Microsoft Dynamics' ERP power play

It's not easy being No. 5 when you're used to being No. 1, but closing the distance will first require ironing out some kinks.

Microsoft, the world's most dominant software maker, entered the enterprise resource planning industry late — just six years ago in 2001 — but when you're a giant flush with capital and human resources it doesn't take long to catch up. Through a combination of acquisition and targeting the relatively underserved small- and mid-market, its ERP unit, Microsoft Dynamics, vaulted from No. 15 to No. 5 in market share (by revenue). And while the road ahead isn't entirely smooth, industry watchers say it's still gaining ground.

Although ERP accounts for one of the smallest parts of the Microsoft empire — worth less than $50 million in revenues in Canada — IDC Canada says MD's global market share increased exponentially last quarter by almost 20%. That's twice the industry average.

“There are only so many Fortune 500 firms,” says Nancy Teixeira, group manager of Dynamics Marketing (at MD), based in Mississauga, Ont. SAP and Oracle, the two ERP heavyweights, had already cornered that market long before Microsoft got in. Teixeira says small- and medium-sized organizations have similar business pains and problems to large organizations, but with only a fraction of the budget to spend. That's where she says Microsoft saw an opportunity — to develop ERP solutions that were faster and cheaper to adopt, and where the other big ERP vendors hadn't made as many inroads.

“What we found in these mid-size organizations were home-grown solutions,” Teixeira says, where some companies would hire an IT expert to come up with a system. “But then you are held hostage a bit — if that person leaves, or something happens, and they are the sole provider of that software you are in a lurch.”

Other companies were using an assortment of software packages for applications they were never designed for. “Spreadsheets like Excel for all sorts of financial accounting — which is frightening because it was never meant for that.”

But because of the huge installed base of Windows technology and its familiarity to a wide number of people, MD saw a natural advantage. That was the main reason Victoria, B.C.-based Island Hearing, a national supplier of hearing aids, bought Dynamics products in 2002. “It looks like a Microsoft application — so it's familiar to employees,” says Director of IT Catherine Bennetto.

And although in general she's happy with it, she says there are some problems. “It's not as easy to use as the marketing campaign makes it sound,” she points out, explaining that it's a difficult system to set up and needs constant supervision and tweaking. “We have nine IT support staff for 300 employees — I'm not sure how smaller firms without that kind of internal IT strength make it work.”

That, says Albert Pang, director, enterprise applications research at IDC in San Francisco, is one of Microsoft's weaknesses.

“Some ERP products from the competition perform much better with other Microsoft technologies; for example Sage customers can run Sage products better on (Microsoft) SQL servers and other Microsoft applications.”

It's just one of the problems Microsoft inherited when it acquired the ERP systems Great Plains (2001) and Navision (2002), but troubling, says Pang, that the mega corporation still hasn't been able to smooth out the kinks.

Still more troubling, he says, is that Microsoft also hasn't been able to transform their acquired systems into global products.

“To catch up with Sage — still the No. 1 ERP vendor in the mid-market range — Microsoft has to prove to customers in other countries it can accommodate their needs,” Pang says. Microsoft can't, for example, run Dynamics in all different languages. And although the product sells well in European countries, it isn't set up for emerging markets in the Asia Pacific region and Latin America. “If they want to set up in Malaysia, they can't do it.”

If Microsoft can make that transformation and shed the baggage it took on with its acquisitions, Pang says Dynamics has the potential to overtake its rivals.

Especially, says his IDC Canada counterpart, Joel Martin, because Microsoft is the king of partner relationships. In the world of small- and medium-sized industries, Martin says you need partners to sell your products. That's because the sheer number of companies in this range means there are just too many customers for Microsoft to service its own.

It's something Bennetto says Dynamics vendors do well. “They provide strong feedback and support, and that's very important.”

At the very least it's a reminder that Microsoft (and, increasingly, its more established competitors), world-spanning enterprise that it is, can't forget its own roots in more humble beginnings. As Dynamics' Teixeira acknowledges, “Without our partners we are dead in the water.”