NetSuite CEO: Fueling Partner SaaS Success With 'Shock And Awe'

NetSuite CEO Zach Nelson makes no bones about it: If solution providers don't embrace the Software-as-a-Service (SaaS) and cloud computing model, they're doomed. It's the nature of business today. "If they don't make the transition to SaaS, they're going to go out of business; that's my philosophy," Nelson said.

And NetSuite hopes to make it easier for partners to cross the chasm to the cloud. Earlier this year, NetSuite launched the SP 100 program which gives partners 100 percent of the margin on NetSuite sales in the first year and 10 percent each year after (partners can also choose NetSuite's standard 50 percent in the first year and 30 percent thereafter). Nelson called it a "shock and awe" campaign to get partners on board, and so far it's worked. Since the unveiling of the SP 100 program, NetSuite has signed on a trio of key partners and has leads on about 100. Of the ones that have signed on the dotted line, one is a top 20 Great Plains VAR, one is a large Epicor VAR and one is a top 15 accounting firm.

ChannelWeb recently sat down with Nelson to discuss the SP 100 program, SaaS and cloud computing and the importance of customization, along with a few tricks NetSuite has up its sleeve for its April partner conference. Here are excerpts from that conversation.

Have you seen any reaction from the Microsoft partners and more traditional solution providers -- you mentioned Great Plains -- that you've reached out to with the SP 100 program? How are they changing their view?

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About 20 percent of the 100 are Microsoft guys Then you saw another 10 percent with the Sage guys. Then the rest is the Epicors, the Lawsons and that bunch; sort of representative of the market share the individual products have. The interesting thing on the Sage front Sage in the U.S. is really struggling. Where we see Microsoft in new business, we don't see Sage in new business; it's really replacing Sage. And what we'll see happen this year with Sage is as their organic growth of the Sage product lines begin to decline, Sage management is going to have to find their profitability in some way, and I think the way they're going to find it is taking it out of their channel's hide, whether it is charging them more for programs or reducing their margin or what-not. The Sage base will be a very ripe base because of what I believe Sage will do to maintain their profitability in this environment.

How much are your top partners making, and how big of a business have they built around this NetSuite model?

We have guys doing between $750,000 and $1 million of recurring revenue business. That's what it would be to us. So it's $300,000 or $400,000 recurring to them. The beauty of focusing on a recurring revenue model is -- especially because we're helping them enjoy that -- it compounds every year for them as well. So $300,000 this year, add another $300,000 and it's not $600,000 next year, it's $1 million. Our view has been the recurring revenue model business, once you get it built -- and you certainly see it in our financial numbers and partners will see it in theirs -- becomes the gift that keeps on giving.

Now, I think with the SP 100 program, we're really educating them how the recurring business model can work for them, and the 100 percent program allows them to transition off that old license drug pretty painlessly, which was the challenge they always had.

Why haven't more software providers stepped up with innovative programs to get the old guard to make that move with a program like this?

It is fairly radical. We were sitting there going, 'I can't believe we don't have 1,000 partners. It's a great product. It's a great program.' We said, 'We have to shock and awe these guys to get them to really look at what they're doing and not listen to their current providers.'

We spent eight years trying to intermediate this channel. They've always been afraid of being disintermediated. We thought about this long and hard, so I think a part of it is just our experience. The other part of it, quite frankly, is VARs have to be very careful who they partner with in the Software-as-a-Service world, and it takes a lot of time to get to scale. There aren't many companies with the scale of NetSuite there's maybe a handful.

The other challenge SaaS companies have [is] they don't have the scale to absorb what we're talking about absorbing, giving them 100 percent of the revenue. VARs have to be very cautions of who they partner with. It is a new world. You want to partner with somebody who is going to be around for the long term. The fact that we understand our business so well and we can absorb giving them 100 percent of the first year value is something not everyone can do.

Next: Tiramisu is more than a delicious dessert

Obviously the SP 100 is a big help in making that transition. What else is NetSuite doing to help make the transition to recurring revenue less challenging for partners?

The big challenge the classic midmarket ERP channel has to make is there is one revenue stream that we've eliminated, and that is the old revenue stream associated with installing the server, installing the software -- it's built into the application, so we've eliminated that revenue stream. The challenge is, if you're a VAR and you've built your practice around shocking the Microsoft or Great Plains server back to life every time it dies, that revenue is gone. And it's going to be gone forever because it's the future of software, the cloud-based approach.

So the real challenge is not in transitioning to a Software-as-a-Service model, but where is the value that you're going to add to the NetSuite solution set? And the value we believe our partners are going to add to the NetSuite solution set is understanding their customers' business, how best to apply NetSuite in a wholesale distribution environment or in a services company. That's the value they're going to have to bring, where in the past the value they brought was knowing the Microsoft solution stack. Knowing the stack isn't going to be very valuable in the future for anybody The more important piece is how to apply it to the customer's business. And, ultimately, the value the customer wants is: How do you make my business more efficient by using this thing called NetSuite? Those are the tools we're trying to help them understand.

One of the last myths around cloud computing was that these applications aren't that customizable. My belief is that they're far more customizable than Great Plains or SAP ever were for a provider. In fact, the customization tools that we've created have now become your Platform-as-a-Service. They're just the evolution of our customization architecture. SuiteCloud is our customization architecture on steroids. You can now build complex applications.

We're actually going to be introducing Tiramisu. Tiramisu is actually the effort by NetSuite to put our developers and our third-party developers on literally the same playing field. Tiramisu is the abstraction of our development tool set so that our own developers will be using the exact same tools that our third parties and ISVs are using to customize and add functionality to the product.

We're about 50 percent done with Tiramisu. So when we talk about our SuiteCloud platform, in 2011 developers in the NetSuite organization will use literally the exact same tool set that our ISVs and our VARs use to customize and extend the application. That will be a huge boon for everybody. Usually in an environment, the developers at NetSuite are down in the guts of the machine adding functionality, and the partners can't get into the guts of the machine. What we're going to do is abstract it so that everybody is literally developing with the exact same tool set. Again, that's a stake in the heart of this myth that it's not customizable. Listen, our developers are going to use the same tools our partners use to add functionality; that's how customizable this stuff is.

Next: The role of BPOs How much of your software base is customized?

I'd say 100 percent -- that'd be fields and forms. Deep customization, which I believe begins at adding tables to the database; 85 percent have added tables to the database. Sixty-six percent have added custom code. They've actually written new applications in SuiteCloud. Sixty-six percent. That's huge. The most used features if you go down our list are: custom records, which are custom database tables; journal entries; customized published dashboards, another element of customization; and custom code. So three of the top four features are all customization.

What skill sets do VARs need to improve or think about that they don't have now as they transition, grow and migrate to the cloud and SaaS?

What it really comes down to is understanding more their customer requirements: How do I apply NetSuite? What business processes do my customers have that I'm going to use NetSuite to automate? The biggest challenge I think for partners is, and it's the biggest challenge for NetSuite, quite frankly, you see this huge giant market that you can address but now you say, 'I'm going to focus on companies that manage cleaning services.' And that's the hardest thing to do. The way you do that is you find a couple customers in that industry, and you partner with them to understand their business processes and build it for them, and then you feel more comfortable saying, 'Now I'm going to sell it to every janitorial services company in the world.' That's the beauty of having a SaaS platform.

You're no longer geographically constrained What will ultimately happen in the reseller community is it will become micro-vertical. A VAR will become the genius in how do you do etail on NetSuite for electronics distribution. Or they'll become the genius of how do you run a professional services company on NetSuite. It really is about micro-verticalization at some point What the VAR brings is domain expertise and knowledge of a company's industry, and then they combine it with the ability to customize NetSuite to address those issues.

In the relationship between NetSuite, the channel partner and the customer, who is the first line? Who holds the paper?

We both hold the paper today. I've given a lot of thought to this because some people say, 'We need to take the paper to have that relationship.' That's not really the case. At the end of the day, I really believe that the customer will always have a relationship with NetSuite because we have the bits; their data is hosted with us. They're going to have to have some contractual relationship with us about that. The VAR is also going to own the relationship with that customer. They own the renewal, they own the customer. They're the front line of defense for the customer if they choose to be We're very flexible in terms of how we allow the VAR to define the relationship.

Do you have any plans to OEM NetSuite to business process outsourcing (BPO) companies?

We have some announcements we're making at the developer's conference. The interesting thing about BPOs is, it's such a screwed-up business model. What do they do? They say, 'Oh, you're running SAP and it's costing you a fortune. Let us run it for you. It'll cost me a fortune.' That's business process outsourcing? What a nightmare. What business process outsourcers need to do is say, 'You're running SAP? That's too bad. We have a more efficient way to do accounts payable. You can keep that, just pay us and we'll do it here.' That's what we're working on. We're working on next-generation business process outsourcers. We're not outsourcing the systems, but literally outsourcing the process and building effectively a system around NetSuite that allows them to do that efficiently and make more money than if they said, 'Give us your SAP system and we'll do payables instead of you guys doing payables.' We have some very cool stuff on that front.

So all of those BPOs will be able to resell a version of NetSuite?

We'll be embedded in what they sell. What they're going to sell is: 'I'm going to reduce your payables and receivables by 20 days. And you pay me X percent of revenue.' We'll be the platform that they offer that service on. So they won't really resell us but we will be embedded in their offering.

Is there anything you guys have found over the years as the No. 1 reason some solution providers can't cross the chasm?

Some guys early on said, 'Forget it. I'm going to bet 100 percent SaaS' and they were successful. Then you see other guys who say: 'We have this business here with Oracle. Let's add this as a second line of business.' I think there are all sorts of business strategies that work.

Do I want Great Plains resellers to stop selling Great Plains? No. Put them side-by-side and we'll win every time, but if that's what it takes to transition a business, do both. I know I'm the future. I know I'm going to win, but you need both products The most important thing, obviously, for them when they look to partners is they have to participate in the recurring revenue stream. If they don't participate in that there's no way at all to be successful, because the whole nature of the SaaS business is based on that downstream revenue recurring. If your partner is not giving you that, I wouldn't be a partner with that company because you're not going to be successful. That's the only way to be successful.