Marc Benioff, CEO of hosted CRM vendor Salesforce, says his company has an edge because it sells a service over the Web. "If you want software, we were never for you," he says. Benioff says his small-business and midmarket customers don't want to install and maintain software because they have limited IT resources.

Microsoft has designed the software to make it easy to use. People can access it through a tab in Outlook, instead of having to learn a new product. It's designed for companies that don't have a big IT staff and can't manage a big CRM implementation.

Salesforce's Benioff says his service gives companies an edge

But there may be problems. Microsoft plans to sell the software via hosting companies and reseller partners, many of which don't have a lot of experience deploying enterprise applications and may not be able to provide the necessary customer training and support. "They've sold Word and Excel into enterprises, but those products aren't the sort of things you bet your company on," Aberdeen's Pombriant says. For Microsoft's strategy to work, the product must be easy to use. "The customer doesn't have the money to pay for a long implementation or a lot of training," he says.

Rivals are quick to downplay the threat. Microsoft is focusing on smaller companies, says Robb Eklund, VP of CRM marketing for Oracle, the No. 2 CRM vendor, and he doesn't believe it's ready to compete for high-end deployments. He says Microsoft offers fewer features than many companies' existing CRM products.

CRM market leader Siebel and Microsoft have been partners for years, with Microsoft selling Siebel's CRM software. So Siebel knew that a Microsoft CRM app was in development. "Our solution is for much more sophisticated users. Theirs is targeted toward the smaller end, for companies that need data tracking," says Ken Rudin, VP and general manager of Siebel sales. "They're targeting a section of the market that we're not focusing on."

Even CRM vendors that specialize in the midmarket say they're not worried. For starters, Microsoft chose the wrong software architecture, says Keith Raffel, chairman and founder of CRM vendor UpShot Corp. A client-server approach is responsible for CRM's reputation as difficult and failure-prone, and the only new applications that will succeed will be based on Web services, such as UpShot's software, he says.

He also doesn't buy Microsoft's argument that users will be attracted to its E-mail interface. "We can integrate with Outlook E-mail, and we don't need an Exchange server to do it," Raffel says.

Microsoft's introduction of a lower-priced CRM option may end up driving down prices. Competitors, however, say that may not happen because Microsoft's software is more costly than it appears. "If you look at total cost of ownership, it's a pretty expensive solution," says UpShot's Raffel. UpShot's app is priced between $780 and $1,500 per user per year.

	Microsoft CRM offers less functionality, Oracle VP Eklund says

Siebel's Rudin expects Microsoft to improve its product. "Microsoft has never been known to take a small part of the pie and sit there with it," he says. "It's a natural progression that they'll try to move up."

But it won't be easy. Oracle, PeopleSoft, SAP, and Siebel are big, established, and the kinds of vendors that large companies feel comfortable working with, says analyst Pombriant. "When you ask who's the expert at operating systems, it's Microsoft. But when you ask who's the expert at CRM, it's one of those other vendors."

Competitors hope Microsoft expands the market. "They're using their marketing muscle to educate all customers about CRM, addressing the segment of the market that knew what the acronym stood for, and not much else about it," Rudin says. "Companies that never thought about CRM are going to look at it now."

And now might be a good time to do so. Savvy businesses are putting the technology in place to gain market share when an economic upturn arrives. Software to improve relationships with customers, and to sell them more products, is one way to prepare for the future.

Illustration by Tom Nick Cocotos