News Stay informed about the latest enterprise technology news and product updates.

Large firms weigh SaaS as NetSuite goes public

As it goes public today, SaaS provider NetSuite is hot, hot, hot. But large companies have good reason to remain lukewarm for SaaS. One analyst's advice: Curb your enthusiasm until you do the logistics.

Ahh, the magic of a four-letter acronym that begins and ends in S.

The run-up to NetSuite Inc.'s initial public offering this week has been a dizzying spectacle, as strong interest in the stock prompted the Software as a Service (SaaS) provider to boost its estimated stock price not once, but twice in two days. The upper range for the stock rose from a predicted $16 to $19, to $22 per share before its final pricing Wednesday night at $26.

More on SaaS
NetSuite IPO has SMBs optimistic

SMBs demand attention from business apps vendors

Top 10 key business drivers of SaaS -- expert podcast
"Larry will make a ton of money, the Street will react positively because it is SaaS, but there are market challenges for them," said Gene Alvarez, vice president of research at Gartner Inc. in Stamford, Conn. "And from an IT perspective, watch out for a mixed-application environment."

"Larry," of course, is Oracle Corp. CEO Lawrence J. Ellison, whose investment firm, Tako Ventures LLC, sank $10 million to $15 million in the company and is still owed $8 million. As NetSuite's largest stockholder (61%), he will collect the balance, and then some, Thursday, when the company is expected to make its public debut and rake in about $160 million.

From an IT perspective, however, NetSuite may not be the no-brainer it seems to be for investors, Alvarez said. The company's on-demand, integrated business software is targeted for small and medium-sized businesses (SMBs), with an emphasis on small.

Alvarez cautioned that large companies that have invested in licensed software they intend to keep may face challenges when introducing SaaS applications, such as integration issues, potential personnel changes and customization problems. In other words: the dreaded mixed-application environment.

"If you are a business where your enterprise resource planning system is QuickBooks, and your customer relationship management system is Excel or ACT!, and your e-commerce system is FrontPage, then moving up to an integrated NetSuite solution is a viable solution," Alvarez said.

But moving to NetSuite's CRM offering could be problematic for a company running licensed software such as JD Edwards for its back office fulfillment and Microsoft Server for Web e-commerce functions, he said.

"You've got to integrate CRM with your other two components, and that should be a concern for the IT organization," Alvarez said.

Licensed software evolves on a different timetable from software offered as a service. A mixed-application environment also brings "a new set of management issues to the IT organization," he said. IT organizations have control over on-premise applications, in theory. SaaS applications, because they are offered as a service, are not meant to be customized.

Alvarez said he believes NetSuite will make inroads with larger companies with its CRM offerings. On that playing field, however, it will be competing against other vendors on a product-by-product basis, which challenges the company's vaunted get-everything-from-us business model: the integrated business applications suite.

Jeff Kaplan, founder of consulting firm ThinkStrategies Inc. in Wellesley, Mass., dismissed the concerns as nothing new to enterprise CIOs who have to knit legacy and new applications.

"Even if you go with a suite, there are integration issues you don't anticipate," he said. Plus, many of the SaaS solutions have APIs, as well as a myriad of professional services firms that specialize in integrations."

When they step up into going after larger enterprises … then it gets interesting because that is a much fiercer environment.
Gene Alvarez
vice president of researchGartner Inc.
Kaplan is a big believer in SaaS. (Read his blog entry " Top Ten Reasons Why On-Demand Services Will Soar in 2008.")

"SaaS is not just about CRM or collaboration or other end-user kinds of applications that can be skinnied down for SMBs," Kaplan said. "Instead, it is maturing to a point where companies can run their financial systems on ERP solutions that now can be scaled for larger companies."

Just look at Inc.'s success with big companies, and the "tremendous effort devoted to demonstrating its viability in that market," Kaplan said. Indeed,'s advertisements these days are larded with endorsements from Fortune 500 companies.

Walnut Creek, Calif.-based Workday Inc., started by former PeopleSoft founder Dave Duffield, is another "proof point," Kaplan said, that SaaS will come to the enterprise. The company delivers on-demand business services. "Duffield's decision to launch the company and be its public face says that he sees the world moving in the SaaS direction. And their goal is to make it enterprise class. They are even working in an early stage with Accenture to ensure there is that third-party integration capability."

Now, whether NetSuite will go this route is another matter, Kaplan said, given its co-dependency on Oracle's Ellison and the widely rumored handshake deal between the company and its benefactor that NetSuite will not encroach on Oracle's turf -- for now. Moreover, NetSuite has a lot of opportunities in the SMB mass market, as well as a lot of proving to do, with strong competitors such as San Jose, Calif.-based Intacct Corp., and the fact that it has yet to make a profit, Kaplan noted.

Gartner's Alvarez said he will be watching closely which market NetSuite sticks to. In the enterprise market, it will be a question of whether NetSuite can convince larger companies to accept its integrated solution, the "take everything" model, or be pressured by the enterprises to support customization, he said.

Alvarez said he thinks NetSuite's success is in the "triple play," offering integrated systems to those who don't have the technology, IT resources or computing power to get it done otherwise.

"That is a tremendous market for them, provided they become a trusted brand," Alvarez said. "When they step up into going after larger enterprises, competing on ERP, CRM and e-commerce on an individual basis, then it gets interesting because that is a much fiercer environment."

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

Dig Deeper on Cloud computing for business

Start the conversation

Send me notifications when other members comment.

Please create a username to comment.