In-Depth

Getting Serious about ERP

Microsoft has finally put together a strategy for its Dynamics business applications and is pumping major resources into the product line. Partners need to be ready for what's coming.

• By Lee Pender and Vicki Powers
• June 01, 2006

This is the next big thing. Once just a group of disparate business applications cobbled together through a series of acquisitions, Microsoft Dynamics is finally coming together as a cohesive offering of enterprise resource planning (ERP) and customer relationship management (CRM) products. A new advertising campaign and serious talk of product roadmaps are signs that partners should pay attention to what's happening in Redmond's once-marginalized Microsoft Business Solutions (MBS) division. Bottom line: Microsoft has arrived on the ERP scene, and there's money to be made.

But in order to make it, many current partners will need to overhaul their strategies. Forthcoming changes in the product line will require them to rethink how they approach selling and supporting Dynamics. None of this activity will happen overnight. Still, now is the time to prepare for what's coming.

From Troubled Child to Favorite Son
Microsoft Business Solutions was once the company's black sheep, with its collection of acquired applications that were largely devoid of the Microsoft look and feel. During the division's five-year history, it has grown its product base through the acquisitions of Great Plains and Navision in 2001 and 2002. Previously, Great Plains had purchased Solomon Software, while Navision had acquired the Axapta application (see "A Microsoft Dynamics Timeline").

Dynamics, a brand name unveiled at a Microsoft conference last fall, is a suite consisting of the Microsoft CRM application (now known as Dynamics CRM) and the four acquired products, Dynamics GP (from Great Plains), Dynamics NA (from Navision), Dynamics SL (from Solomon) and Dynamics AX (from Axapta).
Cobbling Dynamics together since those acquisitions hasn't been easy. The four ERP suites' functions overlap in many ways -- for instance, all four offer portals and e-commerce solutions -- and, at first, many of their functions didn't integrate well with other Microsoft applications. None of them, for instance, offered the familiar Microsoft appearance and functionality. However, Microsoft has significantly increased cross-integration of the products' features, particularly for the 2006 release cycle, says Joe Wilcox, senior analyst at Jupitermedia Corp., a Darien, Conn.-based IT research firm.

A Microsoft Dynamics Timeline 2001: Microsoft acquires Great Plains Software of Fargo, N.D., (a few years after Great Plains bought its major competitor, Solomon Software of Findlay, Ohio). 2002: Microsoft acquires Navision, of Vedbaek, Denmark, for $1.4 billion, providing an entry to the European market. Navision's product lines were XAP, Attain/Financials and Axapta, which the organization acquired when it bought Damgaard in the Netherlands in 2000. 2003: Microsoft launches the initial release of Microsoft CRM. 2005: Microsoft announces re-branding of Microsoft Business Solutions products as "Dynamics." 2006: Microsoft announces it will integrate Dynamics applications with Office and Windows. 2006-2009: Microsoft will combine best-of-breed functionality from its overlapping ERP suites and produce single-platform Dynamics suites tailored for small and larger enterprises.

Now the company is pumping money into an advertising blitz to promote Dynamics and spell out how the product will evolve over the next few years. Microsoft has also made it clear that Dynamics is a chief component of its massive push to target midsize companies, which it defines as businesses with between 50 and 1,000 employees.

Bill Gates, Microsoft's chairman and chief software architect, has emphasized that Dynamics will focus on ease of use and implementation, characteristics not usually associated with ERP. "A new generation of software has to step up and provide capabilities in a way that's incredibly reliable, easy to set up, and brings the information to the right people," Gates said at the first-ever Microsoft Business Summit for midsize companies last fall.

With 1.4 million midsize companies worldwide, Microsoft is chasing a potentially highly profitable audience. Many of Microsoft's past business offerings -- as well as those of its competitors -- have overlooked these companies, typically challenged by limited resources of time, budget and personnel. Microsoft officials also have argued that the market is under-served by ERP giants such as Oracle Corp. and SAP AG, which focus more on large enterprises.

Analysts say that bridging the midmarket gap is critical for the success of the MBS group, which consists primarily of the Dynamics applications. "In the last five years, Microsoft has attempted to grow the [Business Solutions] business, and it has not grown as fast or as successfully as Microsoft hoped it would," says Chris Alliegro, lead analyst at Directions on Microsoft, a Kirkland, Wash.-based research and consulting firm. "It did some soul-searching to ask why products weren't selling faster and how to make costs less than revenue. This is what's driving the focus on the midmarket."

MBS executives say Microsoft is poised to cash in on an ERP revival.

"We believe the market is at the verge of a major implementation wave," says Tami Reller, corporate vice president of the Microsoft Business Solutions marketing group. "In the late 1990s, just prior to Y2K, many customers patched or implemented new systems. [Now] these systems are aged or aging, and we see customers moving to their next-generation solutions."

Dynamics is already showing promise as a contender for that business -- and for a more favored position within the Microsoft family. The long-struggling MBS group remains in the red, and Redmond doesn't expect the division to be consistently profitable until fiscal year 2007, according to Microsoft CFO Chris Liddell. However, MBS did post an impressive 17 percent year-over-year revenue growth in the second fiscal quarter of 2006 and racked up a 21 percent increase in Q3, from $179 million in Q3 2005 to $216 million in Q3 2006.

In addition, a November 2005 report from Boston-based AMR Research Inc. showed MBS as the No. 1 vendor on companies' evaluation lists for future ERP purchases, with 58 percent of respondents saying they'll look at Microsoft Dynamics. In the report, MBS just nudges Oracle (57 percent) and solidly beats SAP (49 percent).

And Microsoft is just getting started. MBS is still the second-smallest revenue producer among Microsoft's seven main divisions, but the company's renewed commitment to pushing Dynamics to the midmarket indicates that there's plenty of room for growth. Furthermore, when Microsoft gets serious about a market with enormous potential -- think back to the Internet Explorer initiative of the mid-1990s -- it's got a track record of success.

The Dynamics push is based on a coherent message. Earlier this year, Microsoft launched a major new ad campaign touting Dynamics as "people-ready" business applications. The idea behind the tag line: Software should empower employees to solve their own problems, become more efficient and move their businesses forward. The message fits with Microsoft's much-publicized role-based approach to software development, which focuses on providing functionality tailored to users based on individual jobs and needs.

Jon Pratt, senior director, product marketing and partners, Microsoft Business Solutions, draws a distinction between IBM Corp.'s "On-Demand" message and Microsoft's "people-ready" stance. "[IBM's message is,] ‘You have a problem, press the button; we can solve it.' [Microsoft says,] 'Your people can solve it. You already have the brains in your organization to get that done.'"

Alphabet Soup Following are the new names of Microsoft Business Solutions products: Microsoft Business Solutions-Great Plains: Microsoft Dynamics GP Microsoft Business Solutions-Solomon: Microsoft Dynamics SL Microsoft Business Solutions-Axapta: Microsoft Dynamics AX Microsoft Business Solution-Navision: Microsoft Dynamics NAV Microsoft CRM: Microsoft Dynamics CRM

Waves of Change
Microsoft, in a strategy it detailed at MBS's Convergence conference in Dallas in March, plans two waves of improvements for Dynamics. The first is crashing on the ERP shore now, and the next will roll in over the next two to three years. It's that second wave that threatens to wash some Dynamics partners away if they're not prepared for its arrival.

As part of that initial wave, Microsoft is already integrating the four Dynamics ERP products into Windows and Office. That effort will continue as the company introduces Microsoft Windows Vista, Office 2007 and new versions of Dynamics applications over the next two to three years. Such integration is designed to provide users with a unified view of all four ERP applications within a familiar Microsoft interface, something the products previously lacked. Microsoft officials call such integration consistent with the company's "people-ready" message.

Microsoft is banking on ease of use and its role-based approach serving as the primary competitive advantages over offerings from better established and more advanced ERP rivals, such as SAP and Oracle. For partners, simplicity and native integration into Windows and Office are key selling points.

Curtis Jones, senior business consultant at Vis.align, a Microsoft Gold Certified Partner and Dynamics specialist based in King of Prussia, Penn., that provides IT deployment and operational services to midmarket companies, says the human side of complex ERP implementations -- often the most important element of an implementation because of the importance of user acceptance -- will be easier with Dynamics natively integrated into Office applications. He predicts that the percentage of employees using the ERP systems in most companies will jump from 10 percent to 50 percent or higher before long. Jones also says integration and a focus on ease of use will be key differentiators for Microsoft, despite projects such as the Microsoft-SAP Duet effort that integrates SAP applications with Office.

"Microsoft will quickly surpass those guys because none of them will focus on the user experience," Jones predicts. "SAP is not even integrated with itself. The time that it will take the other ERP firms to move toward integration based on user experience is huge. Microsoft is focusing from the user experience back to the underlying systems. When you do that, you see a much wider view of applications that impact people."

So while Wave One of Dynamics can be viewed as positive for partners, Wave Two may require some individual reflection and analysis from partners. Due to hit in 2008 and 2009, with iterative releases for each product along the way, the second chapter in the Dynamics product strategy involves combining all four ERP products on a single platform. That move will eliminate the current functionality overlaps, as Microsoft officials say they will pick and choose the best features from each application for that single final product. Officials expect to offer different versions for large and smaller businesses.

Microsoft officials maintain that single-platform Dynamics will lead to easier implementations through a true best-of-breed approach that will eventually benefit companies more than the current overlapping models do.

This, however, is where the work comes in for partners. Many, if not most, Dynamics partners are focused on just one of the four ERP products -- perhaps dating back to the days when the companies that made them were still independent of Microsoft. During the second round, when the best elements of all four are combined into a single suite, having deep expertise in one product will obviously lose its value.

The Only Way Is Up
The answer? Verticals. Instead of being Navision or Axapta resellers, for instance, partners will need to re-focus providing solutions in vertical industries such as health care or finance. Reller says it's the way Microsoft is moving -- and partners should move that way, too. Microsoft's goal is to assign 50 percent of its current partner base into one of 14 verticals by June 30, 2006, its fiscal year end.

"Microsoft is increasingly adopting a vertical strategy and focus to better address the needs of its customers and create additional opportunities for partners to deliver rich solutions using Microsoft's products," Reller says. "The key to profitability is the same as it has always been -- specialize to be successful."

Alliegro says partners can line up in vertical industries as well as create practices and specific applications around vertical industries. "That's where the opportunities lie for partners," he says. "Where they don't lie is moving down-stack and trying to provide general platform capabilities." Microsoft integrated public-sector accounting capabilities into its products, for example, after purchasing a company last year with this solution. Customers at a lower platform level can now do public sector accounting, whereas partners used to provide these specific modules to accompany Dynamics GP. Alliegro says partners should always be wary of playing too close to the platform space.

Reller also says Microsoft will be there for partners making the transition. The company is pumping money into retaining existing Dynamics partners and training new ones and has established several programs to help partners deal with refocusing their strategies and expertise:

• Microsoft Solution Finder, a Web-based tool that helps customers search for and connect with Microsoft partners worldwide based on their industries, locations or specific Microsoft products.
• Microsoft Partner Solution Profiler, which allows partners to describe their company's offerings and gain exposure to customers and other Microsoft partners through several online systems, such as Microsoft Solution Finder and Microsoft Partner Channel Builder.
• Microsoft's Partner Channel Builder, an online tool that allows all Microsoft Partner Program Registered Members to collaborate on new business opportunities.

Still, for companies that have spent years becoming product-focused experts, shifting to a vertical strategy won't be as easy as dropping in on a few Web sites. Columbus IT Partner, a Gold Certified Partner based in Brondby, Denmark, and 2005 Global Partner of the Year, acquired in January another partner focused exclusively on the food and chemical industries. Columbus IT, which has 900 employees in 22 countries and develops part of the Dynamics AX application, has been preparing a vertical strategy for years, says Jim Bertschneider, the company's managing director.

"It's not an option whether we want to do it or not," Bertschneider says of that effort. "We have to do this. The challenge is going to be for the smaller partners. There's huge potential, but also a risk."

Nevertheless, Bertschneider remains positive about Dynamics. "We have no disappointment in what they're doing," he says of Microsoft's push into that area. "We have concerns, but no disappointment. This is definitely going to be good stuff for partners."

As long as partners are prepared.