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NetSuite, a prominent SaaS-based enterprise applications vendor, provided interesting insights into its research and development (R&D) strategy at its recent SuiteWorld customer conference. Unlike some of its peers, such as Salesforce.com and Oracle, that aggressively use mergers and acquisitions (M&A) as a form of “outsourced R&D”, NetSuite prefers to keep the majority of its development in-house as an organic process. By working from a single code base instead of trying to stitch together various acquired technologies, NetSuite positions itself as the most tightly integrated enterprise application platform on the market.

NetSuite product strategy focuses on organic R&D not M&A

In response to a question from Ovum, NetSuite CEO Zach Nelson said that the company’s strategy is to use M&A only to obtain industry expertise, not products or technologies. This is consistent with NetSuite’s sparse history of acquisitions. For example, its OpenAir and QuickArrow acquisitions both support professional services automation and do not provide key functionality for the platform as a whole.

There are several advantages of relying on internal R&D, including a consistent code base that facilitates rapid iteration of updates, quality assurance and testing efficiency, and flexible deployment of development staff. There are also downsides, including potentially slower time to market for hot new functionality, investor pushback on R&D expenses, and betting on the wrong approach to product offerings rather than picking from a plethora of choices via M&A.

NetSuite investments in R&D

Conducting development for a comprehensive suite of integrated enterprise applications requires significant and consistent investment in R&D. Both NetSuite CEO Nelson and CTO and co-founder Evan Goldberg said during their keynotes that NetSuite had increased development headcount by 50% in 2011 and would do so again in 2012. A review of financial statements shows that in 2011 NetSuite added 74 development staff, a 45% increase over the prior year. Besides the 50% growth target in 2012, the targeted headcount of 400 by year-end, which would represent a 67% increase, was also mentioned during Goldberg’s keynote.

NetSuite is also opening a development center in the Czech Republic that will have a staff of between 150 and 200 by year-end, though not all will be engineers or other developers. This is a smart move as companies in the Silicon Valley report increasing problems hiring engineers. By opening up a formal development center in central Europe, NetSuite dramatically enlarges its potential pool of R&D talent to draw upon. Obviously this type of office is a major expense because it requires not only engineering headcount, but also facilities, furniture, equipment, support staff, and so on.

Another example of an R&D investment is the company’s “Sprint of Dreams” exercise, where NetSuite flies in developers from various teams from around the world to develop ideas in a very intensive set of meetings. The ideas are then judged by a panel that includes the CEO and CTO. This not only an investment in developer time and money, but also senior executives are investing their time. Clearly, NetSuite is serious about investing in R&D.

Recommendations to IT executives: add NetSuite to your vendor list

NetSuite’s commitment to innovation and R&D investment makes it a strong candidate for enterprise and public sector IT organizations that are looking to procure an enterprise application, whether a full suite, or a discrete application such as CRM. While an argument can be made that ERP financial management is a stable function that does not require much innovation, the same cannot be said for fast-moving areas like CRM. For example, the newly released SuiteCommerce is a platform that facilitates the creation of an integrated commerce function across multiple channels and that tightly integrates with the back office and front office. However, commerce is a volatile and rapidly moving area, with new forms of selling and customer interaction requirements surfacing on a regular basis. Having a vendor committed to R&D with quick turnaround in deploying new functionality gives line-of-business executives and the IT teams that support them the confidence that their IT tools will keep up with required market changes.