Microsoft's Value/Volume Dilemma

For five years, Doug Burgum has walked the value/volume tightrope at Microsoft.

He has reassured ERP value-add partners that their model is safe in the hands of a company noted for high-volume sales of low-margin software. And, to be sure, the margins earned on ERP have stayed stable even five years after Microsoft bought Great Plains Software.

Now with Burgum set to step back from day-to-day responsibilities as senior vice president of Microsoft Business Solutions to become chairman of MBS, some partners worry that they will lose their highest-ranking advocate for a high-value-add sales model at the company.

Burgum dismisses that notion out of hand, promising to stay active, to even take on more of a public role with customers and partners and continuing to influence the direction of MBS, which last quarter posted its first profit.

During what is probably his last keynote speech at the MBS annual Convergence show as operational lead, a sometimes tearful Burgum spoke about the value of good relationships and straight dealing between businesses, their partners and customers (see sidebar).To most of the 7,000 partners and customers gathered in Dallas last week to hear the latest on MBS plans, the progress report was pretty perky. Most of what was promised last year actually happened. There were some MBS-specific glitches, however. Many legacy partners dislike the new Dynamics brand strategy overlying the old Axapta, Great Plains, Navision, Solomon and CRM names. They say there is no brand equity in Dynamics, and many are refusing to change their own Web sites and labeling to reflect the change.

Microsoft executives assert that the rebranding was done to appeal to a broader audience of potentially new users and is succeeding in that.

There was the promised Project Green that was to move all the product lines over to a new unified code base. That has been scaled back and been made more evolutionary—with each product getting incremental updates moving forward to what will be, in theory, a converged set of code merging the “best of” features of each line.

But scratch the surface and there was some curiosity among partners about how important this business apps push is to a huge software company with equal or bigger bets in consumer wares like Xbox and MSN and in preserving its dominance in operating systems and productivity apps.

Anxiety became even more acute with recent news of the embarrassing slippage of the Vista Windows client into next year for all but volume buyers. Could it be that Microsoft has bitten off way more than it can chew? And if so, how committed is it to MBS which, after all, made only $10 million in profit last quarter, its first profitable quarter after years of amortizing the cost of the Great Plains and Navision acquisitions?At the time of the buyout, many legacy Great Plains VARs viewed the Microsoft takeover with more than a little fear and trepidation. They saw their bread-and-butter tech provider—most of them knew the Great Plains team on a first-name basis—swallowed up by a software giant known for bare-knuckled business practices, and a lot of other priorities.

Most fundamentally, they saw a mismatch between Microsoft’s model, which was (and remains) volume sales of low-cost software, and their own slow, methodical, up-close-and-personal ERP sales process that calls for lots of nonbillable hours spent hand-holding and assessing needs. That process by its very nature requires significantly higher margins for partners.

Steven Mulka is not a doubter. When it comes to growth opportunity for Microsoft—and its partners—“this is it,” he says, gesturing around the Dallas Convention Center, the site of the MBS Convergence 2006 event.

Mulka, a partner with SIS, a Duluth, Ga., CRM and Solomon partner, and others say Microsoft realizes that business applications are a huge, relatively untapped, opportunity. On the other hand, the Office and Windows brands can’t be seen growing much from the 90-plus percent of the desktops they already occupy. Microsoft’s attempt to stretch the “Office System” to encompass more servers and services is thus far unproven; the company can only gain more traction in supersaturated e-mail by booting out a powerful incumbent in IBM Software. And even databases, where there is some room to grow vs. Oracle and IBM, represent a pretty well- saturated market, too.

Ah … but business applications are a different story. A large number of the estimated 40 million small and midsize companies out there now run on Excel and Word. Or Act. Or a pen and paper. This is one gigantic greenfield. Brad Wilson, general manager of Microsoft CRM, says his biggest competitor is still not SAP or Saleslogix or Onyx. It remains “other.”So far, Microsoft seems to really “get” that VARs need more margin to sell ERP, especially into small and midsize accounts. The alternative is a much, much higher cost of sales flowing through a direct sales channel. And, ERP margins have held steady, from the 40 to 50 points that prevailed before Microsoft bought Great Plains, said John Hendrickson, CEO of InterDyn Business Microvar, Minneapolis, and other longtime partners.

As for other priorities, like getting Vista and the new Office 2007 out for their promised due dates, and for combating Sony and Nintendo in games, Burgum says the Redmond, Wash.-based software giant has what it takes to execute on all fronts.

Burgum had been chairman and CEO of the independent Great Plains and took on the Microsoft business apps push when Microsoft bought that company in 2001. He also helped engineer Microsoft’s buyout of Navision in 2002. Burgum has said that Microsoft will continue to respect the higher-margin ERP model.

He and other executives have sworn Microsoft will not put ERP through broad distribution. Skeptics say it is only a matter of time before Microsoft succumbs to old habits and does exactly that. They point to Microsoft’s turnabout a few years back when it promised CRM to MBS partners, then reversed and put it through volume licensing, basically halving partners’ margin in the process.

Optimists in the channel say Burgum has already done the heavy lifting when it comes to convincing other influencers at Microsoft that they need to preserve traditional MBS partner incentives to make MBS and partners alike more profitable.“He got the other senior execs to become evangelists throughout Microsoft. It takes all of them to be on this page to make it a reality and it will not happen overnight, but it is starting to happen,” said Terry Petrzelka, CEO of Tectura, a large Redwood City, Calif.-based MBS partner.

But partners know other big changes are coming. Microsoft, as it has for years, is weighing price model changes to its ERP lineup, which now sells by the module.

Sources told CRN that the company plans to switch from per-module to per-user ERP pricing as soon as this summer and offering suites of the most commonly used modules together. That in itself is not a huge concern to partners. In fact, many would welcome the simplification. They also believe that such a move would not affect margins, at least at first.

Burgum said simply that MBS continues to weigh options—as it has for years.

“Our high-level principle has been … simplicity and transparency and value. Right now, having inherited four pricing systems for ERP we have had a lot of complexity, a lot of granules and modules in ERP. Navision folks even vary theirs by geography,” he noted.Burgum says the company has made incremental progress sorting through all this. This year it is piloting per-user-based pricing for Navision in Europe.“With simplicity comes shorter sales cycles and higher customer adds,” he maintains.

With Oracle and SAP driving downmarket with ERP solutions priced simply by the user, many partners say Microsoft must respond and respond soon. Others advise caution.

The company has already experimented with some suite pricing in manufacturing and distribution verticals, said Linda Rose, CEO of Rose Business Solutions, San Diego. “They have offered a suite for 12 users of all these modules, some of which the users don’t need, but the pricing is so good they go for it.”

But Rose and others said there is only so much you can do to simplify what is, in essence, a very complex sale. The current list of modules for all four ERP product lines now prints out to a very concentrated 15-page, single-spaced list of options. “To order, you’re always going to need to know what you’re doing,” Rose said.

Burgum says the company remains in research and analysis mode. “When the channel is at the heart of all you do, pricing decisions become much more sensitive. You’re not just raising price to the customer, you’re changing the business model of the partner and need to be very deliberate and transparent.”Partners queried by CRN about a move to per- user pricing were largely bullish. They didn’t see it as a threat to margin and added that it could potentially boost sales. For them, as always, margin is paramount.

Said one California partner: “You know, it is all about margins. If they do the same 20 percent that they are doing for CRM, you bet I will look at other products.”