Enterprise: Clash of the titans
By Alorie Gilbert
Two unlikely destinations far from Microsoft's Seattle-area headquarters are becoming increasingly important to its future: Fargo, N.D., and Vedbaek, Denmark.
Those are the respective locations of Great Plains Software and Navision, which Microsoft acquired in one of its most important initiatives in years. The two companies, which make accounting and other software, form the core of Microsoft's long-planned move into enterprise applications--complex programs designed to help companies do such things as close books, process orders, manage inventory, and track customers, suppliers and employees.
"(Microsoft's) intention is to lead and dominate the midmarket for business applications, not just for accounting but by selling anything an enterprise would need to run their business," said Paul Hamerman, an analyst at technology research company Giga Information Group.
Microsoft, however, can hardly be characterized as an underdog. Controlling more than 90 percent of the desktop operating system and business application markets, the company has unparalleled influence on the entire high-tech industry and has repeatedly shown that it can take new markets away from long-established competitors.
The company sees its thrust into enterprise business applications as the linchpin of a broader strategy. As sales of its mainstay Office business software begin to wane, Microsoft is hoping to tap into the multibillion-dollar potential of the enterprise software market and the twin technologies that have become hot corporate trends in recent years--enterprise resource planning and customer relationship management, better known in the business as ERP and CRM.
"Both the consumer and business markets for desktop applications are saturated," said Matt Rosoff, an analyst at Directions on Microsoft. "It's getting harder and harder to get people to upgrade to the next version of Office. So, one way for Microsoft to grow is to get into markets where it hasn't been competing, such as enterprise applications."
Microsoft Chief Executive Steve Ballmer told CNET News.com that the software maker is concentrating on what he sees as a hugely lucrative market serving small- and medium-sized businesses. "The biggest part of the computer market is not the enterprise or the consumer market. It?s the small and medium-size businesses," he said.
Ballmer also downplayed competition with established business application makers. "There will be some overlap between us and SAP, Siebel and others...But that overlap isn?t 90 percent of their revenue or 90 percent of our revenue. It?s a small percentage of our revenue in both CRM and ERP," Ballmer said.
The practice continues with enterprise software, particularly in customer relationship management. Microsoft CRM, or MSCRM, will debut this year at prices between $20,000 and $30,000 for complete packages, including setup and integration. Competitive products routinely sell for at least $100,000 and can often cost millions of dollars when integration and consulting fees are included, giving Microsoft a huge edge with small to medium-size customers.
In some respects, Microsoft is taking a page from Oracle's playbook. Both companies used their roots in IT infrastructure, such as databases and development tools, to branch out into applications that run atop such products. Selling applications in turn fuels new sales of infrastructure products.
That means every time Microsoft makes an enterprise application sale, it sells more copies of products like Windows operating systems and the SQL Server database--used by all of Microsoft's enterprise applications--along with development tools like Visual Studio.Net. As an added incentive, Microsoft is offering steep discounts to customers that buy business applications and infrastructure software.
"Microsoft is hoping that its business solutions unit will not only spur sales of new products, it will help them sell...more copies of Windows and encourages the sell-through of Exchange (e-mail server software) and Office," said Rosoff. "They have a tremendous amount of money to invest in this business. They can't be ignored."
Microsoft may have missed those waves, but it has no intention of being left out in the next one. The company predicts that the market will pick up again in two to four years, giving it just enough time to integrate the companies it has acquired, assemble various products and accelerate its sales efforts.
Microsoft executives also hope a thriving enterprise applications business unit can help offset any slowdown in the desktop applications market. Office sales are down slightly for the year, and there's little room for growth aside from selling upgrades to existing customers--a troubling indicator for a product that contributes more than one-third of Microsoft's revenue.
That's where Great Plains and Navision come in. Great Plains, which Microsoft bought for $1.1 billion, had around $300 million in revenue last year; Navision, acquired in July for $1.45 billion, gives Microsoft an instant market in Europe with $181 million in sales last year. Together, the two companies constitute Microsoft Business Solutions, one of seven lines of business Microsoft Chief Executive Steve Ballmer named as core areas of focus and investment for the company.
The fledgling unit, with several hundred million dollars in annual revenue, makes up a wee portion of Microsoft's $28.37 billion in sales and is dwarfed by SAP, the 800-pound gorilla in the market, with $7.24 billion in revenue last year. But Microsoft has far-reaching plans for rapid expansion.
"To accelerate demand and get customers to switch to Microsoft applications, it will take a next-generation value proposition, and that's about three years out," said Lynne Stockstad, general manager of Microsoft Business Solutions.
In addition to six product lines it gained in its acquisitions, Microsoft plans to introduce five new sets of applications in the next 12 months. One of these sets, MSCRM, is designed to help companies streamline their sales and marketing, making Microsoft a player in the customer relationship management market ruled by Siebel Systems. A second set is meant to help service companies organize projects and delegate work, and yet another aims to help retailers track inventory and gather sales information.
But Microsoft faces serious competition in these areas, not the least of them a fierce group of rivals including SAP, Siebel, Oracle, J.D. Edwards and PeopleSoft. Moreover, Microsoft needs to convince its all-important application resellers--a loosely organized collection of companies that sell billions of dollars worth of software--that it offers them a better way to make money than these competitors.
"Microsoft has to convince systems integrators that it is a deal all the way around--marketing, sales, technology," said Rob Horwitz, an analyst with Directions on Microsoft.
Small companies, small prices
At that price, it's more likely to run into companies like Best Software, FrontRange Solutions and Salesforce.com rather than SAP or Siebel. Siebel's top-of-the-line applications typically require several million dollars to license and install, as well as a staff of IT experts to maintain.
But Microsoft defines its target market broadly, at companies with revenue between $1 million and $1 billion a year. Around the middle of that range, it will encounter larger competitors that are struggling in the weak economy and are setting their sights lower on smaller businesses.
Then, the competition between Microsoft and the likes of SAP, Oracle and PeopleSoft will reach "biblical proportions," said Ram Gupta, executive vice president of products and technology at PeopleSoft.
As a strategic advantage, Microsoft touts its network of 4,500 sales partners that specialize in delivering software to small businesses. Software companies like PeopleSoft and Oracle employ a large, expensive direct sales force often populated with representatives who have a taste for big commissions. These companies also rely on expensive consultants called systems integrators to install their products.
Though a strength, Microsoft's network of sales partners also pose another challenge for the company. Only a fraction of the worldwide network of Microsoft resellers are actually up to speed on Microsoft Business Solutions applications, and some traditional Microsoft resellers are tentative about such applications.
A different ball of wax
"To sell someone an accounting system, that's a whole different ball of wax," Cocanower said. "We don't have expertise in accounting, and accounting is not an area of business I'm really excited to get into. It's such an important part of a company. If you screw it up, you can really cause problems."
Microsoft is also undertaking the massive task of rewriting the applications it has acquired with Great Plains and Navision so that all the products use the same code base. That task, which involves rewriting several million lines of software using Visual Basic and C++ programming languages, will take an estimated three years and the combined effort of 1,500 software developers, said Jeff Edwards, an executive with Microsoft's Business Solutions unit.
Once complete, the integration will make it easier for Microsoft to maintain and further develop the products. It will also enhance interoperability between the different applications.
As far as new Business Solutions applications are concerned, Microsoft is already taking heat for Small Business Manager, an off-the-shelf accounting package it introduced nearly a year ago that is designed to compete against Intuit's QuickBooks. Some resellers say the product doesn't stand up well.
One of many obstacles
Stockstad said Microsoft Business Solutions is introducing a new version of the product soon that should make it more competitive, but analysts say this is just one of many battles the company will face. Microsoft's new customer management software, for example, may pose far more serious obstacles.
"Many small businesses have not grasped the value of CRM software," said Joe Outlaw, a technology analyst at Gartner. "Very small companies already tend to view themselves as customer-focused. If they don't know their customers, they're not in business."
Microsoft says the value of all its Business Solutions applications is intertwined with the delivery of its .Net products, the next-generation version if its operating systems, database and development tools designed to make companies more efficient by harnessing the Internet.
Nevertheless, as often happens with grand plans, the release of .Net products has taken longer than promised. "Microsoft has been pushing this concept for a long time. But there is not a lot out there product-wise," Coorens said.
With the release of its CRM suite and a new application called Microsoft Business Network, scheduled to ship in the first quarter of next year, the company says .Net will begin to become a reality. Both products are being designed to take business transactions typically handled by phone, fax and paper--such as purchase orders, receipts and inventory checks--and move them online.
".Net is about being able to connect," Stockstad said. "And connectedness means more automation between businesses and their customers, partners and employees."
That may sound good, but will small businesses with bare-bones technology staffs be convinced?
"It's a challenging market, the small to mid-size business market," said Rosoff of Directions on Microsoft. "It's fragmented for a reason. It's hard to reach these people."