In an earlier blog post we discussed Microsoft’s commitment to the cloud, looking at how Office 365 can help partners migrate to the cloud. However, most enterprise VARs and system integrators add more value and make more margin with Microsoft’s ERP packages than they do with Office 365. So, time to take a closer look at the cloud opportunity of Microsoft Dynamics.
What kind of market are we talking about?
Microsoft Dynamics consists of three offerings: CRM, NAV and AX, all part of Microsoft’s Business Division (MBD) Unit. MBD continued to grow 16% in FY 2011 to $22.2B. Microsoft Dynamics accounts for roughly 10% of the MBD revenue, approximately $2.2B (worldwide).
Of these MBD products, Office 365 and Microsoft CRM are available on a SaaS basis. Dynamics NAV is planned to be cloud ready somewhere in 2012, to be followed by Dynamics AX. In summary: the numbers are not that impressive and the planned release dates for ERP is still in the distant future.
What is the competition up to?
SAP, Infor, Oracle, Exact and UNIT4 are Microsoft’s strongest competitors in the Benelux ERP market. Exact and Unit4 are probably most competitive in the mid-market space, where Microsoft is most active. Let’s take a closer look at their numbers.
UNIT4: Overall revenue in 2010 increased by 11% to €421.7 million. Their 2010 SaaS revenue grew in 2010 by 31% to an amount of €26.8 million. And for the first 6 months in 2011, Unit4’s SaaS subscription revenues grew 53% from €12.4 million to €18.9 million.
Exact: Overall revenue in 2010 was €228.2 million. Exact’s SaaS offering – Exact Online – has some 61,700 commercial administration users in the Benelux, and keeps growing at a rate of more than 50%. The specific focus to migrate customers from older product lines to Exact Online continues to be successful with 18% of the Exact Online customers having migrated from another Exact product.
So, the competition have their SaaS products in place and are stepping up their marketing intensity and partner capacity. Migrating existing partners will be an important growth engine for them.
How does Microsoft respond?
Microsoft responds by making more money available ($5.8B to be precise – more than 2.5 times the size of its ERP market revenue!) to support partners with tools, training and infrastructure. This partner pot of gold will also be used for partner incentives, for example a Microsoft compensation of 40 percent to eligible partners on new subscription sales of Microsoft Dynamics CRM Online. In addition, new Software Assurance Planning Services (available as of August), will pay qualified partners to deliver deployment services to Microsoft Software Assurance customers.
Despite the partner goodie bag that´s being provided, Microsoft makes it more difficult for partners to actually get access to that goodie bag. Microsoft is moving to a two-tiered structure with Silver (minimum of two employees trained) and Gold (minimum of four certified employees) certified partners. Microsoft also requires competence certification (e.g. CRM, Dynamics, BI etc.). Despite partner concerns this is a logical step. With over 275 partners in the Netherlands, Microsoft needs to make a distinction between knowledge and capacity. It is actually one of the last vendors to do so.
What do we think?
Microsoft is late with its ERP Cloud version. And the size of the Microsoft ERP market is not as large as some of its competitors (ERP installed base market share in the Netherlands by Computer Profile show SAP 38%, Microsoft 13% and Exact 11%). This causes partners to reconsider their Microsoft investments. Netherlands based IT service provider CTB did so as well, and decided to sell its Microsoft Dynamics ERP activity to its partner 4PS. We expect to see more moves like this.
For the short-term it’s a long wait for smaller cloud oriented partners. With no visible ROI until somewhere in 2012/13 they are likely to turn to other vendors that have an online offering available. For the ones that plan to stick around and wait for Microsoft’s Cloud ERP availability, the opportunity is in the installed base. Microsoft’s ERP clients are mostly situated in the mid-size enterprise market (250 to 500 employees). It is also the mid-size enterprise market that is most likely to transition first to cloud based solutions that provide more flexibility and agility.
Next to the installed base there is the add-on sales opportunity provided by Office 365, CRM Online and other Microsoft cloud based products. Many of the existing Microsoft client base know the Microsoft ‘look-and-feel’. Once they start using Microsoft products in the cloud, ERP becomes an easier sale.
Bottom-line, Microsoft makes it easy for its partner community to get to the cloud. Microsoft’s mantra is: “If the partner community gets it, the end-user will as well”. And with over 90% of its sales indirect that is the way to go. The Microsoft ecosystem is simply too large to ignore. However, we ask, will it be worth the – long – wait?
Partners have a choice – and now it’s time to choose!
