Microsoft and SAP: Bittersweet Symphony
Microsoft and SAP have a successful Duet together, but they'll be less harmonious as they battle for ERP supremacy. Partners might be forced to take sides.
- By Lee Pender
- March 01, 2007
In the tug of war between Microsoft and rival SAP AG, Korey Lind's company
is the rope.
Lind is the CEO of service provider Third Wave Business Systems, a Gold
Certified Partner and Microsoft Dynamics GP specialist based in Elmwood
Park, N.J. Third Wave is also a partner in the SAP Business One program,
and those two affiliations have led to some conflicts involving two giant
vendors that are about to wage an all-out war in the market for enterprise
resource planning (ERP) software.
Third Wave is a regional firm that serves mainly small and midsize businesses
(SMBs) in the New York City area. Lind says that she felt neglected by
Microsoft when Redmond began buying ERP vendors in the early part of this
decade to bulk up what would become the Dynamics ERP suite. As a former
Great Plains (now Dynamics GP) specialist, Third Wave had relatively little
to offer the software giant in terms of competencies on the other Dynamics
platforms, AX, SL and NAV.
"[Microsoft] purchased our largest competition and gave them viability,"
Lind says. "Then [it] turned around and said, 'We need to minimize
channel conflict,' and gave leads to partners that handled multiple products."
Third Wave, which Lind says has been a top revenue producer for the
GP line, saw its revenues begin to suffer -- and they suffered more after
the Sept. 11, 2001, terrorist attacks on New York. So, encouraged by former
Great Plains contacts that had bolted for SAP, Lind signed on with the
German vendor in March 2003 to sell the Business One ERP suite for small
businesses. And that's when both sides really started pulling on the rope.
"[Microsoft] got very nervous when we picked up SAP," Lind says.
"[Redmond said], 'You're working with [SAP], we don't trust you,
you're going to take leads and give them to SAP.' I [said], 'I don't do
business that way.'"
Lind has had subsequent -- and ongoing -- discussions with Microsoft representatives
about improving Third Wave's relationship with Redmond, but says that
Third Wave now derives most of its revenue from SAP business and that
its GP business is in "maintenance mode."
Lind's story helps illustrate the scenario that many small and midsize
ERP partner companies could soon face if they want to work with both Microsoft
and SAP. Although the companies are longtime partners and last year jointly
released the new Duet application, they're also shaping up to be fierce
rivals for the lucrative ERP market in the SMB space. And as that competition
heats up, partners that serve SMBs could find themselves caught in the
crossfire of recruiting, influence and competitive pressure from two of
the most powerful software companies in the world. Some will be able to
work with both behemoths -- and others will have to choose a side.
Dynamics Growing Pains: A Special
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:
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.
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 .
Gibbons Paul explores how the GP, AX, NAV and SL
Dynamics suites are coming together, and what their
gradual integration means for partners.
A Duet That's Mostly in Tune
Read SAP's Web site about the company's relationship with Microsoft, and
it's easy to come away with the sense that the two competitors are actually
the closest of friends.
"Microsoft, the leader in desktop productivity solutions, and SAP,
the leader in enterprise business applications, are strong partners. The
partnership has delivered significant value to customers for more than
15 years," the site brags.
The two companies do have a history of cooperation and mutual benefit.
For example, SAP's monster ERP suite, R/3, has run on Windows since 1993.
And given that it runs on SQL Server in many environments, R/3 is a major
driver of license revenue for Microsoft, says Andy Vabulas, CEO of I.B.I.S.
Inc., a Gold Certified Partner and solution provider based in Norcross,
"SAP accounts for a huge percentage of SQL licenses," Vabulas
says. "It's natural for [Microsoft] to want to work with other application
providers so [it] can continue to have the market share [it needs] to
Coopetition with SAP can also provide Microsoft with an opportunity to
show off the flexibility of its development platforms, says John Payes,
director of the Microsoft Global Alliance at MontrŽal-based Nakisa
Inc., a Gold Certified Partner and software vendor that develops for SAP
human resources applications using Microsoft's .NET platform.
"Microsoft introduced us to SAP," Payes says. "When you
look at .NET as a platform, Microsoft's interest is to show the software
community the interoperability message of .NET being able to integrate
with other vendors. When you think of this coopetition that [Microsoft
has with SAP], it's really around .NET. If [Microsoft wants] to continue
to attract more ISVs, it's always good to show that [the company is] not
limited to one particular vendor."
Expanding on the cooperative end of their relationship, Microsoft and
SAP worked together in 2006 to release Duet, which gives users access
to back-end SAP applications through the Microsoft Office interface. Office,
Vabulas says, is another Microsoft staple that reaps the benefits of SAP-driven
licenses. Released in mid-2006, Duet had racked up more than 200,000 licensed
seats by November, according to a laudatory press release issued by the
two companies. An enhanced version, Duet 1.5, is due out this summer.
But Duet is about more than just giving SAP users a familiar interface
and driving Office license revenue for Microsoft. James Utzschneider,
general manager of marketing for Microsoft Dynamics, says that the company
is also using Duet as a tool to get users accustomed to working with back-end
systems through the Office interface -- a move that he says gives Microsoft
a pipeline to ERP market leader SAP's well-established customer base.
"These big R/3 implementations aren't going anywhere," Utzschneider
says. "These big ERP applications are the software equivalent of mainframes
in the '90s. Early on in that process, Unix and Microsoft people were
thinking we can replace mainframes. We never really replaced mainframes.
We just surrounded them with millions of middle-tier application servers,
database servers and Web servers. The same thing is happening in the transitional
Duet will also allow Microsoft to show that it's serious about ERP, Utzschneider
says, and move into companies with Dynamics, especially at the branch-office
or foreign-subsidiary levels.
"As the scalability of our products improves, we find that there
are larger midmarket companies and enterprises that say, 'For our factory
in Vietnam, we can deploy Dynamics for less than a SAP system, which costs
as much as the factory,'" Utzschneider says.
R/3 and its successor, mySAP, are the massive suites that made SAP the
dominant player in the ERP space. But Dynamics partners competing with
SAP are more likely to run into the company's two midmarket offerings:
SAP All-in-One, a suite for midsize businesses based on mySAP; and Business
One, an application for businesses in the $10-million-to-$100-million
range, which is built on a separate code base from that of mySAP. That's
because, with the market for large enterprises already saturated -- largely
due to SAP's dominance in that area -- both Microsoft and SAP are vying
for customers in the lucrative SMB space. And with 1.4 million midsize
companies worldwide, the market holds plenty of opportunity for both players.
The enterprise resource planning (ERP)
market, which took a hit at the outset of this decade
in part because companies were preparing for Y2K, has
recovered. In numbers released in October 2006, AMR
Research Inc. estimated that corporate spending on ERP
would total $29 billion for the year, compared with
$25.4 billion in 2005. The report also predicted that
the market will grow at an average of 10 percent annually
over the next five years.
AMR also predicted that companies would
increase their ERP budgets by an average of 12.3 percent
in 2007, compared with 2006. AMR Senior Vice President
Jim Shepherd signaled the market's rejuvenation with
his comments in announcing the research results last
fall: "This year and next will experience levels of
ERP investment that we haven't seen since the late 1990s.
At that time, new customers were replacing legacy systems
with ERP suites. Today, spending is driven by a healthy
mix of new customers, consolidation projects, add-on
applications and deployment to additional users." --
SAP, for better or worse, built its reputation and its empire on large
enterprise deployments. Troubled implementations at high-profile companies
such as Whirlpool Corp. and The Hershey Co. drew some bad publicity for
the company in the late 1990s, and the perception of SAP software as expensive
and unwieldy lingers to some extent.
"There's always going to be people [who] talk about any of the SAP
implementation horror stories," says Dan Kraus, vice president for
Business One at SAP. "They've become urban legend. When we look at
the problem implementations that are out there, they're almost never tied
to software. They're almost always tied to expectations and change management.
SAP has gotten very good at the change-management process."
And SAP has established itself, according to market share numbers from
Boston-based AMR Research Inc., as the runaway leader in the ERP market.
As a result, the German giant remains top of mind for many IT professionals
when they're considering ERP implementations. It's that mindshare that
the company hopes will help it continue to move down-market, Kraus says.
More Than Just a Duet
Microsoft Dynamics and SAP have a budding
rivalry in the enterprise resource planning (ERP) space,
but they're not the only two competitors in the market.
In fact, Microsoft, as a relative newcomer, trails Oracle
Corp. and Newcastle, England-based Sage Group plc in
revenue share, according to numbers released late last
year by AMR Research Inc.
AMR estimated that SAP controlled 43
percent of market share by application revenue in 2006,
followed by Oracle with 23 percent, Sage with 5 percent
and Microsoft with 4 percent. SAP and Oracle now represent
65 percent of new license sales, AMR reported.
Microsoft, however, has made it clear
that SAP is its target in the ERP space, not Oracle,
says ERP consultant Joshua Greenbaum. What's unclear
is whether Microsoft, which is targeting Oracle's Siebel
CRM (customer relationship management) application with
its own Dynamics CRM offering, can also challenge the
second-largest ERP player.
"The direct competitive threat to Oracle
that hasn't been stated as clearly as it could be,"
Greenbaum says. "Microsoft CRM is going after Siebel
implementations in a very direct way. This is really
attacking a core acquisition of Oracle. The larger question
is: Is it really going to take a chunk out of Oracle's
business? The jury is still out on that. -- L.P.
"We're able to talk about the stability that a company the size of SAP
brings to this marketplace," Kraus says. "Business management is all SAP's
ever done. It's our core focus."
But Microsoft, with its cobbled collection of midmarket ERP suites,
already has a foothold in the SMB space, notes Joshua Greenbaum, principal
at Berkeley, Calif.-based Enterprise Applications Consulting. New innovations
from SAP, though, including a deployment methodology based on business
models, could put pressure on Dynamics.
"Microsoft is more established in the SMB market," Greenbaum
says. "SAP is looking at some very dramatically different approaches
to the SMB market that are going to have a tremendous impact on Microsoft.
Microsoft right now is sitting relatively pretty in terms of the lower
end of the market, but SAP is not intending for that to be comfortable
Microsoft-SAP battles won't all be contained in the SMB market, though.
As Dynamics matures and if Microsoft delivers on its promise of an integrated
suite in the years to come, SAP could eventually find itself with a battle
on its hands even at the higher end of the market (see "Getting
Serious about ERP," June 2006).
"Right now, the way the two companies are constituted and the way
their strategies are set up, the real competition is going to be more
at the higher end than at the low end," Greenbaum says. "I don't
think anyone at SAP is taking those threats lightly. The seriousness with
which [SAP takes them] is tempered by the fact that Dynamics is more of
a future serious threat than an immediate serious threat."
Torn Between Two Vendors
What all this competitive furor sets up is a dilemma for some partners
in the ERP space, especially smaller partners that already work with both
Microsoft and SAP or that are considering doing so. Global systems integrators
-- giants such as Accenture and BearingPoint Inc. that have long worked
with SAP -- are now moving to establish Dynamics practices, Greenbaum
says (for more on the subject, see Greenbaum's new column, "Dynamics
Perspective"). But, he adds, SAP hasn't been as successful luring
smaller partners into its fold.
"The partners that Microsoft has attracted to Dynamics are usually
much smaller and very Microsoft-centric as opposed to enterprise partners
that SAP is able to attract," Greenbaum says. "SAP hasn't been
able to offer that big of a channel for Business One and All-in-One. They've
had a little problem recruiting partners. I don't think the cannibalization
[of the Microsoft channel] has taken place as much as anyone feared or
SAP's struggle to entice Dynamics partners hasn't been for lack of effort.
The company held a partner recruitment event at Microsoft's Worldwide
Partner Conference in Boston last July, I.B.I.S.'s Vabulas says. "Nobody
that I knew went," he says.
Microsoft, too, has been raiding the SAP partner base. Despite stories
like the one Lind tells about Third Wave, Utzschneider says that Redmond's
managed to hold onto its Dynamics partner base while picking up new SAP
partner recruits at the same time.
"I know that SAP would swap our channel for [its] channel in a heartbeat,"
he says. "We're always recruiting [its] channel partners. We don't
see defections. If anything, we're getting partners from [SAP]."
SAP's Kraus says that Microsoft's recruitment of SAP partners has "gone
by the wayside" and that his company continues to build its base
in the SMB channel. SAP, though, is not a pure channel company, at least
not in terms of license sales. Although Kraus says that partners handle
all SAP consulting, SAP's channel provides licenses without the involvement
of the company's direct sales force only when selling to customers with
annual revenues of less than $100 million. SAP employs a hybrid approach
with direct and channel sales for companies in the $100-million-to-$500-million
range and uses only its direct sales force for its largest customers.
And while Lind says that Third Wave is not experiencing any conflict with
SAP direct sales, Vabulas says that SAP is employing a direct sales strategy
more heavily in the midmarket.
"The trend over the past few months is that more direct SAP sales
guys are coming to compete against us instead of the traditional partner
channel focused on the midmarket," Vabulas says.
In any case, each vendor is out to bulk up its channel presence. That
means partners can expect incentives from each company -- but it could also
mean that they'll have to choose between the two. Working with both Microsoft
Dynamics and SAP is primarily the domain of global systems integrators
that have the capacity to develop competencies in both systems, partners
and Greenbaum agree.
Plus, it's not easy, and maybe not worthwhile. "It's very hard for
a partner that's not a large company to have multiple product lines and
have experts in both [systems]," Vabulas says. "I haven't seen
anybody be successful having both of them together in the last few years.
A company that's 100 people or less is going to struggle with that because
of the bandwidth."
In Greenbaum's opinion, the best option for partners that want to work
with both ERP suites is focusing on developing business processes rather
than implementing and conducting maintenance on the systems themselves.
But that, too, is a challenge.
"It's possible for a very savvy SAP partner with a lot of top-notch
business talent to be able to dabble in both environments," Greenbaum
says. "Then the real value-add is business savvy and not technology.
As long as the partnership requirements are around technical implementation,
it's going to be hard for anybody to straddle both environments. The [partners]
who are technology traditionalists can't make that shift. It means understanding
a vertical industry as well as or better than the actual practitioners.
Getting that business-level knowledge infused into this technology model
is not easy to do."
Rivalry in the Spotlight
Although Microsoft and SAP are hardly the only two players in the ERP
space -- Oracle Corp., for instance, currently has a stronger foothold
than that of Microsoft -- Redmond has made it very clear that SAP is its
main target. "Microsoft is going after No. 1 and ignoring Nos. 2 through
4," Greenbaum says.
All of which leads to increased visibility for both Dynamics and SAP.
"I think that people, when they're looking at solutions, they understand
that both SAP and [Microsoft] are long-term players in the space,"
As for Lind, she says that Microsoft's marketing of Dynamics, which began
in earnest last year, has also helped the SAP side of her business. "When
Microsoft starts talking about SAP being its main competitor, it gives
SAP credibility," she says. "I think it has helped."