Zach Nelson: In 1999 when we founded the company and produced NetLedger version 1.0, it didn't do a whole lot, but people understood the benefits of being able to outsource the management of software. So, here we sit in 2004, and we are five years down the road and the application does a lot - in many ways it does a lot more than traditional software does now, from a couple of different perspectives.

How do these changes benefit corporate customers?

One way has to do with the customisation of the application. Every company customises their business applications. We make NetSuite but we still customise the heck out of it, so even our own application doesn't work for us straight out of the box. The main challenge - particularly for onsite [non-hosted] applications - is that once they have been customised, it's really difficult to upgrade them. You've done all sorts of different things to them, the vendor does not know what you have done, they change the code, then ship you a disk and they dare you to install it.

How does hosted software reduce the complications of customisation?

In our world we upgrade the customisations for you. Every customisation you make in our system migrates seamlessly forward. And that was because we knew in 1999 that this would have to be the design measure for our customisation architecture. If we're handing out applications to companies we have to, first and foremost, carry forward everything they've changed in that application when we upgrade them. In that regard the [hosted] model is much more functional, and a much better solution than a traditional application.

Over the last few years, have firms changed their opinion about hosted applications?

Yes. We've all had five years of living on the internet. So people like to actually look at applications like ours, that looks like the internet rather than like old, clunky Windows-based user interfaces. We all want to look at Amazon.com and want to order things. The user paradigm has shifted to be a web-based one, which is one way that I think it's more highly functional.

How will the resurgence of the hosted software model affect traditional software?

There are multiple factors. A major piece of it is that the change within organisations has to be much more distributed in nature. If you're in the UK now, there's a lot of work going to India. Why? It's because we have pipes that allow us to shift that way and enable business to leverage lower-cost workforces. You've got these distributed companies, now you need a distributed application to be able to allow them to act like a single company.

And hosted systems can help?

An application like ours is designed to be distributed. [The way] big computer vendors have been built up on a huge up-front payment and then a small maintenance fee afterwards is the total opposite of the way we sell software. This is why the large software firms tend to have a hard time applying the current structure of their sales teams and products to different delivery models.

Do you see giants like IBM as rivals?

All these companies offer hosted versions of their products. But the challenge is it's still one server, one company. That said, you look at SAP, Microsoft and Oracle - they have huge maintenance streams. So I think the large companies will be able to transition to a subscription model because their maintenance streams are so high... I think they'll get there over time. What the SAPs of the world have is a product issue, which is: How do you deliver cost-effectively a hosted version of R/3 when it's not designed to be multi-tenant?

ABOUT ZACH NELSON

Zach Nelson is president and chief executive of hosted application service provider NetSuite, which was founded by Oracle chief executive Larry Ellison in 1999.

Nelson joined NetSuite in 2002 with 15 years' experience of sales, marketing, product development and business strategy with firms including Sun Microsystems, Oracle, Network Associates and Motorola.