We’ve reached the “end of the beginning” of cloud computing.
So says Zach Nelson, CEO of NetSuite, the company that changed the way companies sold software services — not as a one-time download and cost, but via a Web browser and as a subscription.
It was a radical idea in 1998, when NetSuite first launched. Today there are 42 publicly held cloud software companies on an index tracked by the venture capital firm Bessemer Venture Partners, all of which follow the same basic delivery method. Of those, 28 have market valuations north of $1 billion. NetSuite comes in at fifth place with a market cap of $7.8 billion as of Friday. Salesforce.com tops the list at $46 billion.
The San Mateo, Calif.-based supplier of financial software delivered to companies via the cloud was created after a series of conversations involving Oracle founder Larry Ellison, NetSuite’s founder and now-CTO Evan Goldberg and Salesforce founder and CEO Marc Benioff. The same conversation begat Salesforce too, but NetSuite — first known as NetLedger — got off the ground first.
Over 17 years, NetSuite has evolved into the behind-the-scenes cloud app that scores of other cloud software companies rely on to run its daily operations. Box, Jive Software, Tableau Software, DocuSign and Evernote are customers. NetSuite’s customer portfolio also extends to more traditional industries: Lionel, the 114-year old manufacturer of model trains and cars, and retailer Williams-Sonoma are clients as well.
But what was once radical is now commonplace. Practically all new software worth using runs in the cloud, accessible via a Web browser, while the computer that actually runs it does so out of sight and mind of the user. Cloud delivery itself is unremarkable. And companies like Uber, Airbnb and Zenefits have shown us that using the cloud to deliver a service is only a first step. In the cloud revolution’s second phase, it’s the business model itself that becomes the innovation changing how we hail a ride, rent a room or obtain health insurance.
Technically NetSuite gets classified with the nerdy label ERP, for “enterprise resource planning,” which basically applies to software that tracks every aspect of a company’s finances from the procurement of raw materials to billing for the sale of finished goods. But Nelson is pushing back against that label as NetSuite has focused increasingly on powering commerce: In the last two years it has acquired seven companies that have beefed up its commerce muscles. The act of commerce — selling and billing — is so fundamental to the operation of a business that Nelson says it shouldn’t be separated in NetSuite’s app from other key operational parts. Maybe it’s not quite as radical a shift as the move to the cloud was 17 years ago, but it is resonating with NetSuite’s customers, Nelson says. The ERP system of the future, he says, is simply called “commerce.”
Re/code: In the last year or two you’ve made some acquisitions that have really changed NetSuite. It’s a different company today than it was, say, 18 months ago. You’re more focused on commerce than before. What does that say about your strategic direction?
Nelson: To me the ERP system of the future looks more like a website, and less like a screen in an Oracle or SAP application. … If you use NetSuite internally, it looks like finance applications, while externally it looks like the website your customers see. … The customer-facing website is directly connected to the operational systems. And I really think that is the future of what all ERP systems look like. … But the point, to me, is that the future of ERP is called “commerce.”
Then where is the line between the traditional ERP part and the commerce part? Where does one begin and the other end?
When most people think of commerce, they really only think of the business-to-consumer part of it and focus on making that experience great. But why wouldn’t you want to make the experience as good in the business-to-business context when your customer is buying 10,000 of what you’re selling instead of just one? At least half of getting commerce right is knowing how to process the order, when to process a credit card payment or when to serve up an invoice. When you call it commerce-as-a-service, as we do, there’s a lot to consider, and I think we’re way ahead of the market.
So you’ve got ERP and commerce. Is there a third leg to the stool?
There’s a related part of this that I call merchandising. It’s really a whole new set of capabilities that has to do with engaging with the customer, but it also has a big back-office component like assortment planning, which is knowing that you sold so many of — say, a shirt in a particular color this season — and then figuring out what you’re going to do next season.
So is merchandising the next logical step for NetSuite? Will you build it or buy it?
We’re definitely working on it. In merchandising you’ll see new things from us. … When we buy companies, we use their technology, but ultimately those things get rebuilt in the core NetSuite application. It’s a buy-and-build strategy.
So how are you feeling about the competitive landscape right now? Bill McDermott is now fully in charge of SAP, and that company has been making big noises about its intentions to transform itself into a cloud software player all based on the HANA database. What do you make of SAP as a competitor?
They’ve had many many announcements about being “all in on the cloud.” I think they finally see the writing on the wall. If they don’t change, fundamentally, what they’re doing, they’re not going to be relevant five years from now. I think they’ve realized that this is their last chance. So now the question is: Can they do it? Still, even when they talk about their cloud revenue, it’s all from products that have been acquired — like SuccessFactors and Ariba. They have not built a single successful cloud application. It’s just a fact.
NetSuite isn’t the biggest cloud software company, but it is the oldest. Where do you think we are in the longer-term shift toward running software in the cloud?
I think we’ve come to the end of the beginning. And now we’re getting in a second generation of the competitive landscape. Every company has a different strategy. Oracle has rewritten every one of its applications for the cloud. SAP has had to acquire its way into the cloud and now it’s going to re-write. … But now is easily the most exciting phase of enterprise software that I’ve seen in 20 years.
If that’s the case, where does it end?
It will come down to a battle of the suites. Ultimately, everything in enterprise software comes down to a suite. Applications get combined. There are other areas where there’s personal productivity, companies like Box and Microsoft’s Office 365 — that’s another place where I see a suite battle shaping up.
The great thing about the cloud is that new business models appear. We certainly disrupted the software business with the idea of charging for it like a subscription. And then there’s models like Uber and Airbnb, which have changed how you charge for rides and rooms. There will be many more new business models for sure. There’s Zenefits, which is changing how businesses supply health insurance to their employees.
The thing that you have to do is go from being a point-product to a platform. ServiceNow has done it, we’ve done it, Salesforce has done it and Box is doing it. Point-products tend to get acquired and become features in a larger suite. So really the big question for cloud companies is whether or not the core application can become a platform or whether it fits logically into someone else’s platform. Everyone hopes they are a platform, but most aren’t.
This article originally appeared on Recode.net.