Oracle buys NetSuite
You had to believe this day was inevitable. Oracle announced it was buying NetSuite a cloud ERP provider with over 30,000 customers worldwide for about $9.3 billion. Oracle founder, Larry Ellison also had a large part in founding NetSuite including being one of its top investors. I have always looked at it as Larry’s experiment in cloud computing and I think that is key.
Eighteen years ago, when NetSuite got going, Oracle was already a very big company dominating the relational database market as well as the market for enterprise business applications. Oracle’s challenge then was best summed up in Clay Christensen’s book, “The Innovator’s Dilemma,” though it never mentioned Oracle or NetSuite explicitly. The dilemma being when should a successful company consider cannibalizing its own business to avoid enabling new entrants to the market to do the honors.
The dilemma stems from the fact that successful companies had, until the last 20 years, been loath to change their secret sauce, the thing that made them successful. But a series of disruptions initiated by cloud computing pioneers like Salesforce, showed that standing pat was as dangerous as playing with matches around your balance sheet.
So that was Oracle’s dilemma and you could see it unfolding as then CEO and founder Larry Ellison carefully launched what was then called NetLedger under the leadership of trusted lieutenants Evan Goldberg, CTO and founder, and Zach Nelson, CEO. NetSuite was a lifeboat strategy intended to provide a safe place to pour customers, cash, and expertise if the need ever arose.
As a startup NetLedger morphed into NetSuite and had far less overhead and bureaucracy to contend with than an established company like Oracle and so its innovation cycles were quick and nimble. Taking no chances, Oracle plunged ahead into cloud computing building its own platform and applications, which would eventually displace its traditional products. It also bought a slew of other cloud companies too because buying companies is less risky than trying to fund a similar amount of development in house.
So in this regard, buying NetSuite can be seen as just another cloud company acquisition by Oracle but it’s much more than that. It’s the culmination of long-game thinking—precisely the kind that few public companies can invest in today given the short time horizons of quarterly earnings reporting.
This long game approach is what critics lament is no longer practiced in the Fortune 500. But today, one of the founders of a Fortune 500 company (#77 if you are counting), a brash, fast talking, America’s Cup winning, technology industry showman, pulled a rabbit out of his hat. This shows that planning and execution still count for a lot in business if you know how to adapt.
Larry Ellison
NOTE: This has been edited to correct the spelling for Safra Catz’ name and to remove a ‘not’ that completely misled my meaning.
I was going to write a post about Larry Ellison leaving Oracle after he announced his retirement on Thursday but it is probably pre-mature. Ellison will become the executive chairman while Safra Catz and Mark Hurd run the shop as co-CEO’s and I have a lot of doubts.
It’s not that Safra and Mark are competent executives because each has held down significant positions for a long time. Recall Hurd was CEO of HP a while ago and Catz has had significant responsibilities at Oracle. But two things strike me. First Larry isn’t going anywhere. If he said he was going sailing or going to live on the island he bought in the Hawaiian Islands that would be a good indication for retirement. But as executive chairman, Ellison will still be heavily involved in the day-to-day operations so I am not sure what if any difference this will mean.
Second, I am leery of two riders on the same horse, which is what you have with co-CEOs. It’s not a good idea — heck sometimes one CEO is too many. By keeping Catz and Hurd in the same relative positions they were in when Larry was CEO we run the risk of losing steam, credibility, innovation, and creativity.
I see this situation as an analog to Microsoft. When Bill Gates retired, Steve Ballmer was waiting in the wings. He was one of the original team and he was a continuation of Gates possibly without Gates’ smarts. In the event, Ballmer stayed the course, rewriting Windows every few years and living off the cash cows and that was exactly what Microsoft didn’t need.
The list of markets that Microsoft plays in but does not lead as a result of a drowsy decade of following Ballmer’s script include cloud computing, phones and tablets, and CRM. We’ll see about the Internet of Things (IoT). I fear that something similar could happen to Oracle. The company has bought a lot of other companies recently and knitting them together is a big job that has to be done but I am not sure that constitutes a vision of where business computing should go and I am not sure the new team has that vision.
Perhaps the vision exists in some of the people who came into the company from the acquisitions, an iffy proposition to be sure. Very often when a company gets bought, the founders and lead talent make enough money to leave. They work through a transition period and then depart for some beach to contemplate their next moves. Some stay. Anthony Lye was a great case in point. He came with the Siebel acquisition and turned Oracle’s CRM group into a real money maker. But he’s gone along with many others.
So the question is what’s next. How long will the transition of Larry all the way out of the organization take? The answer will manifest itself when Larry really does retire and more visibly when we see some new blood in the corner office driving a new vision of Oracle.
NetSuite’s SuiteWorld
SuiteWorld reveals cloud computing ERP’s mainstream moment
NetSuite bloomed this week, in part because of a very well produced user meeting, SuiteWorld, held in San Jose but also because there can no longer be any doubt that the market for ERP technology is turning to the Cloud.
What was once unthinkable — that ERP could or would ever be delivered as a cloud solution — has been gaining acceptance over the last couple of years and NetSuite has been the most aggressive of ERP vendors at promoting it. According to CEO, Zach Nelson, the company’s revenues, cash flow and profits are up significantly year over year and the company is projected to operate at a run rate of more than $400 million by the end of its fiscal year.
Negative growth rates at other ERP companies, notably ERP enterprise leader, SAP, whose license revenues declined more than nine percent according to financial analysts from Barclays, speak volumes and contributed to the overall good news for NetSuite. Cloud based ERP is now a value proposition that competes so well that many companies are taking the plunge rather than renewing maintenance contracts with the ERP leaders.
There’s nothing surprising in this. Much the same thing happened in CRM and today all CRM vendors have some form of cloud computing solution that they can promote when seeking new business. They may say they offer hybrid approaches but if you review my last two posts on the subject — “End of the Beginning” and “IT’s Ethical Dilemma” — you might conclude that hybrids are not much more than a fig leaf for those who need to defend their on-premise virtue.
The reasons for the surge in cloud ERP can be traced to market dynamics. The early adopters and early majority buyers have spent the last dozen years buying and installing cloud ERP and now that they can prove success, there appears to be a stampede forming to bring the later adopters into the fold. This is also not controversial. If we’re passing the inflection point of this market, the second half will happen at about twice the rate of the first. My contention is that only very specialized and conservative companies will persist with exclusively premise based ERP roughly three years from now.
Of course this does not mean that premise based ERP will simply go away. Companies like NetSuite and Microsoft have developed surround strategies that might keep premise based ERP going for a while but I would be surprised if there were many net new premise based ERP implementations from here on. The condition will mimic mainframes. There are many still in service but who buys one these days?
All this is not to say that NetSuite is acing the exam, though they are the smartest kids in the class. I’d prefer to see them take an approach that recognizes the importance of best of breed strategies for one thing, and for another, their CRM stance is, to put it mildly, puzzling.
Company founder, Evan Goldberg, and CEO, Zach Nelson, both extol the virtues of SuiteCloud but mostly as a customization vehicle. In fact it is that but it is also a primary integration hub for partners and thus the moral equivalent of a platform in the Force.com mode. I suspect, though, that the company’s approach to SuiteCloud plus its messaging about offering a single integrated system is more out of respect for a customer base that consists of finance and operations people whose job is to make the trains run on time. Leave the swashbuckling social media, best of breed, and customer experience messaging to the likes of Marc Benioff and Salesforce.com for the time being, we have bigger fish to fry, I think, is the unwritten assumption.
Speaking of all things CRM, there was an interesting exchange between my esteemed friends Esteban Kolsky and Zach Nelson over NetSuite’s CRM position. Kolsky inquired at a press conference why Nelson paid so little attention in his keynote presentation to CRM (a true statement). Nelson returned serve and opined that the ERP system is the real customer relationship management system for the obvious reason that it contains real “customers” i.e. mortals who have placed an order whereas conventional CRM as we know it is really a prospect management system.
Messrs. Kolsky, Paul Greenberg, Brent Leary and myself might have begged to differ and in fact, the debate about the C in CRM was settled while Mark Zuckerberg was still in college. But let’s cut this baby in half. Nelson has a point about customers and given his company’s focus on eCommerce as a logical extension of ERP and its function as a customer facing solution, his argument does hold water.
However, this fails to explain how Nelson’s ERP customers handle, let us say, their proto-customers or prospects for that period of time when they are interfacing with a company, on its event horizon so to speak, but have not yet placed their first orders. For them the answer might very well be Salesforce.com, which explains the importance I attach to SuiteCloud and all the rest. I suspect it is also one reason that Accenture, Deloitte, and Cap Gemini have devoted practice areas to the cloud and NetSuite. Nice hat trick, Zach.
But that’s small potatoes in the big schema. For now let’s say that ERP is hard to do and this has contributed to NetSuite’s relatively slow start compared to Salesforce. Both emerged from a discussion in Larry Ellison’s office as legend has it but Salesforce is a multi-billion dollar company today while NetSuite has a run rate of about $400 million. ERP might be hard but its time in the cloud is at last here and I look for more good news from Goldberg, Nelson, & Company simply because it’s now their time and because they’ve done the hard stuff to make their solution viable in a demanding market.
Disclaimer
From time to time I accept free travel and accommodations from vendors so that I can attend their conferences. You ought to know this by now but it bears repeating. NetSuite paid the freight FOB Boston and covered my expenses for SuiteWorld. It was an enjoyable experience that, nevertheless, did not influence my ability to write objectively about what I saw. What kind of analyst would I be if it did?
NetSuite Takes OOW Stage
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.
Moneyball and NetSuite
Moneyball is a good movie and I recommend it. The tie in with the software industry is NetSuite whose logo is all over the dugout and prominent in several scenes. The central character of the drama is Oakland A’s general manager Billy Bean and most of us know his story about actually using statistics in baseball to predict how a team will play. Based on Michael Lewis’ true story book about the 2002 baseball season it’s a good way to spend a couple of hours and because Brad Pitt plays the lead I had no trouble dragging my wife to see it.
The point of this short post though is NetSuite. This is a movie so devoid of product placement that the soda machine, which features prominently in two scenes, is called the soda machine and not the Coke machine. Nonetheless, because the NetSuite logo is plastered on the dugout in real life, it’s there in the movie too. Zach Nelson and the team at NetSuite should get props for being lucky.
