In-Depth

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.

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 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.

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, Ga.

"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 be successful."

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 Montr┼Żal-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 [ERP] space."

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.

Up-Market, Down-Market
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.

ERP Renaissance

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." -- L.P.

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 for Microsoft."

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 thought."

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," Vabulas says.

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."

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