Netsuite, one of the rising SaaS vendors, recently unseated SAP from a subsidiary of Asahi KASEI. The cost savings were huge!
The Asahi KASEI Corporation is not a small company. It’s a fairly large one, with revenues about the same as Sun Microsystems had a year ago; around $15 billion. It is a classic Japanese company, in the sense of having its fingers in more than one or two pies. It has 9 core operating companies which focus on the fields of fibers, chemicals, construction materials, homes, microdevices, e-materials, pharmaceuticals and sophisticated medical equipment.
The eviction of SAP/R3 took place in a subsidiary of Asahi KASEI Fibers in Charleston, S.C. The company, Dorlastan, had been acquired by AKF in 2005 and produces spandex. It’s not unusual for companies to change suppliers every now and then, and hence the adoption of NetSuite at the expense of SAP might not be that remarkable, were it not for two important points:
- A cloud ERP SaaS offering (NetSuite) evicted the premier corporate ERP package SAP. David beat Goliath.
- The cost advantage, as calculated by David Stover, CFO of Asahi KASEI Corp.’s Dorlastan fiber division, was 20 to 1.
The Failure of SAP – The Future’s Cloudy
NetSuite was born as a cloud software company. (For a neat explanation of cloud propositions, read Why The Cloud Protects You From Technology Evolution (and Disruption). As far as a cloud service is concerned, SAP talks the talk, but so far has conspicuously failed to walk the walk. There’s a big difference between these two realities and it is worth examining.
NetSuite, founded in 1998, provides an ERP software suite written for the cloud, with base components of: CRM, order management and fulfillment; inventory management; finance; ecommerce and web site management and employee productivity. It doesn’t end there, because a software ecosystem has now formed around NetSuite, based primarily on NetSuite Business Operating System (NS-BOS) an application development platform that enables ISVs and VARs to add vertical components to the NetSuite base. NetSuite is thus an ecosystem as well as a cloud offering.
SAP AG was founded in 1972, in the mainframe era, and its software has undergone a long evolution. The first version of SAP, R/1, a financial accounting system. This was superseded by business application software suite, R/2 in the late 1970s. That was the kernel of an ERP suite and it was successful in the 1980s and early 1990s. Then came the major upgrade to R/3, a client server version that came available around 1998. Over the years SAP has added many modules. It has also delivered MySAP, a front-end interface, which can access other systems and use SAP as “the back office.” And there is also the Netweaver platform – a development environment with multiple components.
Is there as SAP cloud offering?
SAP has been long on promises and short on delivery. Over the past 5 years, SAP has been developing a version of SAP that it hopes to be able to sell to the SMB market – a market that it has never penetrated in any significant way. This venture, named Business ByDesign, has not delivered. Seven months after unveiling it (in 2008), SAP began cutting back on development following customer feedback, including complaints of performance problems and bugs.
SAP is still waiting to come to market, while NetSuite is happily making hay. SAP’s problem is one that legacy companies inevitably suffer from with the cloud – and, in this respect, SAP is probably the biggest legacy company of all. If it delivered a compelling cloud offering, it would undoubtedly cannibalize its existing revenues – and not in a small way.
The Cost Advantage
David Stover, the CFO of Asahi Kasei Corp.’s Dorlastan fiber division, calculated that NetSuite was saving $1 million in costs. Remarkably, SAP was costing Asahi KASEI Dorlastan a full 3% of revenue. With NetSuite that reduced to about 0.15% of revenue. The calculated cost savings came from:
- The elimination of Wide Area Network (WAN) costs of $20,000 per month (any cloud solution would have eliminated these costs – and they were considerable)
- Software license costs
- Reduction in the number of IT staff
- No need for expensive consultants
In addition to this there was a large reduction (43%) in the number of system users needed to run the application. The number reduced from 130 to 75. This is best viewed as a productivity gain of about 73%, due to an easier to use and far more configurable application. No attempt was made to translate this into a financial benefit, because the 130 staff didn’t spend 100% of their time using the system. However, this is no small productivity gain. It’s very very big.
So Will SaaS Zap SAP?
NetSuite can make an excellent living from the Small to Medium Business (NYSEARCA:SMB) market. It’s the market that the cloud is naturally suited to - and the NetSuite ERP applications fit very well. You can tell that simply by looking at NetSuite’s client list and its growth (about 10% in these recessionary quarters, but much greater prior to that). However, most of the SMB market doesn’t use SAP – the price tag is too high.
Those companies in that market that do use SAP are likely to consider alternatives and NetSuite has clearly proved itself to be one. Still, the more interesting question is :
Do NetSuite (and Salesforce.com) provide a genuine challenge to SAP?
I think they do. To understand why, compare ecosystems. The SAP business model is based on configurable software that comes “with consultants bundled in” and the consultants are not cheap-roll-up-your-sleeves-and-code consultants, they are premium-big-SI-company consultants. In other words there is a SAP ecosystem, but it’s not low cost.
On the other hand, the NetSuite ecosystem (and, similarly, the Salesforce ecosystem) is based on moderately priced VAR and ISV consultancy, where it is needed at all. NetSuite is designed to be configurable just like SAP, but while SAP is consultant-configurable NetSuite is user-configurable. The reality, of course, is that no software packages do everything you want, and thus you need to configure and augment. For most customers, whether they realize it or not, the application ecosystem is really important.
NetSuite is far less expensive because it is a cloud proposition, and SAP could, given time, try to compete with that. But NetSuite is also far less expensive because of its configurability and its ecosystem. SAP will find it very hard to compete with this. NetSuite does not, right now, have all the application components that the monolithic SAP does – not even close - but in time it will.
This is a genuine threat to SAP and I don’t see any easy way for SAP to respond.
Declaration: No position held either for SAP or NetSuite