Talk of the cloud at Microsoft Convergence is not as rampant as some people thought. Instead, Microsoft has been emphasising the features of Dynamics AX 2012 while giving a vague sniff of its cloud intentions.
AX is its solution for larger enterprises many of which have traditionally been in the manufacturing industry. Of the three acquired business applications - AX, NAV and GP - it was always AX that was closest to Microsoft's .NET architecture but it had a fatal flaw. Primary support was for Oracle database. Not exactly something Redmond would be keen to see perpetuated. With version 2012 and a clutch of acquisitions, Oracle is gone and Microsoft is now pitching AX in two ways.
First it wants to be the go-to Tier 2 vendor in SAP/Oracle deployments, principally in manufacturing but also in four other verticals: wholesale distribution, public sector, retail and professional services. It says that with the 2012 release plus Sharepoint and Office 365, it has the bones to reach not the typical 30% of an organization that an ERP embraces but 70-90%. That's quite a feat but, and this is where it starts to get interesting, it wants to become the core ERP for industry master vendors. Let's take a step back.
The other week, I met with Jim Hageman Snabe, SAP co-CEO. He said that legacy vendors might consider using SAP Business ByDesign as the core for what they offer rather than trying to continue develop legacy ERP code. It struck me as an intriguing proposition at the time. (See 4 minute video) This week, Microsoft is saying something similar but going after a much larger slice of the pie because it is already fleshing out core capabilities across five major industries. It sets up an intriguing picture of how ISV strategies might look going forward.
As an example, Microsoft talked about Lexis Nexis. They are a large European provider of specialist software for lawyers. Microsoft is providing core ERP plus case management (a carve out of part of the AX professional services solution) as a starting point. This allows LexisNexis to concentrate on its core competency while being assured that Microsoft will deal with the core transaction and management engines. In public sector Tyler Technologies is taking AX as the core for its offering. Aldata in retail and distribution is doing something similar. Collectively, these three businesses generate total revenue of around $3.5 billion. If Microsoft can snag just two percent of that total in license fees then it automatically acquires something around $70 million in accretive revenue. Add in the prospect that these businesses might join Microsoft and go 'all-in' with the cloud and that figure could go way higher as customers of these businesses expand their technology footprint and usage.
None of this is going to happen overnight. Colleague Ray Wang tested sentiment at the event and reckons that around 20% of Microsoft customers will upgrade in the next 12-18 months. That sentiment may not play out in the same manner in the industries to which Microsoft currently refers. Some may move more quickly, others more slowly.
Where else might such a strategy work? A lot depends on how you want to break down verticals into sub markets within the five main markets Microsoft has identified. I can for instance see the company going after channel masters in other professions. CCH in accounting springs to mind. Functionally, CCH provides solutions that are not not a million miles distant from what lawyers need. It is part of the $4.7 billion Wolters Klewer empire of professional services providers.
Regardless of which companies Microsoft chooses to target, the fact it can point to three large players in sub verticals willing to bet on Microsoft at the business applications level is one heck of a vote of trust. It is a recognition that developing ERP in the modern age is no longer an option for some industry vendors but one best left to those with financial and development muscle.
AX has always been what I consider the unsung hero of the NAV, GP and AX triumvirate. In making this move, Microsoft is starting to cash in on its investment, beef up the offering and put itself into pole position as a vertical market ERP arms dealer for the mid-market. It now has to stay committed to the AX core while deepening Sharepoint and Office links. Anyone want to bet there will come a day when the three are seamlessly bundled?
In recent years, Microsoft has been relatively quiet about its business applications aspirations. If it is successful in pursuing this line then it sets up an interesting competitive scenario between itself, SAP and Oracle. As I said above, SAP is the other company thinking about placing this type of bet albeit their emphasis is on growing through their cloud based ByDesign solution. We've heard nothing from Oracle. Microsoft has a massive partner ecosystem it can mine for opportunities. SAP less so except those as yet un-named ISVs that may look at ByDesign as a second string. Oracle has nothing as substantial as either of the other two players.
There is another aspect to this. While the media laps up the chirruping coming from cloud players, none of them come close to Microsoft's pervasiveness across as many industries as you'd like to mention. Microsoft only has to pick off a couple of dozen reasonable sized players in similar fashion and convince them of AX's viability. If it is successful then Microsoft becomes the stealth competitor to SAP, Oracle, Infor and whatever Epicor/Activant becomes. In doing so through partnership, it solidifies its ERP credentials without having to employ a single sales person. It signals to the world a continuing investment that locks swathes of customers to any technology direction it chooses. That's a smart business model. If it works.