Vendor Rating Update: Microsoft Must Evolve to Keep SMB Lead

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1 Vendor Ratings, Mika Yamamoto Krammer, Robert P. Anderson, Robert H. Brown, James A. Browning, Michael Haines, Bob Igou, David Mitchell (NH) Smith Research Note 30 December 2003 Vendor Rating Update: Microsoft Must Evolve to Keep SMB Lead Microsoft dominates the small and midsize business space with its operating systems and office productivity tools. It s unclear whether the company can maintain this lead and become the business application leader. Microsoft Overall Rating: Positive What You Need to Know: Through 2005, although Microsoft will try to reinvigorate its appeal for more significant growth and penetration in the small and midsize business market, it will be limited by inertia and the challenges of integrating Microsoft Classic and Microsoft Business Services and recognizing the key success factors to simultaneously succeed in each category (0.7 probability). By enhancing, focusing and evolving offerings such as Office, Small Business Server and the MBS portfolio, Microsoft continues to drive for SMB market leadership. With many vendors interested in displacing it, including IBM and SAP, Microsoft must not let inertia take hold and must continue to work on being more focused on business issues to enable SMBs to do business, rather than providing technology with no distinct problem to solve. This drive must manifest itself among Microsoft s products, services and go-to-market strategies. This means moving beyond technology to educate both the channel and end users about the benefits of Microsoft s technologies, how to realize returns and justifying the costs against alternatives. Analyst Comments: Through 2005, Microsoft will earn a portion of its revenue from SMBs, although Linux and business application vendors will look for ways to unseat Microsoft. Significant revenue growth depends on Microsoft s success with business applications. Detailed Rating: Initiative Rating Change Corporate Viability Strategy Positive No Change SMB Strategy Positive New Financial Strong Positive No Change Marketing Positive No Change SMB Marketing Promising New Organization Positive No Change SMB Organization Promising New Market Offerings Product/Service Positive No Change Gartner 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 Office SMB Positive New Small Business Server Promising New Windows Server 2003 SMB Positive New Microsoft Business Solutions SMB Promising New MBS Professional Services SMB Promising New Technology/Methodology Promising No Change Pricing Structure Caution No Change Customer Service/Support Sales/Distribution Positive No Change SMB Channel Strategy and Execution Promising New Support/Account Management Positive No Change SMB Maintenance and Support Services Positive New Corporate Viability: SMB Strategy ( Positive ) With large cash reserves, an enviable installed base and a well-established brand, Microsoft stands to remain the dominant small and midsize business (SMB) market player. The market is Microsoft s to lose. That said, the company must learn how to successfully dovetail the best of Microsoft Classic s (Windows, Office, SQL and so on) and Microsoft Business Solutions (Great Plans, Navision, Solomon and so on) offerings to remain a juggernaut in the infrastructure and business application arenas. Microsoft appears to be moving toward a more-customer-focused business model, while attempting to more-deliberately enable business processes to run smoother rather than inserting more functionality for technology s sake. We are waiting to see if SMBs are convinced. Maintaining the status quo will not earn Microsoft success. With its immense global presence, Microsoft s customers, partners and competitors are closely watching the company in the SMB space. The question is, does Microsoft understand what it takes to be a business application leader while trying to meet expectations as an operating system (OS) vendor? As the launches of the Longhorn (a next-generation OS) and Green (next-generation business applications) products approach, the market is beginning to draw important conclusions. SMB Marketing ( Promising ) The fact that Microsoft was the No. 2 brand in a recent Business Week Global Brands Scorecard, coupled with the fact that Windows and Office are the standard choices among SMBs, shows that Microsoft must be doing something right in its positioning and marketing. As with other large vendors vying for SMB market share, Microsoft frequently relies on partners to communicate with customers. This challenges the company to balance direct-to-market messages with those delivered through channel partners. Moving back Longhorn s release date, an unclear business applications road map and traditionally overly technical Microsoft Classic messaging are significant distractions to paving a clearly communicated path for Microsoft. Microsoft must determine and communicate a clearer vertical solution road map. More emphasis must be placed on addressing SMBs business issues, rather than providing overly technical messages. Secondarily, Microsoft must reassure SMBs that their environments are secure to counterbalance press and analyst reports, as well as hackers, who thrive on Microsoft s security glitches. SMB Organization ( Promising ) Microsoft reorganized its SMB area, placing Orlando Ayala at the head of the Small and Midsize Solutions and Partner Group (SMS&P). Ayala, who must work with seven business unit leaders to drive 30 December

3 sales among SMBs, has his work cut out for him. Reconciling the distinct Microsoft Classic and Microsoft Business Solutions (MBS) cultures and processes, while fostering the strengths of the two, will prove challenging. Ayala s influence and drive will be put to the test. Market Offerings: Office SMB ( Positive ) Microsoft Office continues to be the standard for office productivity tools among SMBs. Although Office 2003 has more functionality, integration and collaboration capabilities, the previous versions of Office provide good enough functionality for most SMBs, and they don t perceive a need to upgrade. Most upgrades are for OS improvement rather than to realize the functionality benefits of Office With so much functionality included among the applications, Microsoft s challenge is to educate SMBs about the added features so that they understand the latest version s enhancements. For example, Office 2003 Small Business Edition includes Business Contact Manager, a contact management application that enhances the experience with managing contacts through Outlook to provide a light, usable contact database without investing in a complex customer relationship management (CRM) application. The addin provides much-needed functionality for small businesses, but it necessitates highlighting the features to encourage use. Microsoft s attempt to justify the price of Office compared with competitors such as Sun Microsystems StarOffice and OpenOffice.org by adding more functionality may emphasize the wrong area. Rather, Microsoft should focus on simplifying the upgrade process and developing functionality to enable easier discovery of Office features and benefits. Small Business Server ( Promising ) Small Business Server (SBS) 2003 is the fourth-generation release of this product line. Since its inception, the product s approach has been the same: Integrate server technology focused on small business to provide a great deal of functionality within a single multifunction server product. Despite these benefits, past releases have not taken off. SBS 2003 is intended to appeal to a broader, mainstream small-business audience. At a lower price point and with greater integration than in the past, Microsoft believes that SBS 2003 is the release that will put SBS in the minds of small business owners everywhere, enabling an easy transition to a server-based environment. SBS 2003 provides a great deal of functionality in one box, at a reasonable price. Although the product is rich, Microsoft s challenge will be to convince small businesses of its benefits, relying on a channel that has built its business on selling OSs rather than business solutions, with the additional challenge of moving beyond its overly technical messaging presents significant hurdles. SBS 2003 was officially released in October Although the product appears promising, it s too soon to tell whether the mass-market appeal has been struck this time by Microsoft. Windows Server 2003 SMB ( Positive ) Microsoft Windows is the dominant server OS used by SMBs. However, Microsoft s historical excessive reliance on security patches is why we do not give Windows Server 2003 a strong positive rating. Enterprises will not be able to significantly reduce the expenditure to secure Windows servers until the second quarter of 2004, when Gartner believes that the new Windows Server 2003 product will reach security stability. With Windows Server 2003, Microsoft has made significant progress in its server-based OS. Server 2003 comes out of the box in a more-secure default configuration than previous versions (such as Windows NT and 2000) Microsoft is applying sufficient management attention and financial resources to make its server-based software products more secure. Additionally, Active Directory makes it easier for SMBs to control and lock down their user desktops. Software distribution is also enabled with Active Directory. 30 December

4 These are two examples of resource-intensive processes that have been simplified for limited IT staffs. The install and configuration wizards are more intuitive and allow the server to be easily set up for different roles (such as application server, file/print server and so on). End users are also enabled with some self-help utilities (for example, the ability to undelete files on file servers reduces potential restore headaches). Microsoft has also introduced a new low-end package, called the Web Edition, which is designed to provide limited and focused functionality, while minimizing overhead and exposure to security flaws. Microsoft s new network-attached storage (NAS) OS, Windows Storage Server 2003, likely will drive Windows-based NAS growth to 20 percent of total market revenue by the end of This version of the OS provides functions related only to file serving and file sharing. Storage Server 2003 will enable hardware original equipment manufacturers to offer storage capabilities at aggressive prices that have been previously available only on high-end NAS devices. Microsoft Business Solutions SMB ( Promising ) MBS comprise five different enterprise resource planning (ERP) platforms and one CRM solution. Microsoft is building a completely.net-based ERP II solution set, incorporating the latest technologies and the best feature/functionality found among all its business solutions. This new Green solution set will enable businesses on a worldwide basis to grow from a small entity to a large enterprise without changing core ERP platforms. MBS must continue to satisfy customers given the multitude of solutions, to maintain and enhance those solutions, to aggressively pursue bringing Green to market, to build a channel that can deliver Green further upmarket and to minimize channel and customer confusion as it does all this. This is a tremendous challenge, and only a vendor with the wherewithal of Microsoft could pull it off. MBS has a plan for addressing the previously mentioned objectives, but execution is still in the early stages. The organization is attempting to better define and market its five business solutions based on distinct characteristics. This should help users and partners understand the future direction of each and determine how to address different customer profiles, eliminating confusion over what to sell and when to sell it. It also addresses channel conflict issues. Microsoft CRM (MSCRM) and Axapta are experiencing significant demand among SMBs. However, competency gaps must be addressed, specifically a stronger implementation channel for Axapta in North America and a strengthened partner certification requirement for MSCRM as it is functionally improved for midsize businesses. Green was delayed until 2006 to coincide with the release of Microsoft s Longhorn OS, causing trepidation among resellers looking to sell into next IT buying cycle forecast to begin in However, if delivered as promised and millions of dollars of investment and focus make that probable at some future point Green will bring significant competitive pressure on the rest of the vendor market and substantial new benefits to SMBs worldwide. MBS Professional Services SMB ( Promising ) MBS Professional Services (MBSPS s) plan is in place and execution is in its initial stages to address the presale, implementation and ongoing consulting needs of larger customers particularly those in the upper midmarket including adding new partners and internal personnel to address needs on a worldwide basis. However, MBSPS s in-house IT professional services capabilities have a long way to go. MBSPS lacks business process and project management expertise. Its focus on the Axapta midmarket manufacturing solution and MSCRM will help address the lack of channel capacity issues in those areas 30 December

5 pertaining to larger customer deals. MBSPS is aware of the acute and strategic challenges, and it has taken steps to address them. Its plan will be completed no sooner than the first half of Customer Service/Support: SMB Channel Strategy and Execution ( Promising ) Microsoft bought its business applications channel and organically grew its infrastructure software channel. The key success factors for each product set are different. The significant challenge that Microsoft faces is rationalizing its channel to eliminate redundancies and foster synergy among its MBS and Microsoft Classic channel families, while rewarding the competencies necessary to foster growth in each. To be the megaprovider of all software to the SMB space, Microsoft must get this right. While Microsoft s next-generation partner program, which is based largely on a point system that recognizes industry partners overall business model and rewards specialization, in addition to financial contribution, appears to be a step in the right direction, execution will be key. Microsoft must demonstrate its ability to evolve the program to encourage a balanced set of competencies that also reward business acumen. Eliminating the channel conflict among MBS channel partners and defining which markets their business applications portfolio will compete in are necessary. Microsoft must target vertical markets for MBS and for Microsoft SMB as a whole. In stark contrast to Microsoft s mass-market approach to SMB software distribution, SAP s playbook is better aligned with the needs and wants of SMBs in its quality vs. quantity approach. However, Microsoft has one of the largest channel in the world and it is almost entirely channel-centric in its approach to all markets, especially the SMB market. SMB Support and Maintenance ( Positive ) Microsoft has recently released new support offerings that provide premium level support at lower costs. This support hopefully will offer what SMBs perceive they are buying. Highly dependent on partners to deliver services for Microsoft product, especially in the SMB market, Microsoft has done a great deal to improve its partner enablement and will only be the prime contractor when the customer insists (SMBs would not have much clout here), when the technology is new to production deployment or when the customer is a marquee account (for example, ebay). Related Research and Ratings: Microsoft s Open Value Licensing for SMBs Do s and Don ts for MSB Application Vendor Selection Management Update: Microsoft s ERP Strategy Is Acquire, Consolidate, Develop Microsoft Repositions Partner Program for Market Leadership Seven More Big Vendor Mistakes Inhibiting SMB IT Sales Midsize Businesses Still Balking at.net Accounting-Based Small Business Management Applications Market Exhibits Slow Growth for 2003 Rating Definition: 30 December

6 Strong Positive Positive Promising Caution Strong Negative Solid provider of strategic products, services or solutions. Customers: Continue investments. Potential customers: Consider this vendor a strong strategic choice. Demonstrates strength in specific areas, but is largely opportunistic. Customers: Continue incremental investments. Potential customers: Put this vendor on a short list of tactical alternatives. Shows potential in specific areas; however, initiative or vendor has not fully evolved or matured. Customers: Watch for a change in status and consider scenarios for short- and long-term impact. Potential customers: Plan for and be aware of issues and opportunities related to the evolution and maturity of this initiative or vendor. Faces challenges in one or more areas. Customers: Understand challenges in relevant areas; assess short and long term benefit/risk to determine if contingency plans are needed. Potential customers: Note the vendor s challenges as part of due diligence. Difficulty responding to problems in multiple areas. Customers: Exit immediately. Potential customers: Consider this vendor only if there are no alternatives. Acronym Key CRM ERP MBS MBSPS MSCRM NAS OS SBS SMB customer relationship management enterprise resource planning Microsoft Business Services MBS Professional Services Microsoft CRM network-attached server operating system Small Business Server small and midsize business 30 December

7 SMS&P Small and Midsize Solutions and Partner Group Core Topics Small and Midsize Business ~ IT Services SMB Business View of IT ~ Small and Midsize Business SMB CIO Strategies ~ Small and Midsize Business Microsoft Headquarters: Redmond, Washington Web Location: 30 December