversial or if he would utter the words, “We come in peace,” as Benioff once had. That much was a given.
Nonetheless, Nelson served roughly the same purpose as Benioff; he was the emissary from the cloud. He functioned as a third party thought leader pointing off in a future direction that Oracle itself could not for various reasons. Nelson’s direction and his talk cemented one of the key elements of cloud computing for large enterprises contemplating — what to do about the growth of increasingly expensive and hard to maintain ERP systems. In an era where data and decision-making are continuously being pushed down the chain of command conventional on premise ERP has a flexibility problem and that was the subject of Nelson’s talk.
For at least the last year various vendors have been talking about their two tier strategies in which they provide a second layer of ERP support or they cooperate with other vendors to do so. Nelson used his time to describe the advantages of using a product like NetSuite in a variety of ways that demanded a second tier of ERP.
For instance, a large multi-national company might use a second tier of ERP systems to capture local or regional data, convert currencies and adhere to local regulations before rolling the results up to corporate in a more tidy bundle. The two tiers could in practice be all NetSuite but Nelson’s point was to also support heterogeneous environments in which Oracle or SAP might be the corporate standard.
Finally, an question that is on lots of minds during a merger, acquisition or sale of a division is what to do about the financials. I have to confess that this is not top of mind for me but I can understand how it can be for the principals. Nelson’s point is that his product, by virtue of its cloud residency, can spin up a company very quickly and enable the separation or merger as the case may be.
The two tier strategy is a happening thing and I expect that we will hear more about it over time and not just from ERP vendors. Much the same argument could be made for front office conversions. As multiple conventional CRM systems begin to age out we might see SaaS CRM vendors trying to ease the transition for their own products.
Finally, two tier provides other benefits to companies such as limiting the growth of conventional ERP and initiating a transition that will move some to the cloud eventually and away from big ERP systems. That’s what Oracle can’t say on its own because as much as it would like to surround SAP systems with NetSuite and eventually convert them, it would not like to see the same thing happen with, say, Microsoft ERP surrounding and ultimately ejecting Oracle from an account. NetSuite has an inside track right now because it runs a complete Oracle stack which will make conversion easier while keeping it all in the family.
Zach Nelson’s talk was a success. He presented an appealing vision of ERP in the cloud and for that I think it’s a lock that he’ll be invited back.
Salesforce held its winter Cloudforce meeting in San Francisco last week. For many the meeting seemed like a reiteration of Dreamforce and to be fair there was some overlap but each time they tell the story, the company adds new wrinkles that cause people like me to pay attention.
What caught the attention of many analysts was the emphasis on enterprise computing, the continuing roll out of the social enterprise strategy and two new products Salesforce Site.com and Salesforce Rypple. One at a time.
We really should talk about the social enterprise first because it drives the broader enterprise discussion. It appears from the rich videos presented at Cloudforce that the social enterprise envisioned by CEO Marc Benioff is alive and flourishing. We heard from Burberry’s, NBC Universal, Kimberly-Clark, HP and Toyota about how adopting social business techniques has changed their businesses by giving them greater interface with customers and the chance at greater profits.
Though the language and the videos were mostly from Dreamforce, each customer company was represented this time by its CIO who testified that the effort and company direction were real. The difference was that at Dreamforce we heard from CEOs about their social enterprise strategies.
What’s interesting is that Salesforce is not trotting out examples of companies that are much smaller than it is. Just the opposite. In every case, the customer company is equal in size to Salesforce or much bigger which only bolsters its case. Salesforce has identified a need and is delivering a different, and by the testimony of the CEOs and CIOs a better, approach to doing business. This approach appears to be becoming the social enterprise standard for the early part of this century.
At a press and analyst Q&A after his keynote, several of us asked about the pronounced emphasis Benioff’s keynote had on enterprise computing. In his on stage discussions with CIOs, Benioff had observed that these customers also use SAP or other enterprise solutions and he’d asked the CIOs about their experiences bringing SAP back office systems together with Salesforce. Those experiences were generally positive, though at least one CIO stressed that simplification was still his goal.
Benioff observed that no company of any size at all buys from a single source. “These companies like what we have in the social enterprise,” he observed. At the same time they are committed to their back office investments. “They’re telling all of us that they want us to work well together and that’s been our strategy.”
So now it appears that a new round of rapid adoption of the social enterprise has begun in some of the largest companies on the planet. If this is a typical ramp up we should expect to see a stampede in the next year, which will only make Benioff’s self-appointed job of becoming a ten billion dollar company easier to reach.
Bring on Sustainability
Back in the Clinton administration, the president, at the urging of his vice president Al Gore, invited an assortment of politicians to the White house for a conference on the environment. The Kyoto treaty was up in the air at that point (the U.S. never signed it). But there was an urgency in many quarters to attempt to get something done for the environment by reducing CO2 emissions. It shouldn’t have been controversial because the approach was along the same model as phasing out chloro- fluoro- carbons, which had caused the famous ozone hole over the Antarctic. That effort had been led by the first president Bush.
Regardless, the meeting blew up. Rather than accept the administration’s leadership, conservatives took to the opposition as if it was any other issue that they needed to oppose and the environment has been a contentious issue ever since. This has plenty to do with what comes next.
I am not a global warming denier refusnick (the double negative is intentional). I believe the preponderance of the evidence and just to keep this moving, if you are on the opposite side of the discussion, please indulge me.
It struck me during Cloudforce that regardless of the political stances, businesses are hardnosed and they do what’s best for them financially. With fuel prices again rising, the marketplace is demanding less expensive and therefore less carbon-intensive approaches to executing their business processes and vendors are beginning to respond. That translate to travel avoidance through the use of surrogate technologies like embedded video and bi-directional communication and that’s what the Salesforce demos offered.
At the Q&A, Benioff reiterated the importance of being able to address customers through a multi-channel approach, to meet them where they are. There was no crusading involved, just the solid business logic of satisfying customer demand and leveraging all technological possibilities to do it affordably. That’s when it became clear for me that this is how the free market handles challenges like the environment. Regardless of what the pols on either side think or do, sustainability is now crossing the chasm and becoming a business imperative. It’s subtle but it’s happening.
The new news form Cloudforce was not highlighted that much but it is important in its own right. The company announced availability of Salesforce Site.com and Salesforce Rypple. I’ve written about Salesforce Rypple, the socialized employee management tool elsewhere.
Salesforce Site.com is also interesting. The next iteration of its Sites solution, this product is a cloud-based content management system (CMS) that is part of the platform and capable of helping organizations to quickly develop social websites.
As a user of an earlier generation of CMS I can attest to how powerful it can be to define a page and let the software figure out how to fill it with content at run time. Moreover with the social platform as an integral component I expect that the websites that Sites.com generates will enable a more engaging level of interaction with customers. It’s also possible that with Heroku as another part of the family that what defines a website is about to be expanded significantly.
Finally, Cloudforce also filled a necessary spot in the ongoing marketing conversation. Microsoft Convergence is happening this week and other vendors including SAP and Oracle will be having events in this quarter so it was important for Salesforce to raise its profile. OF all the things you can say about Salesforce, you should always be mindful that this is a very good marketing organization.
I am not a financial analyst and I don’t even play one on TV. Of course, judging by the last five years’ performance of those in the financial sector I’d say there is a serious dearth of such talent. Of course, that doesn’t stop the sector from issuing reports and guidance about individual companies. Heck, it’s their job.
I ran across a report today from Cowen Research about Salesforce that leaves me with lots of questions. The report downgrades the stock based on potential future performance, which is fine as far as I am concerned. No company and no company’s stock stays at the top all the time, that’s a given. But I don’t understand the logic of the analysis.
The reasons for the downgrade are several but all stem from what the report sees as “…billings growth slowing faster than expectations. In 3Q, CRM (Salesforce’s ticker symbol) missed billings expectations. Mgmt repositioned other bookings related metrics as better metrics, yet is unwilling to provide regular details around these other metrics.”
I was at Cloudforce New York earlier this month when a financial analyst pointed this out during a press conference in a question for Marc Benioff, CEO of Salesforce. If you are an industry analyst as opposed to the financial variety, what ensued was about 20 minutes of the most boring back and forth between the analyst and Benioff. It reminded me of the Monty Python skit about the dead parrot. http://www.youtube.com/watch?v=e6Lq771TVm4
I am not sure anything material was accomplished other than for Benioff to reiterate his company’s guidance that it would have a run rate north of $3 billion in its next fiscal year. I am working on memory here but I believe the issue was that the company issues revenue numbers as its primary guidance. They could, but don’t, focus on gross sales because they are a SaaS company. If for example, a customer signs a $20 million deal over five years that works out to a million dollars per quarter and that’s what they report on because that’s what’s current revenue.
So, no matter what the size of the deals Salesforce is signing, they only recognize a fraction of them each month or quarter. This is effectively leaving money in the bank and the analysts have a problem with that. This is a part of educating the financial markets about the subscription economy. Subscriptions are so different from conventional product sales, and their revenues, that some analysts effectively try to put a square peg into a round hole when they are assessing a company.
Salesforce also recently announced that it will offer enterprise licenses to enable whole enterprises to take advantage of its sprawling product lines and the analysts have problems with that too. Here in three parts is, in my opinion the most serious and erroneous part of, their analysis. Let me take them sequentially.
1) Competition is catching up. Oracle is defending the enterprise, Microsoft is gaining traction in the mid market, and SugarCRM is gaining ground at the low end.
This is true. Everyone has a flavor of cloud computing today. After more than a decade of having their brains bashed in by Benioff touting the benefits of SaaS and cloud, other vendors have put browser front ends on their products and shipped operations elsewhere (a.k.a. but not really, “The Cloud”).
But we all know that this minimal move does not accomplish the intent and that real cloud computing is also more sustainable because it makes far better use of storage and compute facilities, sharing gear where it makes sense. Moving a data center to another location with dedicated servers and spindles is like moving your dirty coal fired powered power plant to another state and calling yourself an environmentalist.
Other vendors are catching up in CRM but most of them also have ERP customer bases that they are spending considerable effort defending as the industry enters a new replacement round. Several competitors have also announced social media products and their versions of cloud computing. Alas, announcement is not delivery but it does raise an important question: if the market is so crowded why are so many vendors rushing into it?
2) Massive investments in Sales have over stimulated the market beyond its natural growth rate. Next year normalized sales productivity will decline, making growth even harder absent extremely aggressive investments in sales and marketing at the expense of margin.
I am not sure what the natural growth rate for CRM is but I believe you can say the same for ERP, except in the once in a decade period when everyone wants to buy the new technology. The market for enterprise software’s existing solutions is fairly saturated. Heck, if you’ve looked at the GDP nationally or globally lately, you understand that growth is not exactly on the march anywhere. That’s why innovation is key.
3) The company has lost focus. Management’s obsession with the new new thing has distracted it from crisp execution in its core market, SFA. The push behind Collaboration, PaaS and Social Media Monitoring have taken sales into different and unproven categories with different buyers.
A natural characteristic of markets is that growth slows over time as demand is satisfied. That is why companies come out with new products and services. It’s also why market lifecycles graph out as sigmoid curves instead of straight lines. Given this truth, number 3 above is puzzling.
Salesforce has done an admirable job of refreshing and extending its product line into uncovered areas of the front office. The company could have easily built an ERP system and jumped into an already crowded market for back office technology. But it chose instead to build net new products in markets that are quickly evolving and where there is little organized competition. This is sometimes referred to as a “blue ocean strategy” after a book by the same name. The essence of the idea is that a successful company finds unoccupied niches and satisfies the needs of those niches.
By my analysis, in the software world that means identifying new approaches to business that will help organizations reduce the friction found in all business processes. Business today is being buffeted by credit and other financial challenges as well as soaring resource costs lead by oil but also including many raw materials especially the so-called rare earth elements that are needed to make modern technology. You don’t need to be a chemist to understand that rare earth easily translates into expensive.
So in all that should a company like Salesforce elect to penetrate ERP or decide to penetrate new markets in a blue ocean strategy? Time’s up.
The financial analysts see it differently. According to them Salesforce has lost its lead on the competition and then lost focus by going after new niches. “Management’s obsession with the new new thing has distracted it from crisp execution in its core market, SFA. The push behind Collaboration, PaaS and Social Media Monitoring have taken sales into different and unproven categories with different buyers.
If you take this at face value, the only thing for a company to do is the stand still and let the competition devour it. Many companies have taken just this advice and obligingly gone to hell in a handcart.
How can you first say, that massive investments in Sales have over stimulated the market beyond its natural growth rate and follow it up with management’s obsession with the new new thing has distracted it from crisp execution in its core market, SFA?
Finally, there’s this weird nonsequitur: “…we remind investors that the company’s platform was built over a decade ago and is likely in need of a rewrite at some point to take advantage of the latest technologies.”
Well, not exactly. The application set was begun more than a decade ago and through its life Benioff has stated that they’ve rewritten the platform. Salesforce has been rebuilding the platform to expose it to the outside world incorporating other languages (Java, all of Heroku, etc.) and ways of delivering content including websites and to add functionality, especially in the social media realm. Who else is trying to do this?
Salesforce is far from a perfect company and it’s right for analysts to be watchful of any company so that they can advise clients on investment decisions. But I’ve been watching this company for a long time and I don’t understand how some of it’s core strengths can be seen as weaknesses.
I spent part of last week in the Seattle area at a small meeting Microsoft organized for analysts. The purpose was to brief us on product positioning and plans and much of the meeting was covered by non-disclosure. Consequently, I am at a loss for how much I can divulge in this setting, at least until things are announced.
I am fine with NDA information and the Microsoft presenters were generally good at stating what was on or off the record though there were a few times when the presenter said, “Some of this is NDA.” “Great, I’d think, which part?” And inevitably the presenter would default to, “We’ll get back to you.” Not a big deal, just the reality of dealing with a big company.
Now, as a practical matter, though the particulars of the meeting were interesting, the non-NDA facts that are generally available on the Internet tell an interesting story fairly well.
At $62.484 billion in revenues, Microsoft is one of the biggest technology companies. More than double the size of Oracle and four times SAP. It is also about two thirds as big as IBM. Of course, each of these companies got to its position in a different way and the comparison is less important than what these large numbers say about the market power that each, especially Microsoft, wields.
More interesting still is this consideration. The last time the world paid massive attention to its back office computing needs was Y2K, a term made famous because companies everywhere had to update their back office systems to accommodate four digit date formats. Rather than heavily edit aging mainframe and AS400 applications to account for the new millennium, companies en mass scrapped their big iron and took on lighter ERP applications that ran better and cheaper.
But that was ten years ago. It was so long ago that client server was the main computing metaphor, social networking was barely on the horizon, CRM didn’t have an agreed on name and you could actually board an airplane without taking your shoes off. A great deal has changed in the intervening decade, especially in software—enough to make it worthwhile to reexamine existing systems with an eye toward taking advantage of improvements to both economize and to take advantage of new business processes.
Forgive that small digression but it was necessary to fully illustrate this point: Microsoft is many things and one descriptor that should not go unremarked upon is that it is an ERP company. It is an ERP company at least as much and maybe more than it is a CRM company at least by the measure that Microsoft has three ERP products.
The ERP replacement cycle, driven by a need for economy, plays to Microsoft’s advantage because it offers products that operate in the cloud as well as on premise and the company is agnostic about where the products run. In fact, all competitors in the front and back office have come to the realization that running applications via cloud computing is a growth industry. Oracle has a grid computing offering, SAP is debuting cloud friendly products, and a raft of smaller companies such as NetSuite are intent on becoming the next big thing just as many of today’s incumbents displaced mainframes a decade or more ago. But Microsoft is different coming from a background of small and inexpensive systems compared with the big project and big license solutions from the traditional vendors.
Microsoft appears to be executing on a classic strategy of gaining footholds in key areas and expanding on them leveraging its low cost cloud infrastructure to tip the balance in favor of replacing ten-year-old ERP systems.
Much the same can be said of CRM. Where first generation CRM systems are nearing end of life, Microsoft is confidently offering replacement systems that have been the beneficiaries of significant investment over the last several years. These systems also run on cloud infrastructure, though cloud does not necessarily mean multi-tenant.
Microsoft and others—with the notable exceptions of companies like NetSuite and Salesforce.com—have decided to kick the can down the road with regard to multi-tenancy. While multi-tenancy might have advantages, it is not advantageous enough yet to push the issue. As a result, it may have to wait ten more years—until the next wholesale replacement cycle—until multi-tenancy becomes more of a standard.
So adding up three key factors — the market cycle, cloud computing and the market reach enabled by more than sixty billion dollars in revenues and the marketing budgets that implies—and a picture emerges of an imperative for change to lower cost systems that can easily drive the recovery in IT.
Of course business products aren’t sold in shrink-wrap at retail and success will depend on the performance of the partner ecosystem. But the partners have been a solid part of Microsoft’s success all along. Nonetheless, some attention to elevating their games will be essential if Microsoft expects to reach a new plateau in enterprise computing. I think they know that.
I had been skeptical of the on-demand ERP market for several reasons; the biggest is that ERP is a very different animal than CRM. You can sequester CRM in the front office where most processes have been manual until recently and if something goes wrong with CRM you can always fall back. The same is not true of ERP. As we have seen again and again in the last several decades, if ERP doesn’t work or doesn’t install cleanly, you will need to change your name and move to Texas.
So in ERP the idea of providing it on-demand somehow looks like adding a layer of complexity rather than taking one away as is the case with CRM. All that may be changing now as NetSuite appears to have gotten its game on. The company offers a soup to nuts array of ERP, CRM and eCommerce delivered on-demand and after some early stumbles — and despite the recession — appears to be pulling itself together very nicely.
From my vantage point, it appears that one of the big success factors is that the company is doing a better job of picking its customers. When it was founded as NetLedger, the company had a decided bias toward the SMB market. And while the executives might still point to that virtue the financial reports show a move up market to a place where customers are big enough to have staffs that can take on an ERP implementation and where budgets have enough room for the training and services necessary for success.
NetSuite also has taken on the cloud computing trend with gusto and though they are much smaller than Salesforce.com, they have aggressively gone in for a culture of building and customizing within their tool set. They have also brought to market several industry tuned versions of their whole product line.
Yesterday, NetSuite announced its Q1 2009 numbers and they were good overall though the street will be expecting more soon. Q1 is the second quarter in which NetSuite declared a non-GAAP profit though by GAAP standards they are still manufacturing red ink, but that’s improving. There was a respectable revenue increase (up 22% to $41.6 million) and an eye-popping 542% sequential increase in non-GAAP operating income.
To be fair, these are not the kinds of numbers that make you a household name but given the state of the marketplace, the economy and the time in its life-cycle, you have to tip your hat to Zach Nelson and his team for going strong.
Actually, you need to tip your cap to Larry Ellison too, if you want to. It’s Larry’s company and his imprimatur is all over it. The idea of a suite of end-to-end products and the move to take things up market are two strong indicators of Ellison’s approach.
What’s especially interesting to me is that Ellison has put so much into building a mini-replica of Oracle’s applications suite approach for the SaaS market with NetSuite. If I didn’t know better, and who says I do?, I would say that NetSuite is an attempt to build an applications business on-demand that could some day be the obvious transitional choice for thousands of Oracle application customers who finally get the on-demand religion.
NetSuite is a public company with Ellison as the principal shareholder and the day could come when Oracle absorbs NetSuite and operates two divisions, one for the database and one for the applications. That’s not very different from the way things are but it does offer the benefit of building up a new applications division that is based on on-demand computing while keeping the on-premise business humming until the time is right.
Time and circumstance will tell if my thoughts are even remotely in line with what is really in the offing. For the time being, NetSuite is on schedule to make money and prove its mettle as a free standing company. They’re moving up market and bringing out the kind of additional functionality they would need to become part of a more elaborate plan.
The people are nice too and they’re fun to watch.