Interview: NetSuite CEO Zach Nelson talks to CRN Editor In Chief Michael Vizard

One of the hottest segments in the industry today are SMB applications delivered by application service providers. Leading contenders in this space include Salesforce.com, Siebel, which last year acquired Upshot and NetSuite, which unlike its major rivals offers a complete set of front and back-office applications.

In addition to selling its own application suite, NetSuite partners with Oracle to offer that company's application suite for small business. In an interview with CRN Editor In Chief Michael Vizard, NetSuite CEO Zach Nelson explains why the company has the most channel-friendly approach of the leading ASPs and previews the company's plans for 2004.

CRN: In the last year, what have you done to make the business model associated with being an ASP more attractive to companies in the channel?

Nelson: We have this new account-cloning technology. What this allows them to do is basically configure our system, customize our system for one customer, and then before they distribute to that customer, clone it and sell it to as many companies in that vertical market as they want. Basically, we're putting them into the software business so they're going to amortize their cost over many sales and still charge the same amount. It is something we just announced. We basically charge nothing for you to clone the account. We only charge $300 per cloned account.

CRN: How does your approach to the channel differ from rival ASP companies?

Nelson: We start with 30 percent margins on the license sale and the partners get the referring revenue as well. So it's not a one-time sale. It's as long as the client keeps paying us, they keep getting their 30 points, which is something new, I think, in ASP land. We're trying to do a lot of things in the licensing area to help them out. We also allow them actually to sell our support packages, so they don't have to build a big, monstrous support organization. What we figured out is we need to reintermediate partners because there are just too many customers to reach and they have relationships. We spent the last year and a half trying to break the code on that from a program standpoint. Resellers accounted for about 25 percent of our billings last year. We have 200 in the program today. I really would like to be a complete channel model, but I think there's enough push involved in the sale now that we still have to be there; 50 percent of our sales would be great for the channel next year. Quite frankly, we're planning on doubling again this year so if they stayed at 25 percent that would be great because that means they doubled too.

CRN: How many tiers are there in the NetSuite channel program?

Nelson: For the entry level, we have a trusted adviser program; that's your entry level. That's for people that don't want to really sell anything. They just recommend. From there, it jumps to the solution provider program, which basically allows full 30 percent margins, all the training and basically it costs $5,000 to join.

CRN: What's the biggest challenge for VARs working with an ASP?

Nelson: Because the customer's data is with us and not literally with the reseller, we have to essentially take the paper with the customer. Some resellers like it and some don't. The good side of this for the reseller is we carry the receivables; the bad side is they have to wait until we get paid for them to get paid. I think over time with larger resellers we'll probably let them carry the receivables and let them take the paper and pay us after they get paid. But right now, because we own the customer's data, the customer tends to want to have some sort of relationship with us in addition to the local partner.

CRN: There's a lot of evangelical marketing on behalf of the ASP model. Do you really believe that all software will eventually be delivered using this model?

Nelson: I have a skewed view, of course, but my firm belief is a lot of the software will be delivered this way in the future. It's not going to be 100 percent, but I think it's going to grow very rapidly. You look at us growing at 300 percent. Some other successful ASPs are growing at comparable rates while Great Plains and all those other guys are shrinking. Clearly, this is gaining market share compared to the old way of delivering software. Nobody wants to manage software. It's a waste of everybody's time to install it, upgrade it, maintain it, reinstall it, tie it all together. Now you can decide whether or not you want the bits delivered in a box or as a bit stream across the Internet. In the customer's mind, the models are becoming more equal and you don't have to be a crazed fanatic to go choose an ASP model.

CRN: One of the issues with the ASP model is the perceived inability to customize the offering. Is this a serious limitation?

Nelson: That is sort of the knock that traditional application vendors apply to ASPs. I think that's going to be a red herring. What we try to do in our product is take a lot of things that were customization requirements in other applications and make them part of the configuration so that any normal human can do these things. In addition, you can add things like custom tables to the database. And the third area of customization that we've added is the ability to add custom code to the application. Today we allow you to use client-side Java scripts to do field validation. In our midyear release, we'll have service-side Java scripting. And in our March release, we'll be putting a Web services layer on top of that to make it even easier to integrate. So, basically, it's becoming a development platform for third-party applications.

CRN: What are you doing to support mobile users?

Nelson: We have some patents around caching that make us fairly productive in a low-bandwidth wireless environment. We're also building an offline client primarily for sales users. That comes out in late March.

CRN: What should your partners be emphasizing when they are in front of a customer?

Nelson:< The pitch really has to do with cost of ownership, all the upgrades, maintenance, installations. The initial cost is obviously much cheaper and the ongoing costs, we believe, are cheaper when you look at the total cost.

CRN: When you compete with Salesforce.com or Siebel, what do you emphasize?

Nelson: Siebel is $70 per user, per month, but we're $75 per user, per month. And Salesforce is $125. We'll also be the first ASP to actually guarantee service levels or your money back. Our differentiator is that we have the integrated front office and back office in a single solution. Our statement is there's only one thing you can't do in Salesforce or Upshot, which are the sales applications. What you really want to do is cross-sell and upsell. If the customer is looking to do any kind of integration with the back office or the Web, we're by far the better solution. We probably have 40 Salesforce.com conversions in fairly big deals. They tend to be companies that have a more complex sales process. They have to ship product; we have the shipping integrated. They have to calculate tax. They have an international business; they have an order management need. So we've got about 40 customers that have switched over to us from them, but we've had one switch from us to them.

CRN: What are the Web capabilities that you are referring to?

Nelson: We have an integration technology that we call SMB XML--small, medium business XML. We can integrate both our back-office applications and front-office applications to anything that can speak XML. And we have this whole ability to generate your Web site out of the product to provide complete e-commerce-enabled applications. Once you put your data in our application, you just push a button that says display and we have a default Web site that can be generated out of your system. The combinations of those two technologies really allow our customers to do B2B online transactions and supply chain painlessly. We have customers today that are integrating with Wal-Mart based on their standards straight out of the Netsuite product using SMB XML.

CRN: Where do you see Microsoft as a competitor?

Nelson: I think they want to continue to sell box products. I don't think they're ever going to build a multitenant architecture. I don't think it's going to be a very profitable model for resellers because it's just not designed to compete against something like ours, which is designed basically to be a multitenant architecture. I think lack of an ASP strategy is an Achilles' heel for Microsoft down the road. They're also trying to rationalize their application strategy under Project Green. They're saying three years from now they'll tie all that together in one magic bow and that will be their new application strategy. That's the second big hurdle they have.

CRN: What is your relationship to Oracle?

Nelson:< We started it back in around 2000 where we introduced the first integrated version of our product and named it Oracle Small Business Suite. We licensed the Oracle brand with our entry-level product for small businesses. With us paying the licensing fee, we give customer the feeling of a large, stable entity behind the company.

CRN: In 2004, what do you think the big driver will be for new sales?

Nelson: All that code out there is dying. It's not e-commerce-ready, it's not supply chain ready, it's dead code. I don't think many vendors have anything to offer them that gets customers to the next generation of where they want to go. I think we have a huge opportunity to take the ERP upgrade cycle that they will miss.

CRN: Salesforce.com goes to some effort to link its efforts to Tibet and the Dalai Lama. Do you feel you're at a marketing disadvantage without your own religious icon?

Nelson: We have Larry Ellison, so no.