Microsoft’s Mandate for Change

I spent part of last week in the Seattle area at a small meeting Microsoft organized for analysts. The purpose was to brief us on product positioning and plans, and much of the meeting was covered by non-disclosure. Consequently, I am at a loss for how much I can divulge in this setting, at least until things are announced.

I am fine with NDA information, and the Microsoft presenters were generally good at stating what was on or off the record, though there were a few times when the presenter said, “Some of this is NDA.” “Great,” I’d think, “which part?” And inevitably the presenter would default to, “We’ll get back to you.”

Not a big deal, just the reality of dealing with a big company.

10 Years Later

As a practical matter, though the particulars of the meeting were interesting, the non-NDA facts that are generally available on the Internet tell an interesting story fairly well.

At US$62.484 billion in revenues, Microsoft is one of the biggest technology companies. More than double the size of Oracle and four times SAP. It is also about two thirds as big as IBM. Of course, each of these companies got to its position in a different way, and the comparison is less important than what these large numbers say about the market power that each, especially Microsoft, wields.

More interesting still is this consideration: The last time the world paid massive attention to its back-office computing needs was Y2K, a term made famous because companies everywhere had to update their back-office systems to accommodate four-digit date formats. Rather than heavily edit aging mainframe and AS400 applications to account for the new millennium, companies en mass scrapped their big iron and took on lighter ERP applications that ran better and cheaper.

But that was 10 years ago. It was so long ago that client server was the main computing metaphor, social networking was barely on the horizon, CRM didn’t have an agreed-on name and you could actually board an airplane without taking your shoes off. A great deal has changed in the intervening decade, especially in software — enough to make it worthwhile to reexamine existing systems with an eye toward taking advantage of improvements to both economize and to take advantage of new business processes.

Microsoft’s Role in ERP

Forgive that small digression, but it was necessary to fully illustrate this point: Microsoft is many things, and one descriptor that should not go unremarked upon is that it is an ERP company. It is an ERP company at least as much as — and maybe more than — it is a CRM company, at least by the measure that Microsoft has three ERP products.

The ERP replacement cycle, driven by a need for economy, plays to Microsoft’s advantage because it offers products that operate in the cloud as well as on-premise, and the company is agnostic about where the products run. In fact, all competitors in the front and back office have come to the realization that running applications via cloud computing is a growth industry.

Oracle has a grid computing offering, SAP is debuting cloud-friendly products and a raft of smaller companies such as NetSuite are intent on becoming the next big thing, just as many of today’s incumbents displaced mainframes a decade or more ago. But Microsoft is different, coming from a background of small and inexpensive systems compared with the big-project and big-license solutions from the traditional vendors.

Microsoft appears to be executing on a classic strategy of gaining footholds in key areas and expanding on them, leveraging its low-cost cloud infrastructure to tip the balance in favor of replacing 10-year-old ERP systems.

Waiting on Multitenancy

Much the same can be said of CRM. Where first-generation CRM systems are nearing end of life, Microsoft is confidently offering replacement systems that have been the beneficiaries of significant investment over the last several years. These systems also run on cloud infrastructure, though cloud does not necessarily mean multitenant.

Microsoft and others — with the notable exceptions of companies like NetSuite and Salesforce.com — have decided to kick the can down the road with regard to multitenancy. While multitenancy might have advantages, it is not advantageous enough yet to push the issue. As a result, it may have to wait 10 more years — until the next wholesale replacement cycle — until multitenancy becomes more of a standard.

So adding up three key factors — the market cycle, cloud computing and the market reach enabled by more than $60 billion in revenues and the marketing budgets that implies — and a picture emerges of an imperative for change to lower-cost systems that can easily drive the recovery in IT.

Of course business products aren’t sold in shrink-wrap at retail, and success will depend on the performance of the partner ecosystem. But the partners have been a solid part of Microsoft’s success all along. Nonetheless, some attention to elevating their games will be essential if Microsoft expects to reach a new plateau in enterprise computing. I think they know that.