Rethinking The Midmarket

There's some data to support the notion that smaller businesses could use an IT boost. Microsoft commissioned a survey, reviewed by a Harvard University business professor, that concludes midsize companies with high IT capabilities grow 30% faster than their peers.

Microsoft could use some fast growth itself. It acquired Great Plains in 2001, then a second ERP developer, Danish company Navision, in 2002. But those big deals--Microsoft paid more than $1 billion for each--have yet to bear fruit. Each of those companies had previously made acquisitions of its own: Great Plains had bought Solomon, and Navision purchased Axapta. As a result, Microsoft Business Solutions now finds itself with four distinct ERP suites that sometimes overlap one another in function and whose resellers are sometimes knocking on the same doors. The company earlier this year revised a plan called Project Green to mesh its various ERP suites over time, in order to give partners more realistic deadlines to discuss with customers. But Microsoft still needs to rationalize its channel and cut down on conflicting sales.

"If I'm a prospect, there's still so much confusion," says Helene Cole, CEO of Altara, a reseller of business applications. "The challenge is you have so many resellers out there. There's Axapta, Solomon, and Great Plains, and for many jobs, all three could fit."

Microsoft Business Solutions remains a money loser, and sales growth has been relatively modest for the past few quarters--up less than 6% last year, to $803 million in revenue, with a loss of $201 million. Getting the unit profitable will be key as Microsoft looks to emerging businesses to make up for slower growth of its huge Office and Windows franchises. Microsoft's revenue for the fiscal year ended June 30 increased just 8%, the company's first year of less than double-digit growth.

The tepid performance so far is a result of long sales cycles and high development costs from supporting four product lines, says Chris Alliegro, an analyst at research company Directions on Microsoft. The return on investment for midmarket business apps "isn't immediately obvious," he says. "And this is a market that isn't flush with IT dollars."

Gates contends he's willing to be patient. The division is "in an investment mode," he says, though he adds that its growth last year isn't bad compared with competitors such as SAP and Oracle, if you look at license sales isolated from the big revenue boosts those companies get from selling maintenance contracts for their suites. Gates compares Microsoft's investment in business apps with its ventures in Internet TV, just now resulting in large deals, and database software, where the company is taking aim at being No. 1. "Microsoft probably has the longest-term horizon for big things we do than any company you can think of," Gates says.

There's a problem with Microsoft's banking on its role-based ERP to spark growth; the idea isn't unique among ERP vendors. Oracle and SAP have been tailoring their apps to employee job roles for years. "It's a basic point of entry for enterprise software now," says Joshua Greenbaum, principal of Enterprise Applications Consulting. "If you're not doing this, you're a second-rate vendor compared with Oracle and SAP."

Jim Benson, chief technology officer at K/P Corp., a commercial printer with $80 million in annual revenue and about 500 employees, says 110 employees use Salesforce.com Inc. tools, which give them personalized data based on their roles. And K/P is designing role-based software for its printing customers, too. "You don't want people wading through stuff that's not relevant," he says.

Microsoft's share of the ERP market remains small--projected to be 4% this year, according to market-research company AMR Research, compared with 43% for SAP and 19% for Oracle. "Our systems have been role-based since day one," says Frank Prestipino, VP of global enterprise applications marketing at Oracle. "Microsoft's challenge is they have a number of different products that overlap." What about overlap in Oracle's own product line? Oracle has its midmarket Oracle E-business Suite Special Edition and the JD Edwards WorldLine product it got when it bought PeopleSoft. Oracle differentiates the two by computing platform (Oracle E-business on Unix and JD Edwards Worldline on AS/400, for example) and vertical-market emphasis, since JD Edwards is best-known for manufacturing uses.

That kind of vertical focus hasn't traditionally been a Microsoft forte, since its need to do business through its vast reseller channel keeps it at a distance from customer requirements. "It's the reseller's responsibility to personalize the products as much as possible. That's always strategically been a problem for Microsoft," Greenbaum says. It also has been a problem for its resellers, who weren't able to instantly demonstrate to customers special functions for their industry, nor answer questions about how they'd be supported. "The Oracle or SAP representative standing next to them just shoots them out of the water."

But Microsoft is taking steps to make its resellers' knowledge of their specialty markets into a bigger asset. For one, the job roles Microsoft is building into its business software aren't set in stone; companies can customize them to account for employees who do more than one job or wear different hats. "SAP is almost overspecialized in terms of how it presents the information," Gates says. "We believe we've brought a whole new level of flexibility to this." As far as Microsoft's broad product portfolio, he adds that the company is heavily promoting only two lines--Axapta and either Great Plains or Navision--in most countries.

And Microsoft this year introduced a program called the Industry Builder Initiative that lets a handful of partners, whose customized modules for Business Solutions apps pass muster, add their software to the price list available to all Microsoft resellers. Reseller Iteration2 got the mobile inventory system it built for Schuck & Sons' Axapta rollout listed as a Builder Initiative app. Now, whenever other partners sell it, Microsoft and Iteration2 divide the royalties. Says Carter: "It gives us a chance to put our product in the strongest channel in the world." It also speeds sales. "You don't have to negotiate with that ISV, and neither do the customers," says Altara CEO Cole.

Microsoft's role-based apps also could give it a financial lift by letting it sell more licenses for users that don't traditionally touch such programs. But Gates cautions that many of those potential new seats will need to be inexpensive and very easy to use--for example, for a warehouse worker who used to carry a clipboard but now has a PDA.

Besides making life easier for its customers and resellers, Microsoft's embrace of roles could influence its software design across the board. "Even something like how you use Office," Gates says. For example, users of the desktop standby might watch a built-in video or tutorial explaining sophisticated ways to sort E-mail by conversation, or how to use new apps like InfoPath and OneNote, then expose those features through a template suited to that users' workplace role. Microsoft also is looking for synergies between Office and its business apps. The next version of the productivity suite--Office 12, which is due next year--will let workers comment on new business data published by Microsoft ERP apps. There are also plans for an improved version of Microsoft's SharePoint software that will let users type search terms into a box to search a product catalog, employee directory, or accounting software. Says Gates, "We're taking business search and taking it far beyond the classic document search."

Will midsize businesses buy it? Those companies have proved in the past that embracing one Microsoft technology--Windows Server or Office--doesn't come close to making them a Microsoft shop. Midmarket may be a promising green field, but Microsoft's going to have to fight for every inch of turf.