Microsoft guns for ERP -- move over, SAP?

If it wasn't clear before, it is now: Microsoft Corp. is gunning for the enterprise resource planning (ERP) market, and users and competitors are bracing for the impact.

Industry insiders are piecing together Microsoft's intent, illuminated when the company announced earlier this month that it plans to buy Danish business software developer Navision A/S for $1.3 billion. Along with word that Microsoft will release a corporate-class upgrade to its Project program and the February unveiling of plans to launch a customer relationship management (CRM) product, the Navision deal shows that Microsoft is serious about ERP, which comprises basic accounting software modules and extended customer and supply chain management applications.

Though it had been rumored in press reports, the announcement of the planned Navision acquisition shocked some users.

"Frankly, my initial gut reaction was, 'Oh no, they're gonna swallow up the competition and force inferior products on us!'" said Reed Steiner, controller at Sorenson Media Inc. in Salt Lake City. After dwelling on it, though, Steiner said he's excited about the potential benefits of the acquisition.

Sorenson, a video-related software maker, plans to integrate its $100,000 installation of Navision's Axapta ERP suite with its Web-based ordering system. Sorenson's "eStore" is based on Microsoft's SQL Server database, on which Axapta runs.

Steiner said he hopes Microsoft can meld the best features of the products it will soon own if the deal goes through, and tune them to run well together on the Internet. "It would be exciting if they could pull it off," he said.

Even the mighty Microsoft, however, hasn't succeeded in every new venture. Efforts to promote new technology and to supplement slowing revenue growth from more mature product lines have stumbled, analysts said.

"Microsoft has a lot of things to worry about, and it is getting spread very thin," said Charles Homs, a senior analyst at Forrester Research BV in Amsterdam. For example, Microsoft's foray into television set-top box software hit a snag last year when United Pan-Europe Communications NV, one of Europe's largest cable operators, abandoned MSTV software in favor of rival applications from San Carlos, Calif.-based Liberate Technologies Inc., Homs noted.

It's also unclear whether Microsoft's MSN online venture, with about 8 million subscribers, will ever pull even with America Online Inc.'s AOL Instant Messenger service, which has about 34 million subscribers, according to Homs and other analysts.

Microsoft does, however, have the resources to expand the ERP software market among small and medium-size companies, if it can deliver relatively inexpensive (compared to so-called Tier 1 packages from the likes of SAP AG and J.D. Edwards & Co.) accounting, supply chain and CRM applications built to fit into its Internet-centric .Net software architecture, according to analysts.

Last year's $1.1 billion purchase of Great Plains Software Inc. in Fargo, N.D., was Microsoft's entrance into corporate accounting. The deal was widely considered a way for Microsoft to supplement its Office suite -- the market for which is becoming saturated -- and complement its SQL Server database, on top of which Great Plains software runs.

Analysts at market research company IDC, in Framingham, Mass., however, claim they had Microsoft's true intentions pegged.

"We thought it could be the first step toward an 'ERP for the masses,' and now with the Navision acquisition it's all come pretty clear," said Dennis Byron, IDC's vice president of enterprise applications research. "It could attract thousands of developers to develop very industry-specific niche stuff to add on to whatever it is Microsoft will come up with. This would be a huge benefit to users -- it could result in providing the market with its first price break in years."

Vendors shy away from giving out average prices for ERP suite implementations because pricing typically depends on how many modules are purchased and whether installation, systems integration or customization services are also required.

"Tier 1 products can cost millions to implement, while products aimed at companies in the low midmarket cost a fraction of that, a third or less," said Bruce Ciarleglio, vice president of marketing at The Aston Group, a value-added reseller (VAR) in La Jolla, Calif.

The definition of midmarket companies varies widely, starting as low as approximately $20 million in revenue and going as high as $1 billion in revenue, according to Ciarleglio, vendors and analysts.

But Microsoft could spark changes in the market.

"I see Microsoft coming out with an ERP starter pack, selling for [$14,052] or so, and for about five users -- out of the box for small companies," said Brent Teijssen, marketing manager at GAC Group of Companies BV, a VAR in Oostelbeers, Netherlands. "You answer a number of questions and it installs itself."

If the announced acquisition closes as expected in August, Navision will furnish Microsoft with 136,000 customers, 2,400 resellers and other partners, and 1,300 employees, in 31 countries.

Microsoft would also get software, including Navision Financials and the new extended version of the software, called Attain, aimed at midsize companies, as well as Axapta, which is aimed at the higher end of the midmarket for companies with revenue of about $500 million.

The question is how Microsoft will integrate these offerings into the products it acquired with Great Plains: eEnterprise, for midsize and large companies; Dynamics, for small and midsize companies; Solomon, for midsize companies; Small Business Manager, for small companies; and the Great Plains Siebel Front Office software.

The resulting hodgepodge of products needs to be linked with the Office suite, ERP-related products such as Project, and the company's .Net software platform. This entails rewriting applications on a code base incorporating standard Internet data-exchange protocols such as XML and Simple Object Application Protocol. The idea is to refashion the applications to interoperate seamlessly, letting companies mix and match them to offer customized Web-based applications.

Integration of the business products portfolio on a unified code base on the .Net platform won't be accomplished until the latter part of the decade and would be a leap forward, acknowledged Doug Burgum, president of Microsoft Great Plains and senior vice president of Microsoft, during a media conference call earlier this month.

"We believe that when the Windows platform really took off it took off, because Microsoft itself stepped in and delivered some proof applications; this is an opportunity for the Microsoft business applications to be a proof point for the [.Net] platform and help accelerate the platform," he said.

It's a daunting challenge, and success isn't certain.

In overall ERP sales, Microsoft ranks fifth behind Tier 1 players SAP, Oracle Corp., PeopleSoft Inc. and J.D. Edwards, Byron noted. The world's largest corporations standardize on sophisticated products from these companies. Meanwhile, the low-end and midtier market has several software accounting and CRM packages from Intuit Inc., Peachtree Software Inc., Computer Associates International Inc. and Inc. -- just to name a few -- many of which are also connecting to .Net.

Great Plains' corporate vice president of business solutions, Tami Reller, said, "We are solely focused on building great solutions such that we can build very nice market share in the small-business and midmarket segment, and we are far from having more than single-digit market share."

The first fruits of the Microsoft-Great Plains collaboration will be in a Small Business Manager upgrade next month and Release 7 of Dynamics and eEnterpise in July.

Release 7 illustrates Microsoft's incremental approach toward integrating software into the .Net fold. Though it isn't "written in .Net," Reller said, it will work with the upcoming Business Desk, a .Net user interface that will work with Great Plains products, and Microsoft CRM, both full .Net releases due in the second half of the year.

Users are cautiously optimistic as they eye Microsoft's opportunity to integrate standard Office productivity tools, the SQL Server database and various ERP applications

Microsoft's acquisition of Great Plains has had beneficial effects already, according to David Root, chief financial officer at Eagle's Flight, Creative Training Excellence Inc., a Guelph, Ontario-based training company. Eagle's Flight, with about $20 million in sales from 14 countries, uses Great Plains' Dynamics.

Besides the software, it was the company's corporate culture, which under Burgum has nurtured close ties to its VAR network, that attracted Root. "At the end of the day, it's about leadership, which is important to us because we're in that business. ... One thing I have to give Microsoft is that things seem to be happening a lot faster at Great Plains since the acquisition," he said.

Root is optimistic about potential synergies between Microsoft, Great Plains and Navision, but he has some caveats. "Navision is really flexible, but I like the fact that it's harder to do certain things in Great Plains; in general ledger accounts, you can move data around from one table to another, but you have to know what you're doing, while in Navision you can change all that, but the [audit] trail isn't there," he said.

Other users hope that Microsoft retains Navision's strengths, generally seen to be a balance of simplicity and the flexibility needed to be able to customize the product in many different countries.

"Microsoft can go ahead and add features, as long as you can turn off the features you don't use," said John Wade, president of multimedia materials provider Gung-Ho Co. in Incline Village, Nev., an eEnterprise customer. For example, in eEnterprise "every order entry has to go through manufacturing resource planning [MRP], but I'd like to use MRP only when we need it."

In addition, product integration isn't easy.

"Microsoft acquired Visio, for example, but even if you're using Visio 2002 [diagramming software] with Office, if you click on 'show me all Office files,' you don't see Visio files," Wade said.

Users also warily eye Microsoft's new licensing policy, which requires them to sign up for an annual maintenance program or pay full price when they want to upgrade.

"I do worry about licensing," said Bart Snel, head of IT at Jansen Poultry Equipment BV in Barneveld, Netherlands. The 53-person company sells equipment to the poultry world and uses Navision Manufacturing. "You never know what is going to happen there. Maintenance fees might go up as well," he said. Other potential problems include channel issues.

"What will happen if Microsoft's existing partners sell Navision products?" said Nigel Montgomery, research director at AMR Research Inc. in London. "Many of the Microsoft partners are going to be bigger than the Navision partners. There is a need to develop a new channel policy for the new partners that not only satisfies the new channel but also protects the existing channel."

VARs aren't the only business partners Microsoft must deal with. The Tier 1 vendors are trying to move into the midmarket, where Microsoft will compete fiercely. Yet Microsoft will have to work with these vendors to ensure, for example, fine-tuning of SQL Server with applications from PeopleSoft, SAP and other ERP vendors.

"We are competing with Microsoft. We are also a partner. We have one of these 'co-opetition' situations, which aren't uncommon in the industry," said Laurie Doyle Kelly, an SAP spokeswoman for corporate finance and strategy.

For now, Microsoft eschews talk of moving into the real high end -- companies of more than $800 million in revenue. Its long-term vision, according to Reller and Burgum, is to deliver base ERP products such as general ledger modules built on its .Net software application framework, and let an "ecosystem" of third parties add functionality for vertical markets. But if enough vertical-market functionality is delivered, the Microsoft-based products could conceivably compete on the high end.

"I believe they can get there, but it will take time," said The Aston Group's Ciarleglio. "Building the credibility case for the reliability of Microsoft products will also take time."

Tier 1 vendors profess confidence.

"As we and others see Microsoft's acquisition of Navision, it's targeting the small and medium-business SMB segment. This is an area we're also targeting. We've been in this market for some time," said Kelly.

Oracle executives promote the strengths of the company's financial products, which, they said, allow for product configuration without requiring expensive modifications to underlying code.

"We are highly focused on the midmarket, and have been for a while," said Fred Studer, vice president of eBusiness Suite marketing at Oracle. "We haven't hit Microsoft head to head yet. ... We have not seen competition from Navision or Great Plains."

But some wonder how long it will be until Microsoft reaches into ever-larger corporate accounts.

"I don't think it's any secret that Microsoft is increasingly desirous of putting the heat on Oracle and SAP across the board. ... There's an opportunity to move with SQL Server into the traditional domain of ERP vendors," said Matt Light, a research director at Gartner Inc. in Stamford, Conn.

Microsoft's moves in the ERP market could unfold in classic fashion, said those who recall a pattern in operating systems, personal productivity software, software suites and databases. Microsoft enters a market and, over a succession of upgrades it improves the software, attracts converts and expands the overall size of the product category's low-end and midmarket segment. Then it announces the software is scalable and challenges the high-end leaders in the category.

"We did not realize Microsoft had taken over the desktop market before it was long past competitive possibility," said Bill Clough, research director at IDC's European software group.

Whether Microsoft can integrate its patchwork of products and challenge the Tier 1 vendors, as well as myriad low-end players, will probably not become clear until after 2005.

As Microsoft's Burgum summed up: "We have big dreams about what we think we can deliver in terms of value, and we're excited about trying to get after that, but it's a big task."

John Blau in Dusseldorf, Germany, contributed to this report.

Copyright © 2002 IDG Communications, Inc.

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