To The Middle
Big ERP vendors haven't done well in the midmarket. Can Microsoft do better?
The competitive landscape for business-applications software is changing. To understand how, get out an atlas and look for Vedbaek, Denmark, then Fargo, N.D. What do those outposts, 4,300 miles apart, have in common? The answer is in Redmond, Wash. Microsoft officials have been racking up frequent-flier miles for the past year, methodically acquiring and developing products aimed at a large and still largely fragmented market: business applications for small and midsize companies. A year ago, Microsoft acquired application developer Great Plains Software for $1.1 billion, and two weeks ago, it snapped up Navision for $1.3 billion. Related to it all, the company has been working internally to develop a suite of customer-relationship management apps that's due later this year.
Though success isn't a sure thing, Microsoft wants to sell small and midsize companies low-cost, ready-to-assemble enterprise resource planning, supply-chain, financial, and other run-the-business applications. The blueprint calls for Web services to weave them all together. Not coincidentally, Microsoft's Office XP desktop applications, Visual Studio.Net development tools, and Windows operating systems also are important elements.
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The results of the strategy are already showing up in Microsoft's earnings reports. For the recently reported fiscal third quarter, Microsoft eked out a 5% gain in business-software sales, even though revenue from Office declined slightly. What saved the day? "Great Plains revenue offset the decline," Microsoft's financial report says. That's right, Great Plains, the Fargo, N.D., developer of ERP apps that's now part of Microsoft's business solutions division.
Look, too, at Microsoft's investments. At a time when major applications vendors find it harder to sell their wares--license revenue fell 30% at Oracle, 12% at SAP, and 28% at Siebel Systems in their most recent quarters--Microsoft this month reached into its $38.7 billion cash reserve to buy Navision, an obscure Danish vendor of accounting and supply-chain software. Microsoft plans to make Navision's headquarters outside of Copenhagen the hub for its European operations when the deal closes in August.
Microsoft plans to spend "hundreds of millions" a year on developing business apps for small and midsize companies, Gates says.
As Gates envisions the world, desktop and business applications will be woven together via Web services to let IT departments mix and match applications across networks, with less middleware, custom integration, and consulting work. Microsoft officials give the example of an Excel spreadsheet user accessing inventory data from a supplier's remote server. This desktop-to-back office architecture, seamlessly linking people and systems within and across companies, will provide an IT backbone for collaborative business, Gates says. The linchpin will be XML, the development language and Web-services standard, incorporated in development tools, databases, and the apps themselves.
"Most customers have to buy discrete pieces of applications, but there's no integration framework," says Kerry Gerontianos, president of New York software developer Incremax Technologies and of the International Association of Microsoft Certified Partners. "I'm not suggesting I'm going to become a Great Plains or Navision expert anytime soon, but because of Web services, I can write interfaces to them. That opens up opportunities to me."
The opportunity to sell such software to small and midsize companies is there. Less than 15% of the 5 million to 6 million U.S. companies with fewer than 500 computer users have CRM software installed, estimates the Aberdeen Group. Many independent software vendors have targeted business applications at the midmarket--FrontRange, Interact Commerce, J.D. Edwards among them--but the market still is "fragmented, and nobody has a big R&D pool" devoted to it, Gates says. Someone does now. Microsoft plans to spend "hundreds of millions" annually on its application initiative, Gates adds.
Microsoft could be uniquely positioned to deliver standardization and integration in the midmarket apps sector. Its drag-and-drop software has always been relatively easy to use, and new products that approximate the look and feel of Office will require less user training by companies. With its far-reaching reseller channel, Microsoft also knows how to turn new products into franchises--witness the rise of its SQL Server database.
But Microsoft faces competition and skepticism. Larry Walker, director of IT at Saint-Gobain Semiconductor Inc. in San Jose, Calif., a unit of the $28 billion Saint-Gobain Group, questions the vendor's experience in the notoriously complex market. "I never thought of Microsoft as that kind of a vendor," Walker says. The manufacturer is installing apps from Adonix, a French ERP vendor. "ERP software is complex at any company," and managers need to evaluate it in terms of features, installation, and ongoing support, Walker says. "I don't know that Microsoft's support organization would be able to handle it. ... It's a big, big chunk for a company to take on."
And ERP buying decisions often fall to finance executives, who have less exposure to Microsoft's legion of Windows-Office-SQL Server resellers. "Finance people look for tried-and-true apps," says Peter Osbourne, manager of $769 million Dollar Rent A Car Systems Inc.'s advanced technology group in Tulsa, Okla. "That's a tough market to crack."
The future on scrap paper: Gates sketched out how apps will tie together via Web services.
Does Microsoft plan to sell its applications to larger companies? Gates insists that won't happen, because there's simply no room for a newcomer. "If you go to a CIO and say, 'It's your lucky day. You get to put in a totally new piece of ERP software,' that guy is going to say, 'You're nuts. I don't care what it does.'"
Indeed, Gates is quick to correct anyone who even asks about Microsoft's intentions in the enterprise-applications market. "It's not enterprise," Gates says. "Don't use that term because that sounds like we're trying to do the thing we're not trying to do."
Instead, Microsoft plans to sell Great Plains and Navision apps as separate offerings to companies with up to $800 million in annual revenue that the vendor can reach through resellers. Navision's Attain and Axapta integrated ERP products run mostly on Windows and SQL Server, and its resellers are already licensed to sell Microsoft products.
When he announced the Navision acquisition, Microsoft senior VP Doug Burgum said the company is more likely to focus "down market" than up. In other words, Microsoft may be planning to drive down prices for midmarket applications. For about $100,000--at the high end--Great Plains customers can buy a fully configured financial-management system for 20 users, including deployment costs. Navision sells a 12-user system for about $80,000. Those prices barely get customers in the door with Oracle and SAP.
Microsoft won't say how much it will charge for its CRM suite, due by the end of December, but analyst Fletcher estimates it will be priced at about $500 per user, or a tenth of what Siebel's applications can cost. "Microsoft's acquisition will eventually frustrate these tier-one vendors in the middle market," predicts Forrester Research analyst Charles Homs.
Still, Microsoft will find itself competing with vendors that have strong selling points, including more experience and best-of-breed products. Keith Knutter, director of IT for Microsoft customer Tilia Inc., a San Francisco maker of kitchen products with 150 employees, says he has no interest in moving away from Siebel's "industry-leading" CRM applications.
Don't be surprised if Microsoft or other companies offer Microsoft's apps as hosted services. Despite the difficulty application service providers have had getting customers, Microsoft's apps will be designed so they can be hosted--a model Gates says is viable for small businesses--or run on a company's own servers. "The basic idea that you ought to be able to run some of these things remotely, with the cost of fiber as cheap as it is--it's not that crazy," he says.
Making its products more distributed also means changes to Microsoft Office. In January, Microsoft released two Web-services toolkits that let Office XP users pull data into Excel and other applications from Web sites. FedEx, General Motors, and JetBlue Airways are testing the technology. David Lifka, chief technical officer at Cornell Theory Center, a computing research center that collaborates with Microsoft Research, says he has advised engineering companies about using load-balancing tools in Visual Studio.Net to write Excel calculations that begin on a user's PC, then scale up to a server. "You're offloading all that computing in a seamless way," he says.
So, even while Gates has turned the entire company's attention to improving the quality and security of its products (see story,"Code It Right The First Time Is Microsoft's New Mantra"), he's also embarking on a broad and ambitious applications strategy.
Still got that atlas handy? Look for Microsoft's application business somewhere between No Man's Land and Pay Dirt.
-- with Steve Konicki
Photo of Bill Gates by Nathaniel Welch/Corbis Saba
Photo of the sketch by Sacha Lecca