Clash of Titans: Microsoft's SaaS Play

Microsoft's next version of CRM software, code-named "Titan," will reveal the company's competitive response to and its approach to Software as a Service.

In the first few months of this year, Microsoft distributed "Titan," the next version of Microsoft CRM, to 300 early-adopter partners. During the second quarter, the pre-release code will go to 1,000 partners in advance of the product's general availability later this year.

Titan is more than simply a new version of Microsoft CRM, although the release will offer plenty of traditional feature upgrades. More significant is the fact that the release is one of Microsoft's first practical implementations of Software as a Service (SaaS), with Microsoft providing hosted CRM directly to customers who choose that option. That SaaS option is formally called Dynamics CRM Live.

Dynamics Growing Pains: A Special Report

Since making its move into business applications, Microsoft has bought, built and partnered its way to steadily increasing revenues and market share. Inevitably, those gains generate conflicts. For Microsoft and many of its partners, those are the best kind of problems to have. But for partners specializing in Microsoft's Dynamics suite, the issues can get particularly sticky.

In this collection of articles, we examine three of those issues:

Lee Pender covers the increasing conflict between Microsoft and SAP as both companies dive into the market for small and midsize businesses to compete for one of the most desirable untapped customer bases.

Scott Bekker looks at Microsoft CRM's forthcoming "Titan" release. With the addition of a Software as a Service delivery option, Microsoft offers new opportunities for some partner companies, but also raises the possibility of elbowing others out .

Lauren Gibbons Paul explores how the GP, AX, NAV and SL Dynamics suites are coming together, and what their gradual integration means for partners.

As they get their hands on the code, some of Microsoft's most involved partners, such as Invoke Systems, Sonoma Partners LLC, Streamline Solutions LLC and Genesys Telecommunications Laboratories Inc., have already been thinking hard about how they will go about making money from Microsoft's implementation of SaaS and Titan's other new features. At the same time, Microsoft's approach with hosted CRM-a balancing act of traditional revenue sources, partner considerations and competitive issues-offers many clues about how the company may approach SaaS in other markets.

These partners understand the tough challenges Microsoft's new approach to CRM will bring, but most believe the end result can be positive for them. "We're pumped," says Mike Snyder, a principal at Sonoma Partners, a Gold Certified partner based in Chicago. "I know that it's going to add a lot more people onto the Microsoft platform, and that can only be good for partners like us."

Titan's Big Changes
Titan's most important new feature by far is the addition of the SaaS delivery model. Titan will be available in three ways. First, customers can buy the software to be installed on their premises, which is the traditional model for Microsoft CRM and the way customers are used to buying Microsoft software in general. Obviously, this is the model most partners know and have built their businesses around. In addition, Titan will be available by being hosted by partners, continuing a delivery model that a handful of partners began offering in the first half of 2006. Finally, there's the brand-new option for customers in North America to subscribe directly with Microsoft for CRM that is hosted by the company at data centers that it has been building aggressively around the United States.

"Titan is the core underlying bits that will support three business models for us," says Brad Wilson, Microsoft Dynamics CRM general manager. "Our existing partners have another way to deploy the technology that can fit people's buying patterns, fit people's budgets." Key to the new model is the underlying idea of portability of data, settings and customizations-in other words, allowing customers to transfer their CRM applications and data from on-premise to Dynamics CRM Live to partner-hosted and back again-without losing investments.

Titan introduces several other important new features. It will be the first release that supports multi-tenancy, in which several organizations or instances of Microsoft CRM can run on a single server. While that change is mostly invisible to customers, multi-tenancy has important implications for hosted CRM providers, including Microsoft.

There are two other key "multis," as Microsoft calls them, in Titan. The product brings multi-language support on a single server as well as multi-currency support. These changes will be useful for hosting providers, especially in Europe, but they will also be a selling point for multi-national corporations. Meanwhile, Titan adds two new supported languages, bringing the total to 24. (For comparison, Windows Vista launched Jan. 30 with support for 19 languages, covering most of the world's major populations, but will support 99 languages by the end of the year.) Says Wilson: "Multi-language and multi-currency help more broadly in international business. Today we're in [more than] 80 countries, and the majority of our business is international."

Given the recent release of Windows Vista and Microsoft Office 2007 and given Microsoft CRM's tight integration with both desktop products, a host of Titan improvements involve bringing Microsoft CRM up to speed with Windows and Office. Partners say that they're also interested in workflow enhancements, as Microsoft moves from a workflow engine specific to Microsoft CRM to the Windows Workflow Foundation.

The Debut of SaaS
Titan will include one of Microsoft's first implementations of Software as a Service. A major topic over the last few years, SaaS is based on the idea of having customers rent, rather than buy, software, accessing it over the Internet rather than installing it on their own systems. With the naming of Ray Ozzie as Microsoft's chief software architect in June 2006, Microsoft gave Software as a Service a much higher profile both inside and outside the company. While the company released Windows Live and Office Live before Microsoft CRM Live, neither previous Live offering really delivers core Microsoft software on a subscription basis the way Dynamics CRM Live does. Wilson says that Ozzie and the rest of Microsoft's cross-organization leadership team on Live services were heavily involved in the strategy and tactics behind Titan.

Microsoft isn't offering Microsoft CRM Live in a vacuum. When the product becomes available in North America, it will run up against a well-established player: The San Francisco-based company is a pure-play, on-demand CRM vendor with more than 556,000 paying subscribers. In comparison, Microsoft CRM has about 350,000 installed seats. While hadn't reported last year's full financial results at RCP's press time, it had done about $350 million in revenue in the first nine months of 2006, a 61 percent increase over the same period during the previous year. is obviously watching Microsoft's entry closely. While the 8-year-old CRM company's base of installed seats is larger than Microsoft's, Redmond has budgets and the kind of profile in the broader IT industry that can't match.

"[Its] size and [its] scope and [its] ability to go out and tell [Microsoft's story] is going to fire the flare in the air," says Bobby Napiltonia,'s senior vice president of worldwide channels and alliances. "When Microsoft goes and says 'Software as a Service,' every single person in the world can see it. People are going to go to the Web, and they're going to see that [Salesforce. com is] an alternative."

Napiltonia portrays Microsoft's blended approach, bringing SaaS along with on-premise and partner-hosted, as confusingly muddied. "I look at that business model: 'Well, we'll host it, or you can host it or maybe the partner will do it.' The first thing I do [as a potential customer] is I start scratching my head," he says. "It's really hard to do perpetual licensing and renewal and mix that with Software as a Service."

When asked, Microsoft's Wilson declines to confirm whether's success drew Microsoft toward offering hosted CRM as one of its first Live services. Instead, he replies: "The way we look at it is this: There's definitely a market in CRM for Software as a Service. There's definitely a market for lower-complexity systems in general."

Wilson portrays the move as motivated by a desire to reach the smallest businesses. "On the on-premise side, we sell from five seats to 10,000 seats or more. [But] I think the biggest gap in our partner channel coverage today is in offerings to small business. One thing that Dynamics CRM Live is going to do for us is to make it very inexpensive for small VARs to engage with these customers," he says.

Microsoft partners are more willing to discuss the challenge. "Right now, I know we're losing customers to and other hosted offerings," says Sonoma Partners' Snyder. "Once the Microsoft platform has a very well-priced and strong-feature-set hosted solution, I know that a lot of the people that are doing pilots are going to sign up for CRM Live."

Jason Hunt, chief technical officer at Invoke Systems, a Gold Certified Partner based in Baltimore, brings the perspective both of a well-connected partner-company executive and a former Microsoft employee on the CRM team. Of Microsoft's move into doing its own CRM hosting, Hunt says that, as a business model, "it totally makes sense. is [27,000] customers, [556,000] seats. Microsoft's [seat-per-deployment ratio] is much higher than that." Microsoft needs CRM Live to get down to those 10-to-20-seat deals, he says. At the moment, "there's an entire small business market that's been shut out."

Partner Opportunities
Hunt, Snyder and other partners see several openings for new business that will emerge with Titan's release. Some will be quick hits, some involve dreaming up new business models and still others depend on the complex interplay between three different models for delivering CRM. They include:

1. Winning deals with small businesses. This is the most obvious opportunity and one that's attractive to many partners. "If someone calls us now from a 10-user organization and they don't have Active Directory, we know that's going to be a tough sell," Snyder says. The release of Titan with the Dynamics CRM Live option will give partners an answer for those customers who can't afford to invest much.

The biggest current question mark: It's unclear how much partners will be able to make from pointing that business to one of Microsoft's Live data centers, which will ultimately determine whether referring customers to Microsoft will be worth a partner's time. Wilson says that Microsoft is weighing that question carefully and working through the options. "We'll be giving more details out to people nearer to the Live launch," Wilson says. "We're definitely looking at ways to make sure that partners are being compensated fairly."

Wilson acknowledges that customers can set up CRM on their own, but says that Microsoft will encourage them to engage with partners: "There's a lot of business expertise that our partners have that the average customer hasn't spent a lot of time thinking about," he says. "Even if the IT is simplified, there's still a lot of room for vertical expertise and for functional expertise. I would strongly advise all customers to engage with a partner who can help them successfully land this tool within their organization."

In any case, Hunt sees value in spending time with customers who can't yet afford to spend much money or time on CRM. "Probably quite a few customers that are certain sizes don't have funding. We have to walk away from them," Hunt says, but adds: "Some ... will turn out to be much larger customers long-term. They're start-ups with potential."

2. Testing deployments on Dynamics CRM Live. One way for partners to quickly take advantage of the new Dynamics CRM Live model will be integrating it into the sales process. Some partners see the Live offering as a way to help prospective customers rapidly implement pilot deployments without synchronizing schedules with IT departments or getting companywide buy-in for test projects.

Although Dynamics CRM Live has been typically viewed as a small-customer solution, this approach may apply to bigger companies. "Sometimes large customers will have a group within their organization that wants to champion CRM. They recognize the benefits but the company as a whole may not," Hunt says. He believes that Dynamics CRM will provide an avenue for that opportunity.

Microsoft's Wilson sees similar opportunities with customers who are committed to Microsoft CRM but can't make implementation a priority for their IT departments or shoehorn the projects into infrastructure budgets-yet.

"Sometimes people also might want to try a system for three months, six months or a year, but eventually they might want to buy it," Wilson says. "When they change their minds, our partners have the ability to say, 'When your people go home, we can pop it into your environment.' Partners have this ability to use Software as a Service as another way to engage customers."

3. Upselling to customers. Even with customers who aren't thinking of their Dynamics CRM Live implementations as temporary, partners will be keeping a close eye out for hints that those customers are outgrowing their SaaS models.

"They're going to need services or they're going to outgrow it," Snyder says. "As the deployments get bigger, you're going to want to go on-premise or partner-hosted, and that's where partners like us will really benefit."

Invoke Systems' Hunt echoes that opinion, saying that his company currently gets business from former customers who eventually need to host their own data for operational or regulatory reasons. Not having to install software is a great benefit, he says. "But if you ever get to the point that you have 2,000 users and you don't want to have someone else hosting, you've got to cut bait," Hunt says.

4. Developing new models. Introduction of the new delivery option gives partners the chance to get creative and dream big. By concentrating on business expertise that could be placed on Dynamics Live CRM or be hosted by a partner in a multi-tenant, scalable environment, they're gaining opportunities to address small businesses in a variety of industries on a massive scale.

"It gives Microsoft CRM a lot better chance to chase after verticals," Invoke Systems' Hunt says. "That's ultimately how we're going to make money off of it."

Hunt gives an example of a citizen relationship-management vertical application that his company is bringing to market for state and local governments. Invoke Systems has created a government portal based on Microsoft CRM for citizens and governments to interact on issues such as the locations of downed trees and similar requests for government services.

"Every city in America, every county in America needs this," Hunt says. "The problem is, not all cities are like Seattle or Houston and have the budgets to afford something like this. What we're excited about is the fact that now Microsoft CRM is hostable and CRM Live exists. We can host it on CRM Live or link up with another partner and host it ourselves. That is something we're aggressively looking at."

Such opportunities are endless, Hunt says. "How many real estate agents are there in America who could use CRM but can't afford it?" Quick Facts

$310 million in 2005

$350 million first 9
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Microsoft's Wilson hopes similar thinking can lead to a new category of partner in the Microsoft channel. "You've got VARs, ISVs, SIs for larger customers," he says. "One thing I'm actually intrigued by with this is the potential to have a whole new type of partner with low-end IT skills but a lot of business savvy: someone with a lot of vertical knowledge of how to run a flower shop, for example. These kinds of people use their expertise to configure the system to help a flower shop run. It's kind of a business-analyst skill."

For Genesys Labs, a Daly City, Calif.-based company owned by Alcatel-Lucent in Paris, which specializes in customer call center software, the Dynamics CRM Live option will allow customers more choice, says Karl Holzthum, senior vice president for channels and alliances.

Genesys Labs offers a software connector from call center systems to Microsoft CRM. Says Holzthum: "Although Microsoft is initially launching Microsoft Dynamics CRM Live as a direct SaaS, we're excited that Microsoft has shown intentions that [it] will be working with partners with value-added solutions, such as Genesys, to bundle complete solutions to meet enterprise customer interaction needs. We believe that Microsoft, consistent with its past strategies, will make these adjustments to open up Microsoft Dynamics CRM Live in order to leverage its traditional partner ecosystem."

Microsoft CRM Quick Facts




5. Lowering set-up fees for hosted CRM. Many scenarios involve Microsoft and its partners chasing new customers that might previously have gone to (assuming that Microsoft rolls out an acceptable partner-compensation model). There's one area where Microsoft's and its partners' interests aren't so clearly aligned: partner-hosted CRM.

A handful of partners jumped on board with Microsoft in mid-2006 to offer partner-hosted Microsoft CRM. Among them is Streamline Solutions, a Gold Certified Partner with headquarters in Newport Beach, Calif., which had one of the first named customers to buy hosted CRM through a Microsoft partner.

For Streamline Solutions President Lance McLean, multi-tenancy offers clear advantages: "Multi-tenancy will allow us to leverage our hosted infrastructure better and pass on more competitive prices to our customers. In the single-tenant world, we have to charge setup fees because they're sitting on a dedicated box."

According to Wilson, the market opportunity for hosting companies like Streamline Solutions should expand once Titan is released with its switch from single-tenancy to multi-tenancy. "By being single-tenant today, the model skews toward the upper end for us," says Wilson, citing the higher costs of implementing solutions. "Multi-tenancy gives you good economies of scale, especially when you're going to provide Software as a Service for small businesses. You don't want to do a separate server for every three companies. We think partner-hosted CRM will probably take off more once [multi-tenant] Titan is here."

Microsoft has assured its hosting partners that Microsoft Dynamics CRM Live will focus on "vanilla" CRM implementations that will appeal mostly to small customers. But that's still a potential area of conflict between Microsoft and its partners. As multi-tenancy allows partners to more economically host solutions for smaller businesses, they may come into conflict with Microsoft over that group of customers. At the same time, Wilson acknowledges that the large enterprises that are the most lucrative customer set for hosting providers may come knocking on Microsoft's door.

While Wilson says Microsoft is definitely positioning Microsoft Dynamics Live as a small-business play, he says, "I can guarantee you that no matter how I point it at small and midsize businesses, I'll have bigger customers asking about it. Once we open it up, it'll go where it goes."

The SaaS Big Picture
Even as Dynamics CRM partners explore the new business angles that Titan uncovers, Microsoft's approach to Dynamics CRM Live provides a case study in how the company is applying its impulses on Software as a Service into action in a real market. From the clues Microsoft is leaving in the CRM space, the company's SaaS strategy appears to include:

1. Adopting a blended approach. The SaaS opportunity is most evident when a company like is blazing a Web-delivery-model trail into a market. Microsoft, however, is not eager to throw away existing cash flows in installed software to maximize revenues on a pure SaaS delivery. This reluctance was evident when Ray Ozzie started recasting Microsoft comments about SaaS as "Software Plus Services" last year. The lesson: In the case of CRM, Microsoft will try to rake in as much revenue as possible from on-premise installations and licenses and offer the Dynamics CRM Live only as a source of additional revenues.

2. Following market leaders. It's noteworthy that Microsoft's first major business application being offered in a Software as a Service model isn't spotlighting a brand-new opportunity. Instead, it's following on an opportunity that has been delivering on for years with a business that shows solid year-over-year growth. Whether Microsoft feels forced to respond, is attracted by the revenues, or both, this landmark foray into SaaS for Microsoft goes where others have gone. The lesson: Watch for Microsoft to enter SaaS markets where some other player is already succeeding.

3. Hauling partners along. The long-term implications of Software as a Service are cloudy for the Microsoft-partner relationship. However, in the Dynamics CRM Live case, Microsoft seems to be trying hard to make room and create opportunities for partners. For such a sea change, it's disappointing that Microsoft apparently won't fully explain the partner revenue model until other, more pedestrian pricing details would normally be released. Still, it's a wrenching set of decisions for Microsoft. The lesson: As long as Microsoft intends to keep its revenue streams blended, it must have help from its existing partners.

4. Allowing for some potential channel conflict. Some SaaS-related channel shakeups will be messy, especially at the edges. As Microsoft explores new models, some will work, others will not, and Redmond's tactics will change. The lesson: A fairly minor adjustment for Microsoft can be a huge deal for a small partner that happened to line up with the wrong Microsoft initiative. It's not clear yet that partners who committed to hosting Microsoft CRM are in this boat, but that possibility definitely exists.

5. Opening up new partner opportunities. Partners that have the best understanding of the technology, Microsoft's strategic objectives and their markets stand the strongest chance of finding exciting new opportunities as Microsoft introduces SaaS layers to its existing product delivery mix. The lesson: Of course, there's always danger in being first. Betting wrong or too early can lead to trouble (see No. 4). But betting right could make your company a household name.