Netsuite has had success in engaging with large enterprise businesses through its ‘two-tier’ ERP approach, but is likely to face an uphill struggle if it tries to convince customers to extend their use of its software to core systems.

Two-tier ERP involves a company using one main system at corporate level, and a separate, smaller system to support a subsidiary or international operations. It has become increasingly popular among large businesses as it offers greater agility and speed of deployment compared to larger ERP deployments.

This approach has enabled Netsuite to engage with a number of customers at the large enterprise level, and has gained further support through the number of strategic partnerships with large SIs in recent years, such as Capgemini and Accenture, helping it to achieve 35 percent revenue growth in its most recent financial results.

However, while smaller or mid-market firms are more likely to adopt its combined ERP and CRM products across their business, Netsuite faces a major struggle to replace large incumbent suppliers such as SAP or Oracle for core implementations with enterprise size customers.

Two tier becomes one?

According to CEO Zach Nelson, Netsuite's presence as part of a two-tier rollout offers it the opportunity to be implemented in an enterprise's central business at a later stage, for example when customers are forced to upgrade core applications of larger suppliers.

"When the nasty call comes in that says ‘that version is no longer supported’ - that’s the call they start to think that ‘[Netsuite] works pretty well, maybe we should consider this for everything’," he told ComputerworldUK. 

"That is when they start to replace these things, when legacy systems - the SAPs and Oracle’s of the world - say they are no longer supporting version 6 or version whatever, they will start to throw Netsuite into the mix. It is just like a complete reimplementation anyway, so why wouldn’t they implement something else. That is where you start to see two-tier at least start to be considered to go one-tier."

Nevertheless, the view from its enterprise customers shows that there is still long way to go before the Saas provider will be widely considered for 'top tier' purposes.

Speaking to ComputerworldUK at Netsuite's recent customer conference in San Jose, Roddy McKaig, CIO for the world's largest carpet manufacturer, Shaw Industries, said that while it was relying on Netsuite for is expansion into China, it would not be replacing its core systems any time soon. This was largely due to the complex nature of its legacy systems, built up over a more than a decade.

“Our business is too tailored to adopt Netsuite. It would be a multi-year conversion to try and do that. It won’t happen in the foreseeable future,” he said.

The view was also shared by US online retailer Williams-Sonoma, which used Netsuite for setting up a new presence in the UK and Australia at speed. “If we were doing a re-do [of core systems] NetSuite would definitely be an option, but as far as what we have invested in, we are happy," said vice president of international systems, Rob Bogan.

Rip and replace

According to Gartner research director Chris Pang, it will be tricky for Netsuite to begin to capture business for central applications on a large scale.

"In terms of converting them into Netsuite all over, that is going to be the ambition, but realistically, especially if it is a large organisation, it probably won’t happen for a long time, if at all."

This is due to the investment many large companies have made in ERP, often having set up systems a number of years ago that have since become massively customised and complex. At the same time, businesses are likely to have paid off the main capex spend, and are just paying maintenance on software, meaning that there is little impetus for wholesale rip and replace.

However, there are certain circumstances where businesses could look to begin a major overhaul. For example, where a company is bought out by another firm and both firms look to standardise on a single platform. Also, where existing systems get outdated to the point where a major modernisation project is required.

Growth market

While the opportunities to move into the central business may be relatively few and far between, there are plenty of reasons to think that the two-tier approach will gain more ground, says Pang.

"If you have got a well-honed ERP strategy where you have a standard template you can roll out to different countries or new subsidiaries, then you are going to stay with that. But for organisations with very different business arms, when there is not a lot of commonality and it doesn't make sense to bring across the standard template, that is where the two-tier message can have good runway.  

"What they are selling is an application to deal with the day-to-day operations of another business, but still feed in the summary financials to the headquarters so that it can report on the overall health of the business."

There are many firms providing some sort of two-tier ERP systems. This includes Microsoft, Epicor, Infor, Sage X3. Oracle EDS, although doubts remain over the continuation of SAP's Business ByDesign system. Pang concludes that, just like for Netsuite, there is room for a lot more growth among these firms in future.

"Netsuite is not at the $1 billion mark so there is a lot of room for growth. In terms of the two tier story, the summary is that there is a long road ahead for people to do it. It is not going to be a flash in the pan and disappear after two years, we are certainly seeing a lot of activity around two-tier implementations and we expect a lot more to come."