by Seth Fineberg

SAN MATEO, CALIF. — Businesses of all shapes and sizes, particularly the much-sought-after small-to-midsized business sector, are finally warming up to the idea of conducting crucial business functions online — and companies like NetSuite Inc. are pleased to be a part of that shift.

NetSuite is one of the few “pure” application service providers left from the late 1990s that is not only proving that the model can work, but helping change the way that professionals think about how they run their businesses.

Founded in 1998 by Oracle Corp. chief executive Larry Ellison and Silicon Valley technology expert Evan Goldberg, the company — then known as NetLedger — began with an idea that was spawned from a problem that Goldberg had been trying to solve at a previous company: how to run a business on one integrated system.

Ellison had previously been an investor in one of Goldberg’s ventures, and when Goldberg mentioned his problem of having to run a business on disparate systems, Ellison simply said, “Go build something to solve the problem.”

That something was NetLedger 1, an entirely Web-based general ledger system designed for small enterprises. The product eventually became known as the Oracle Small Business Suite, NetLedger’s flagship product.

The company now has four main products: Oracle Small Business Suite, NetCRM, NetERP, and the business management and e-commerce solution NetSuite. Last fall, the company rebranded from NetLedger to NetSuite to signify its commitment to the product, as well as to try to emphasize that they are more than just an online accounting system.

Today, there are over 7,500 businesses using NetSuite, and the company reports that, as of February 2004, it became “cash-flow positive,” and expects to be “GAAP-profitable” by the end of this year, according to chief executive Zach Nelson.

Analyst Katherine Jones of the Aberdeen Group believes that part of the company’s success lies simply in the fact that they’ve been able to prove that something that SMBs truly need actually works.

“They are a total hosted business solution, particularly for companies that sell over the Web,” Jones said. “They have good management, a nice growth rate, they are trying hard to expand their functional footprint, and customer satisfaction seems pretty high.”

Her only caveat: “They need to sustain research and development efforts and get above the waterline in marketing to capture more mind share.”

Nelson realizes that the company still has work to do, but as the product continues to move upscale and deals are won over the likes of Microsoft/Great Plains and even more robust products such as PeopleSoft and SAP, people are starting to notice this once unknown ASP.

“I think we are winning because everyone talks about integration but no one has it completely, and people are realizing that when they want front and back end together, it’s us hands down,” Nelson said. “Companies are sitting with two and three generations of disparate systems, and they want a change. They also want to log online to do their jobs more, using a browser rather than Windows.”

The only other real competitor that NetSuite goes head to head with is — one of the only true ASP CRM vendors.

But even there, Nelson feels that his company has an edge. “For one, we have e-commerce functions, we go from contact to cash, whereas they can’t sell you anything. They have no order management, just prospect management,” he said. “In most ASPs, they are replicating the failure of client-server applications in terms of delivering departmental functionality. With us, the whole process is automated.”

Nelson also indicated that a testament to NetSuite’s model is found in some of the other desktop product vendors, such as Siebel, SAP and Accpac International, to name a few, as they have also realized the value and importance of having a hosted CRM solution.

The company’s main product has gone through much evolution, as well. NetSuite 9.5 was just released in March 2004 with advanced billing capabilities, customer mining and segmentation tools, and “no-click” e-mail integration for systems such as Microsoft Outlook, Lotus Notes, Yahoo! Mail and America Online. NetSuite 9.5 also includes the fulfillment of over 250 customer-requested enhancements, in addition to previously announced improvements to NetSuite’s real-time dashboards.

The company is also hard at work on version 10, which is expected later this year.

Craig Sullivan, NetSuite’s director of product management, believes that paying close attention to customer and reseller feedback has been a real advantage for the company overall. And, because it is a Web-based product, new releases can be brought out about twice a year, rather than every 18 to 24 months.

“Our customers are very vocal. We wouldn’t claim we have some as passionate as Mac users, but they really do get into it and want to help us improve it,” Sullivan said. “There is a certain point where a business has to buy an SAP or PeopleSoft because they have some key features others don’t have, but if we can keep the broad range of features and continue to enhance, we can win that deal. As we continue to move upstream, we have to make sure we retain our roots and maintain that usability and SMB focus so it’s not daunting to them.”

And with users that are only in the thousands per year rather than tens or even hundreds of thousands, Sullivan believes that NetSuite will continue to be the product of choice for SMBs.

NetSuite had been targeting companies below 50 employees, which still make up a portion of the company’s revenue. But as the product has moved upscale, the company is finding that businesses with from 50 to 250 employees are its sweet spot. Clients primarily consist of wholesalers and distributors, service companies, high-tech businesses and retailers. Sullivan said that, while many companies are using NetSuite for financials and CRM, approximately 40 percent are using it for e-commerce.

As for its reseller channel, NetSuite has also been able to prove that the model works for most of its 220 partners. Currently, as much as 25 percent of NetSuite’s revenue comes from its reseller network, based in the U.S., Canada and the U.K. NetSuite also has a distributor in Australia, called NetReturn.

Some of the company’s resellers are true success stories, basing their entire revenue stream on NetSuite alone.

One example is San Clemente, Calif.-based reseller and 2003 Accounting Today Technology Pacesetter LifeSci Technologies, which saw its revenue jump from $800,000 to $3.6 million between 2002 and 2003 — a 350 percent increase.

NetSuite Inc.San Mateo, Calif.
(650) 627-1000
Year founded: 1998
Employees: 300
Senior executives: Larry Ellison — founder and majority owner; Evan Goldberg — chairman and chief technology officer; Zach Nelson — president and chief executive; Jim McGeever — chief financial officer.

Main products:

  • Oracle Small Business Suite. Small business accounting product targeted at businesses with fewer than 50 people.
  • NetCRM. Hosted customer relationship management solution; its main functions include sales force automation, quotes and orders, commissions, marketing and customer support.
  • NetERP. Hosted enterprise resource planning product; its main functions include order fulfillment, time and billing, inventory, purchasing and full e-commerce abilities.
  • NetSuite. Combined ERP, CRM and e-commerce, available in basic and professional versions starting at $2,000 a month. Targeted at businesses with from 50 to 250 people. Version 9.5 released March 2004.

Another example is found in Raleigh, N.C.-based Loehmeller Consulting Inc. Not long ago, the company had been reselling Microsoft, Navision and Accpac Advantage Series. The company now only sells NetSuite, and is enjoying profitability.“We are a small company, and I wanted a model where I didn’t need 50 employees. I’m also a big believer in ASP and a lot of resellers are threatened by the ASP model,” said president Rufus Loehmeller. “The products we used to carry are great products, but we just thought that we were new and small, and didn’t see ourselves fitting in. We had to decide what we were going to do and when we started becoming successful with NetSuite, the choice was clear.”

Loehmeller said that one of the reasons he stays with NetSuite is that he doesn’t have to worry about servers or databases, and that it’s one solution. More important, he enjoys the financial incentives of being a NetSuite reseller. Although a majority of NetSuite’s revenue comes from direct sales, the channel enjoys a 30 percent margin on all first sales and annual renewals.

And while some NetSuite resellers believe that there could be better advanced training, and that there is always more to be done with the product, they also enjoy the fact that deal times are cut down to just a few months rather than six or more.

NetSuite isn’t looking to grow its reseller channel too much more, and will only do so as the company expands. Nelson indicated that his 300-employee business is likely going to be 400 before long, and they are on track for significant growth.

“Our biggest challenge is managing growth and complexity, but I’d like to keep tripling over the next two years, and I think we can do that in this underserved, fragmented market,” Nelson  said. “Many applications out there for this market are so complex, and we have to continue to execute and take that market share.”

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