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Tuesday, September 29, 2009

NetSuite a viable alternative for SAP customers?

NetSuite has been getting some attention recently in the press and among my blogger friends for its PR campaign to offer itself as an alternative to SAP. The opportunity? A good number of SAP customers--approximately 70%--are on older versions, such as R/3 4.6 and 4.7 that are nearing end-of-support. These customers must either upgrade to a more recent version, forgo maintenance and support, or migrate to some other system.

That's where NetSuite is offering itself with its Crossroads Initiative as an alternative to SAP.

The terms are attractive: Zach Nelson, NetSuite's CEO, has been touting the special promotional offer: basically, to provide a NetSuite license in year one for the price the customer is now paying in SAP maintenance fees, followed by a 50% discount on NetSuite's then-current list price in year two and beyond.

Functionality gaps
Sounds like a great deal. But is NetSuite really a viable alternative for most SAP customers? I think the answer is no, for at least two reasons:
  • My primary concern is the issue of functionality. In a recent evaluation for a distribution company, my consulting firm Strativa found significant issues with NetSuite functionality. These gaps did not involve esoteric requirements, but basic needs involving inventory allocation, available-to-promise, returned material, controls over changes to sales orders, and other issues. Furthermore, this client is not a large company, but rather has well less than $100 million in annual revenue. It is unlikely that any company large enough to be running SAP would find NetSuite to have functional parity.
  • Second, NetSuite is reported to be well behind the curve in terms of supporting requirements of multinational organizations, especially those with localization needs in international sites. Many SAP clients fit this description.
Some counter that NetSuite's sweet spot is really with services business, not product-based businesses. My response is, that may be so, but that caveat sure doesn't appear in any of NetSuite's marketing materials for its SAP Crossroads Initiative.

Where NetSuite fits
It would appear then that NetSuite would only be a viable alternative for organizations with very simple requirements, perhaps basic financials with some sales or CRM needs. Or, small services-based firms. Such companies really have no business being on SAP in the first place. NetSuite may be targeting SAP in its marketing efforts, but in reality it is most likely going to show success with small companies that are outgrowing Quickbooks, or existing customers of Sage, Best, Exact, and other Tier III system providers.

To be fair to NetSuite, I think they've done a great job in moving the ball forward for software-as-a-service in the enterprise systems space. NetSuite's multi-tenant architecture is a terrific platform for other developers, such as Rootstock, to build upon and extend NetSuite's core offering. If there is any hope for NetSuite to close the functionality gap with SAP, Oracle, and other mature providers, it is likely to come from such efforts in NetSuite's partner community to develop industry-specific functionality.

There's no shame in serving small businesses. That's the natural starting point. As Clayton Christensen describes, disruptive technologies (such as SaaS) always start with success in the low-end of the market, then move up-market as the technology matures.

And long-term, I agree with Nicholas Carr that SaaS solutions (or cloud-based systems, on-demand systems, utility-computing, or whatever you want to call them) are likely to replace on-premise systems for the majority of customers. The economics are simply too powerful.

But in the meantime, unless an SAP customer was too small to be on SAP in the first place, it's unlikely they will find NetSuite a viable alternative.

Update, Oct 1. To all NetSuite customers that have converted, or are in process of converting, from SAP: I would really like to hear from you, confidentially if needed. Email me at the address shown in the righthand column.

Update, Oct. 2. David Stover, CFO at AKSA commented on this post and responded to my invitation for further dialog. As it turns out, David's experience is a good example of where NetSuite does in fact provide an alternative to SAP. David's firm, a manufacturer of textile fibers, was previously a user of SAP, as dictated by the firm's corporate parent. When the firm was then spun off, David realized that SAP was simply too big and too costly, without the support of the previous corporate parent. In a quest to cut costs, David then embarked on a search for a simpler solution and wound up on NetSuite.

To illustrate the point, of AKSA's 200 employees, 100 of them previously were using SAP. Now, under NetSuite, only 20 employees need to use the system. The remainder, who are mostly production people, get their information from reports or Excel worksheets. In my words, David de-automated the operation, allowing it to run on a much simpler system.

In our discussion, however, David did confirm my basic point in this post regarding NetSuite functionality gaps, mentioning one perfect example. NetSuite doesn't do standard costing, something that is a requirement in many if not most manufacturing firms. It only does average costing. So David wrote some custom scripts in NetSuite to work around the problem, a solution that would probably not be acceptable for many manufacturing prospects.

So, in my opinion, David's experience can be summed up as follows:
  • There are companies out there running SAP that don't need to be
  • Such companies can and should look for simpler solutions, and NetSuite is one of them
  • NetSuite is not the functional equivalent of SAP, but to serve customers such as AKSA it doesn't need to be.
I'd still like to hear from other customers that have made the switch from SAP to NetSuite. If you have a story, contact me. My email is in the right-hand column.

Update, Oct 8. My fellow Enterprise Advocate, Dennis Howlett, has a lengthy post following up on my post here. Dennis goes into great detail regarding NetSuite's progress in addressing the localization issues, which I only mention generally above. Read Dennis's entire post, as he has done significant primary research on this matter and other matters involving NetSuite.

Related posts
Netsuite claims new deal flow more predictable
Workday: evidence of SaaS adoption by large firms
All not sweet with NetSuite
Computer Economics: The Business Case for Software as a Service
IT departments face extinction
The end of corporate computing

by Frank Scavo, 9/29/2009 05:04:00 PM | permalink | e-mail this!

 Reader Comments:

Good article. We actually looked at NetSuite with an open view of replacing our SAP legacy system. Your analysis is pretty much spot on and we wasted a lot of time with their reps and service people.

When you look beneath the hood of NetSuite it lacks a lot of components and functionality (such as what you mentioned). Also it lacked a lot of service functionality that we needed to do with project costing, tasking multiple people on the same task/milestone and tracking of independent subs and how they cost onto a project. So I am not even sure it fits sophisticated service companies either. Even with their add-on products (at more cost) such as openair.

Its easy to be attracted to the promotion though. We were. But it doesn't really factor in the true costs of implementing a full ERP system of this nature. For instance - change management, training, converting all your data onto something that is completely different architecturally. It was not even clear if the promo is perpetual ether. As in we pay the same price each year forever. The real kicker was not being in control of your data (we read some horror stories with smaller companies on this - and how they hold your data hostage). This was simply too much risk for us.

We also noticed some disturbing lawsuits from customers.

In the end, we decided to upgrade with SAP. It has its faults for sure, but at least we know what they are, have worked around them, and do not have to re-invent our business at great disruption - more just migrate to something similar. That way we can focus more of our resources on what we do.

I can see how the promo is attractive to some lower tier sap customers. But my advise to anyone thats reasonably intelligent is to check your contracts and if they say it is on the roadmap. Certainly do not base your decision to buy based on that. Also, I would advise anyone who is not fully familiar with cloud-based systems to engage the services of a consulting firm that is independent and can give solid advice on which way to go. Because if not, it could cost you your businesses.

Personally I think, as you have eluded to, that NetSuite is not ready for this type of audience and will have to improve significantly on many fronts.

Good hype though.
I think the real opportunity for NetSuite is:
- The <5,000 employee company who makes less than $250 million that has been oversold SAP - there are unfortunately a LOT of these guys because SAP will sell their software to anyone who breathes.
- SMB-like divisions and subsidiaries of large global enterprises. Its a huge cost-out play for HQ while it provides a system that is much easier to use and fits the bill for the SMB-like division.
I appreciate the feedback and additional insights of the first commenter. I find it interesting that he/she found NetSuite's service functionality lacking, as service-based businesses are supposed to be a sweet spot for NetSuite.

Rob, I think you have a good point regarding divisions of large SAP-user companies being a potential target for NetSuite. I'm wondering if NetSuite has any functionality to interoperate with SAP at the corporate level (e.g. financials integration), as that would certainly facilitate such an arrangement.
If you go to the NetSuite web page and look up success stories for former SAP customers who migrated to NetSuite, you will find me there. Rob’s comment is correct in terms of NetSuite’s fit – my company, a fair sized manufacturer under the $250M threshold, had run SAP for several years. I had no qualms with SAP except for its size and complexity. I am now going on my 3rd year with NetSuite and am very satisfied – yeah, we saw a couple shortages of specific functionality (for instance standard costing), but what ERP system doesn’t? Instead we looked at the cost and effort to make things run the way our business really needs (as opposed to the business running the way the system requires), this is one area where NetSuite excels, it is so simple (and cheap) to customize (even to do standard costing). In fact, that is the key to understanding the product – to keep the basic platform simple and if you really need a change, then it’s essentially painless to have it your way. When push comes to shove, I have yet to find a transaction that NetSuite can’t do, except for those that we really didn’t need in the first place. We opted for simplicity and gained transparency, ease of use, some really helpful tools, flexibility and a lot less paper (as well as a hefty cost savings).
David S., I would like to speak with you about your experience, if you are willing, and confidentially if you desire.

Email me if you are open to a chat. My email is in the righthand column of the Spectator.
Actually, my offer goes to any NetSuite customer, especially those who have converted from SAP. I would really like to hear from you, confidentially if need be.

Email me at the email address shown on the Spectator (right hand column).
Frank, we love the attention and comparisons to SAP, even when the context and related data is less than accurate.

If you have any followers in the SAP user community, they'll now be curious to learn more about us. And thanks to SAP lovers for all that Tweeting. We can't buy that kind of penetration into the SAP customer community.

For the record, NetSuite has never claimed that we are a good solution for replacing SAP across an entire enterprise. We may get their some day, but for now we are quite content to fill the major gap that SAP has created by not offering their installed base a viable cloud solution. As Mr. Stover pointed out in his post, NetSuite is a very strong solution for divisions and departments of large companies that have deployed SAP at the corporate parent level.

We've got lots of real examples and we would be happy to share these with you, as well as offer any of our technical and PS staff who might be able to improve your knowledge of NetSuite.

I don't believe you have ever visited NetSuite, or had the chance to meet with any of our staff. We'd like to change that.

Please contact me at ddowning@netsuite.com and we will set up one or more briefings at your convenience.
David, thanks for the offer. I will take you up on it offline.

Frank, when I was at Gartner we had a term called “effective functionality” – what users actually utilized versus what they bought. It was usually shockingly low. For all the talk of wall to wall ERP, many enterprises, especially when you leave manufacturing markets primarily implement financials, some core materials management etc. So given that limited footprint, you have to step back and ask is the on-premise cost base justifiable? Not just the starting licenses, or the on-going maintenance, you are typically stuck with a more expensive database, compute/storage( internal data center or external hosting), even so-called cheap application management is pricey, upgrades which are disruptive,, ,it is mainstream, not an aberration, these days to see on-premise TCO over a 5-7 year basis be 3 to 10X that of emerging SaaS and cloud infrastructure metrics.

Is it worth that much more when you prorate against “effective functionality”? Usually not, then when you look at the company SaaS keeps – Google, amazon, salesforce etc – you also see the rate of innovation is X times that in on-premise world. The usual pushback is SaaS is not as stable, secure, scalable etc. Do a hard nosed assessment of SLAa you get from internal IT or your hosting firm, go read your SaaS vendor’s SAS 70 etc and you will see what “effective peace of mind” for on-premise really is.
Vinnie, for those SAP customers whose "effective functionality" happens to correspond to NetSuite's feature set, of course NetSuite would be an alternative to SAP.

Those customers should never have been on a Tier I ERP in the first place.

But it's still hard for me to believe that is a significant percentage of the SAP installed base.

As I said in the main post, I would really like to hear from more of these types of customers.
Over the years I've worked for 6 SAP customers in various industries. Custom development featured heavily in all of them. There are various reasons for this but the most significant ones in my observation are 1) the needle in a haystack problem - that the functionlity might exist in the suite but no one can find it - or the cost to find it (or risk of not finding it) is greater than building an alternative; 2) a perfect fit is rarely found, which results in having to change business processes to suit the "closest fit" functionality available - or tamper with code behind standard functionality; and 3) that it is often quicker to develop dedicated functionality than to configure a solution from a myriad of internal pre defined options.

Note that the development of dedicated functionality reduces the reliance on deep experience and knowledge of the configurable options, and instead relies more on a universal skillset and problem solving ability - together with deep process knowledge of the business users and managers.

Despite how this might sound, it isn't necessarily bad for a couple of reasons. First, newer development tools offered by SAP (and others) are making it easier to build custom functionality, and second, many parts of enterprise SAP software actually complements custom functionality. For example, job scheduling tools and role maintenance (authorization) tools are just as relevant for custom functionality as they are for standard functionality - they simply deal with custom objects instead of standard objects.

So for argument sake, even in an SAP based solution where all business needs are handled by custom logic, the solution still offers compelling advantages over an alternative of having to develop a solution from the ground up using a popular development studio.

What I am driving at is that I think SAP and Netsuite, for instance, should be compared not so much for their off-the-shelf functionality, but rather 1) the technical capability of each environment to support the needs of the customer, 2) the amount of overall effort required to implement a working solution, 3) the quality of the solution in the eyes of the business users and managers and their feeling of ownership, and 4) the cost and effort required to support and adapt the solution as the customer evolves over time.
We are a small manufacturing exports organization. We have been a SAP user since 2000. We are running ERP 2004 now. Recently, we had to decide to forego SAP enterprise support. Our need for any further upgrade is pretty limited, so we don't think we would be moving to any other new application.

Out of curiosity, I visited NetSuite's website and looked for information related to MRP and EDI integration, but couldn't find much really. Is there any NetSuite user, who has been using these functionalities?
Nats, I can speak to the EDI capabilities (or lack thereof) by NetSuite. I'll be interested to find out, as you are correct: that's a must-have for many manufacturing firms.

Regarding MRP, it appears that NetSuite has partnered with Rootstock to provide this functionality. I found this article on this subject:
Thanks for the link Frank. It is still an evolving trend, so I will watch it keenly.

It is interesting now that SAP is also into this domain (SaaS)trying to catch up!

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