COM K. Steenstrup, R. Anderson, Y. Genovese

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1 K. Steenstrup, R. Anderson, Y. Genovese Research Note 29 May 2003 Commentary Microsoft's ERP Strategy: Acquire, Consolidate, Develop Microsoft has bought into the enterprise resource planning market, but its long-term strategy is broader. When evaluating midrange ERP systems, plan for a Microsoftdeveloped.NET product that will supersede current brands. Through acquisitions, Microsoft amassed a varied product portfolio of enterprise resource planning (ERP) products. Microsoft has told Gartner that it will support these products through at least 2012, although it hasn't yet made a formal announcement to its installed base. At the same time, Microsoft intends to create a single, global code base, built on.net technology, that exhibits functionality from all of the brands in its portfolio. The data modeling and design required for a common code base will take two years to complete, so Microsoft will introduce the first major release of its.net solution suite (with Web services) by 2005 (0.7 probability). Thus, while supporting current products, Microsoft will also be preparing its customers for an upgrade to this as-yet-unreleased product. Gartner believes that the goals represented by this two-pronged strategy may be contradictory and difficult to reconcile. The cost of enhancing and supporting multiple products will cause Microsoft to decrease investment and indirectly encourage upgrades. If you are using Microsoft ERP products or intend to use them, plan for near-term changes in support and functionality, and expect to implement a.net-based ERP eventually. Microsoft's complex strategy appears to be based on its belief that the IT market will pick up again by This is a timeline that will enable the vendor to integrate its acquisitions, assemble various products and roll out clear, consistent sales efforts. A vendor with fewer resources wouldn't be able to simultaneously juggle so many initiatives and invest so much, with so little return guaranteed, in preparation for a future that is itself a work in progress. Gartner 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Buy Now, Build Later The business applications market offers significant recurring revenue to large vendors such as SAP, PeopleSoft and Oracle. The crowded and fragmented lower end of this market, in particular, presented an opportunity for penetration by a single "mega-suite" vendor. Since 2000, Microsoft has accumulated a large customer base within the lower-end market by buying products and companies that embrace all geographies. Microsoft has added four significant midtier ERP products within just a few years: Solomon and Great Plains, from Great Plains Software Attain (now called Navision) and Axapta, from Navision Software We believe that, although Microsoft has bought market share in the ERP market, it has not yet demonstrated that it can deliver the full strategy. The Microsoft Applications Support Scenario Microsoft has stated that its goals for its ERP products are as follows: To enhance and extend its current ERP offerings To build new solutions that surround and add additional value to its current offerings, such as customer relationship management (CRM) systems To build a new generation of solutions based on a single, global code base To build an independent software vendor (ISV) community that extends and enhances the transformational value of these new solutions Gartner expects the opposing directions indicated by these goals to cause confusion among its customers and reseller channels. Different skill sets are required to acquire customers and retain them. Business application vendors must work through long sales cycles, consultative solution selling, and ongoing service and support to gain loyal customers. On its own, Microsoft, cannot carry off the intense, "hands-on" customer-centric business model required to succeed in the business applications market. Until now, Microsoft has focused on product strategy and paid less attention to the equally critical areas of sales and service. For example, we do not know of any reseller in Microsoft's worldwide network that offers all of the Microsoft Business Solutions (MBS) applications. This fragmentation in the field has resulted in channels selling against each other and has affected the quality of delivery to customers. Action Item: More than 50 percent of the current Great Plains and Navision customers will upgrade by 2009 (0.7 probability). If you're using Microsoft products, you should ensure that support (for product, conversion and integration) continues for an appropriate time span. Reconciling Future Product Strategies With Developers' Widespread.NET Technology Adoption Microsoft must support vendors using.net for development; otherwise, users will not value the benefits of Microsoft technology embedded in their products. Revenue from the ISV community is at risk, including ERP vendors that have converted their products to.net or are contemplating doing so. Most of these ISVs are MBS competitors. Included are small vendors (such as Epicor and Mapics), as well as large vendors that rely, in part, on Microsoft infrastructure as the basis for deployment (such as SAP). 29 May

3 Microsoft has already announced products targeted at the retail, manufacturing, distribution and professional services automation verticals. By 2005, Microsoft's products for verticals will compete with at least 30 percent of its ISVs (0.8 probability). Thus, it's unclear how Microsoft will keep both sides happy and maintain the considerable revenue that's on the table. Microsoft appears to be protecting the ISV base by developing a core business application product that would cover the functionality required at the operations level, such as global financials and human resources, as well as the cross-business process level, which includes CRM and supplier relationship management (SRM). Microsoft believes that this will result in an original equipment manufacturer (OEM) product portfolio that will be used by ISVs to develop industry-specific extensions. In the future at least, in theory a user purchasing a product from an ISV might obtain: Core functionality addressing operations Cross-business processes from Microsoft that have been extended by the ISV with industry-specific functionality The ability to leverage office automation applications The downside is that this would require many ISVs to give up some unique core capabilities and become entirely dependent on Microsoft to provide them. Gartner believes that Microsoft's theory regarding the ISV relationship is faulty because: ISVs will not want to give up recurring revenue from operations-level business applications. Most of them already have lucrative partnerships, or have built or acquired their own functionality. Product functionality is not generic at the cross-application level and can't be simply "extended" with vertical-specific functionality. In many cases (for example, process manufacturing), vertical-specific functionality is more intertwined with the product than it would be with general applications. For example, "to order" functionality requires a product configurator engine. This configurator is not a candidate for "bolt-on" functionality it must begin at the customer interaction level (thus infiltrating CRM) and track through the manufacturing and services cycle without disconnects. Action Item: After 2005, ISVs will have to stay outside of the Microsoft world, which could serve as a point of differentiation to sell ERP systems, but come at a cost of integration to bridge the gaps, or they can remain inside the Microsoft world, thus obtaining access to ubiquitous architecture and technology. Customers will need to carefully review the industry credentials of ISVs and the integrity of any product extensions. Sales and Service: A "Hands Off" Approach Won't Work Through 2005, the adoption of Microsoft products will be hampered by support and viability concerns of the distributed channel model (0.7 probability). The diverse channels and the plethora of smaller partners could affect the success of your implementation. Many of MBS's channel partners have sold systems to smaller enterprises with simple requirements, such as tailoring reports. If MBS hopes to extend its success beyond its traditional small and midsize business (SMB) base, it will have train its partners to service the more-rigorous requirements of larger enterprises (such as systems integration or business process re-engineering). Otherwise, it will need to recruit or acquire new partners to address their needs. As consistency among the partners becomes 29 May

4 important, we believe that, if your company does not match the corporate-dictated profile of a current channel, you will be more likely to be handed off to new partners. Many of the channel partners are very knowledgeable about specific vertical segments and have succeeded by establishing good relationships with just a few customers. Although low-cost, local implementation specialists appeal to SMBs, the companies in the Microsoft channel network remain relatively small. The economy has adversely affected many partners, limiting their ability to hire additional resources for sales and implementation or educate their sales force and customers about the new Microsoft products. Enterprises that have selected or used these partners give them mixed reviews: Some are delighted with the commitment displayed by the local partner and show a strong affinity for doing business with local or regional providers; others are wary of becoming dependent on a company that has few employees and struggles to remain financially stable. Action Item: Expect to experience continued channel conflict and service issues until Microsoft more strategically backs the distribution channel (for example, with additional certification and coordination of channel overlap and conflict), and its role in specific industries is stabilized. Upgrade Costs More Than Just Price MBS has stated that, if enterprises license Great Plains, Solomon, Navision or Axapta, and if they stay current on the MBS Enhancement Program/Upgrade Program, they will be able to move to the MBS.NET solution without having to repurchase the functionality they have already licensed. However, the hardware upgrades, modifications, consulting and tools needed to take advantage of the.net solution are not included in the Enhancement Program/Upgrade Program. Because this solution has not been designed, let alone released, Microsoft has not yet demonstrated that the functionality of the old and new products match. If you currently use these products, you should expect gray areas of dispute to appear. In ERP upgrades, functional changes, as well as ostensibly minor changes to the user interface, can be very costly much more so than in "office automation" products. Other ERP vendors that previously have forced a similar migration such as SAP, which went from R/2 to R/3; J.D. Edwards, which went from World to OneWorld; and Oracle, which moved to 11i have experienced confusion and resistance, even though all worked through a direct sales-and-service network. Because of these issues, Gartner believes that Microsoft will be challenged to: Smoothly migrate its diverse customer base to the single, global code base Support the partners through difficult economic times Maintain the ISV channel interest in both technology and applications During this transition period, we expect customers to unnecessarily delay major ERP deals in expectation of MBS's offering. We have already heard reports of Microsoft approaching senior executives with the pitch: "You don't need ERP, you need Microsoft." In effect, Microsoft is telling prospects that they should not simply purchase software with specific business process functionality. Instead, according to Microsoft, they should assemble the entire technology stack, integration with desktop automation, as well as ERP and CRM functionality. In effect, Microsoft broadens the requirements until no one but Microsoft can satisfy them. Action Item: If you're using Microsoft products, you should obtain a guarantee from Microsoft that the functionality will be carried over to the new products. 29 May

5 Bottom Line: Microsoft has bought market share, but it has not demonstrated that it can deliver the full strategy. Nevertheless, its current enterprise resource planning products offer good functionality for the midmarket and are worth including in shortlists. If you currently use or intend to use Microsoft ERP products, you should: Negotiate support for your current selection through 2005, but prepare for an upgrade to a yet-tobe-seen.net ERP solution Start mapping a timeline to upgrade, even though it may seem too early now Evaluate your requirements against current and future published Microsoft product plans Consider local channel partner capabilities, which vary widely, but strongly influence the success of Microsoft products 29 May