In-Depth

Making Sense of the Dynamics Business

Is Microsoft's Dynamics business holding strong or dropping fast? For partners and industry experts alike, that question is especially tricky to answer these days.

• By Rich Freeman
• March 01, 2009

After all, in October 2008, Microsoft reported that customer billings for the four ERP applications and one CRM solution in its Dynamics product line grew 10 percent in the first quarter of the 2009 fiscal year. That's down sharply from the 18 percent growth the company recorded in the previous year's first quarter, and the 19 percent Q1 growth it enjoyed the year before that.

Moreover, in the last eight months alone, Microsoft's U.S. Dynamics organization has shaken up its partner management team and announced a senior leadership, with Dave Willis, a former Microsoft regional executive, succeeding Craig McCollum as vice president of sales.

Sounds like trouble, right? Not so fast. Given the reeling state of the global economy, 10 percent growth is arguably pretty brisk. And if Microsoft is anxious about Dynamics sales, it's sure doing a good job of hiding it. "We're continuing to see growth," says Doug Kennedy, vice president of Microsoft's worldwide Dynamics partner organization. "We're seeing some of the opportunities slip a little bit, but not the majority of them."

Meanwhile, just to confuse matters further, many Dynamics partners are sounding downright cheery these days. "We had a record-setting 2008, both in revenue and profits," says Jeff Creighton, vice president of operations for Gold Certified Partner Computer Support Services Inc. (CSSI), a business solutions provider with headquarters in Lewisburg, Pa. So what, he asks, if demand has been softening a bit lately? "In general, we're looking for an up year." Same goes for Green Beacon Solutions LLC, an ERP, CRM and marketing automation integrator and Gold Certified Partner based in Newton, Mass. Sure, customers are taking a little longer to approve new purchases. "But it hasn't really affected our revenues at all," says Sharon Ward, Green Beacon's director of solution strategy.

To borrow from Alice, of Wonderland fame, it's a picture that gets "curiouser and curiouser" the more one looks at it. Is Microsoft's Dynamics business in freefall or holding strong in a brutal market? It could be months before anyone knows for certain.

Mysterious Numbers
Of course, it would be somewhat surprising if Dynamics revenue wasn't sliding given overall trends in the business solutions market. IT analyst firm IDC expects ERP spending worldwide to grow 5 percent in 2009. "That's much slower growth than what we saw a few years ago," observes Albert Pang, IDC's director of enterprise applications research.

Moreover, recent sales figures from Microsoft competitors seem consistent with that tepid outlook. Last September, for example, Redwood Shores, Calif.-based Oracle Corp. reported a 9 percent revenue increase for its applications business in the first quarter of fiscal 2009 as compared with the same quarter a year before. That sounds good until you consider that application revenues were up a whopping 36 percent in Q1 of fiscal 2008 versus Q1 of 2007. Meanwhile, Oracle's second quarter application revenues came in at $1.484 billion this year, a scant $2 million more than the same quarter 12 months earlier.

"Lots of projects that were sold in the beginning of the year are keeping the services teams busy." Jeff Pyden, Managing Director, OmniVue Business Solutions

Oracle, however, concentrates more heavily on the enterprise market than Microsoft, making its financial results an imperfect point of comparison. Yet business isn't looking much better for The Sage Group plc, a U.K.-based maker of business solutions for small and midsize companies, including the Peachtree accounting program and ACT! contact management system. Its revenues grew an anemic 4 percent worldwide in the second half of the 2008 fiscal year-and they actually dropped 2 percent in North America during that period.

Still, Microsoft's quarterly reporting practices make it difficult to know whether Dynamics is performing better or worse than that. Since July 2006, Microsoft has issued a single set of results for its entire Business Division, which, in addition to the Dynamics line, is responsible for Microsoft Office, Exchange Server and numerous other products. Moreover, the key metric it does break out separately for Dynamics -- "customer billings" -- differs somewhat from the revenue numbers other business solution vendors report. Revenue, Microsoft says, is subject to accounting rules governing when sales can and can't be recognized. Customer billings, however, encompass everything the company charged someone for in a given period, making it a "pure measure" of how the Dynamics business is truly faring.

The upshot of such reporting peculiarities, though, is that even veteran Microsoft-watchers have difficulty assessing how well or poorly Dynamics is doing. "You can intuit opinions, but you can't look at a balance sheet and say 'There are the numbers,'" observes Chris Alliegro, who covers Dynamics for Directions on Microsoft, the Kirkland, Wash.-based analyst firm. The sharp decline in customer billings is a worrying sign, Alliegro notes, but it serves as inconclusive evidence that the Dynamics business is struggling. "Based on that one number, you can't really say with much confidence one way or the other."

Cushioning the Impact
That Dynamics partners generally claim to be doing fine at present only further muddies the waters. Perhaps, Alliegro speculates, they simply haven't felt the slowdown yet, thanks to all the in-process deployments they're still completing. Implementing an ERP or CRM solution is a lengthy process, after all, and difficult to cancel midstream. Indeed, at least some partners say that services rather than new software licensing is what's fueling growth at present. "Lots of projects that were sold in the beginning of the year are keeping the services teams busy," reports Jeff Pyden, managing director of Gold Certified Partner OmniVue Business Solutions, an Alpharetta, Ga.-based reseller that focuses on Dynamics GP, SL and CRM.

Furthermore, even upbeat partners are starting to feel bumps in the road. CSSI, for example, has recently seen several Dynamics deals go up in smoke at the last minute when customers decided instead to buy QuickBooks, Intuit Inc.'s comparatively bargain-basement accounting package for small businesses. And many partners say customers are taking longer to make up their mind these days. "They're being exceptionally cautious in terms of wanting to make absolutely sure they're making the right decision," says Ward, of Green Beacon Solutions.

Even so, several factors may be cushioning the sluggish economy's impact on the Dynamics channel. For starters, ERP solutions have simply become too strategic for most businesses to do without, even in a recession. "They still need to run their business, so they still need the services we offer," says Sandra Glick, president of Gold Certified Partner CriticalEdge Group Inc., a Dynamics GP and CRM reseller in Hamden, Conn. Moreover, some partners are already seeing their clients gear up for an expected recovery now by upgrading their business software. "Customers are using this time to get themselves ready for the next rise in business," says Ed Cowen, president, CEO and sole employee of TTD Enterprises LLC, a Dynamics GP and CRM reseller and Registered Member in Schaumburg, Ill.

In addition, Microsoft and its Dynamics partners enjoy some critical advantages relative to key competitors such as Oracle and SAP AG of Waldorf, Germany. Chief among those advantages: a customer base skewed heavily toward small and midsize businesses. According to IDC, global sales of ERP software to companies with fewer than 1,000 employees will climb a robust 12 percent this year to $10.4 billion. Plus, IDC's Pang adds, the sheer scale and diversity of Microsoft's Dynamics client base make abrupt revenue declines less likely. "They have hundreds of thousands of customers," he observes. "Perhaps that will allow them to weather this storm better than other vendors."

Meanwhile, many partners say that economic turmoil is actually driving greater demand for certain applications at present, including CRM solutions. "A lot of people are starting to look for efficiencies in their organizations," notes Creighton. "Things like sales-force automation and better tracking of leads are a natural extension of that." Similarly, with so many difficult trade-offs to weigh, many companies are deploying business-intelligence solutions to tap into the real-time data in their ERP systems. "If you're going to make better decisions, you need better information," Glick observes.

Pyden, of OmniVue, is also seeing increased interest in hosted business applications. So far, Dynamics CRM is the only Dynamics product officially available in Software as a Service mode, but that hasn't stopped numerous partners from delivering hosted versions of Microsoft's ERP systems on their own. Small businesses in particular often find such offerings attractive, because the shared infrastructure and subscription-based fee structures free them from costly upfront outlays on hardware and licensing. "There's a lower end of the market that's really ripe for the hosting message right now," Pyden says.

Marketing Muscle
Still, while few Dynamics partners appear to be suffering right now, Microsoft is taking steps to keep sales flowing during the recession anyway. Most conspicuously, since November, the company has been offering certain Dynamics customers 36 months of interest-free financing. "That's a pretty good deal," says Steve Reed, vice president of sales at Fullscope, a Dynamics AX integrator and Gold Certified Partner based in Athens, Ala. It's already helped Fullscope rescue several teetering opportunities.

Other partners, however, point out that those 0 percent loans are available only to "qualifying" Dynamics customers. "Their qualification standards are as strict as the outside market," Pyden notes, so customers who couldn't get credit before are generally having no more success borrowing from Microsoft. Moreover, only new Dynamics customers qualify for the program, leaving the existing customers doing much of the spending right now out in the cold. "It ends up being not as helpful as we thought it would be," Creighton says.

On a more positive note, some partners see Microsoft being more aggressive in the marketing arena. For example, the company recently helped Cowen underwrite a direct-mail campaign, and when he reported strong results, he promptly received funds for a second go-round.

Back to Basics
Of course, some aspects of Microsoft's Dynamics business have changed in the last year, including the structure of its U.S. partner management team. Microsoft has said little publicly about the reshuffling it executed last July, and was unable to provide further details by press time. However, a source close to Microsoft told RCP in December that the move involved moving Dynamics partner account managers from the field and centralizing them.

Few partners have noticed much difference. "It really hasn't had much of an impact at all," Ward says. "We had good relationships with all of the field people before and we have good relationships now." Glick, meanwhile, views the changeover as a net gain. "We still have the same partner account manager, but we're actually getting a lot more attention from him," she says. "That could be one reason our revenue is up."

Most partners have less to say about Craig McCollum's abrupt departure last December. According to a Microsoft spokesperson, the outgoing exec wanted to "spend time with his family and pursue other opportunities both inside and outside the business applications industry." But the switch caught some partners off guard. "I was shocked, obviously," Pyden says. "I don't know what happened." Just the same, Pyden admires Willis, previously a regional vice president with Microsoft's U.S. Small and Midmarket Solutions & Partners Group, and expects him to do well. Like many other partners, however, Glick isn't sure yet what to make of the new vice president. "I guess I'll find out when we meet him at Convergence," she says, alluding to Microsoft's annual Dynamics partner conference, to be held March 10-13 in New Orleans, La.

Until then most partners will have their hands full adapting to the challenges of a constantly changing market. "We're really just going back to basics," Ward says. That means zeroing in hard during sales pitches on perennially compelling topics, like ease of use and rapid return on investment, as well as subjects that gain added appeal in a weak economy, such as cost reduction. Kennedy encourages partners to propel opportunities as quickly as possible through the pipeline. "You almost have to treat every day like it's year-end," he says. With business conditions shifting so rapidly, deals on the brink of closing can vanish overnight.

The relative prosperity Dynamics partners say they're enjoying could prove equally vulnerable. Indeed, Microsoft has already removed its companywide revenue forecast for the 2009 fiscal year in anticipation of further economic misery. "It's hard for me to imagine the Dynamics partner channel won't be impacted by that," Alliegro says. For now, however, Fullscope's Reed isn't worrying. Recession or no recession, he says, certain fundamental sales rules continue to apply: "If I'm walking in the door to a business and I'm able to demonstrate to that business that by spending $1, they're going to save $2 or it's going to put them in a position to make $5, they're always willing to hear that."