Gates Lays Out Strategy for Building Better Business Software

Microsoft believes it has figured out what kind of software midsize companies need to run their finance, sales, and other operations. And it's not what it's been trying to sell them. So today, it laid out a change of strategy for its 5-year-old business-software division.

The new direction, around which it has pinned large hopes for future growth, centers on a simple but so far elusive idea: Different kinds of workers in a company use PCs differently. At an event on the company's Redmond, Wash., campus today, Microsoft officials planned to detail the new approach for its $800-million-a-year Business Solutions group. The concept is that applications should be tailored to an employee's role in a company.

Microsoft chairman and chief software architect Bill Gates said the company is investing in midmarket apps--where it lost more than $200 million last year--for the long term. "Applications can be way better than they are today," Gates said in an interview with InformationWeek. "We are putting a lot of R&D dollars into the business, and that's because we believe it can be a much bigger business. We can have a much higher share of the business than we have today."

After two years of market research, Microsoft managers have identified more than 50 everyday job roles at midsize companies they say will benefit from desktop environments created just for them--everything from a president or CFO, to account managers in a sales department, to line workers on a factory floor. Instead of dozens of screens and menus, those workers will get Web pages that show only the information they are most likely to care about, often at a glance. Companies will be able to customize those entry points into Microsoft's applications, too. Microsoft plans to deliver two dozen of these role-based applications this fall as part of upgrades to its Great Plains enterprise-resource-planning line and to its customer-relationship-management package. Next year, it plans to roll out 25 more for its Axapta and Navision business applications.

The new software spans a broad array of job titles that extends well beyond IT and operations managers that tend to run ERP software. It's a reflection of new workplace realities in which PC data gets consumed by nearly all workers. It's also an effort to catch Microsoft up to its toughest competitors in the business-apps market, Oracle and SAP.Microsoft's new roles-based apps are part of a broader midmarket push being unveiled today that will include a future Windows server package, code-named Centro, that combines the Longhorn version of Window server with forthcoming versions of Exchange and SQL Server in a no-frills platform designed to be run by the IT generalists common in the companies with under 1,000 employees. They're the "inch-deep, mile-wide" IT staffer, says Microsoft director Steve Van Roekel. "Anything with a plug and a wire, they support."

The company is rebranding its four ERP lines--Axapta, Great Plains, Navision, and Solomon--as Microsoft Dynamics. New versions of the Dynamics products will incorporate new search technology Microsoft is building, as well as integrate data analysis and report-writing functions from its SQL Server database. Microsoft will unveil new licensing and financing options for midsize companies, and new incentives for them to enroll in its Software Assurance maintenance agreement. And the company released a new lower-priced accounting package, Small Business Accounting 2006, to attack Intuit Inc.'s QuickBooks software.

Small business is just the kind of market Microsoft loves: fragmented, and still largely untapped. Selling software to companies with more than 50 but fewer than 1,000 employees looks like a rich opportunity. There are more than 1.4 million midsize companies with PCs worldwide, according to Microsoft, and collectively they own 68 million PCs and 4.8 million servers. That's a lot of hardware to fill. They spent $215 billion on software and IT services last year, and that's expected to grow to $306 billion in 2009. And even though they're smaller, midmarket companies are facing many of the same pressures as larger ones: Global markets for goods and labor that are pushing down prices, customers who demand more personalized service, and expensive government regulations.

"A $4 billion company doesn't necessarily do things that are more complex than [our customers], though they may do more of it," says Greg Carter, a VP at Iteration2, an Irvine, Calif. reseller of Axapta, Solomon, and Microsoft CRM. New role-based user interfaces in Axapta can make the software less intimidating for midsize companies, he says. "In the old days, you'd see 100 different menu items on your desktop." Role-based user interfaces "really make the application easier to learn."

Microsoft acquired Great Plains Software in 2001, followed by its purchase of a second ERP developer, the Danish company Navision, in 2002. Each of those companies had previously made acquisitions of their own. As a result, Microsoft Business Solutions found itself with four ERP suites--Great Plains, Solomon, Navision, and Axapta--that sometimes overlap in function, and whose resellers are sometimes knocking on the same doors.Microsoft Business Solutions remains a money loser, and sales growth has been relatively modest for the past few quarters—up 5.8% last year, to $803 million in revenue, with a loss of $201 million. Microsoft officials hope the roles-based application strategy will bring some spark to the business.

Gates compares Microsoft's investment in business apps to its ventures in Internet TV, just now resulting in large deals, and database software, where the company is taking aim at being No. 1. "Microsoft probably has the longest-term horizon for big things we do than any company you can think of," Gates says. "Every new version we bring out we believe will drive our share."

Microsoft's new roles-based approach to ERP isn't unique. Oracle and SAP have been tailoring their apps to customers' job roles for years. "If you're not doing this, you're a second-rate vendor compared with Oracle and SAP," says Joshua Greenbaum, principal of Enterprise Applications Consulting.

Compared with Oracle and SAP, Microsoft's share of the overall ERP market remains small--projected to be just 4% this year, according to market research company AMR Research, versus 43% for SAP and 19% for Oracle. "Our systems have been role-based since day one," says Frank Prestipino, VP of global enterprise applications marketing at Oracle. "Microsoft's challenge is they have a number of different products that overlap."

Microsoft is taking steps to simplify its product line and turn its resellers' knowledge of their specialty markets into a bigger asset. The company is only heavily promoting two lines—Axapta and either Great Plains or Navision—in most countries. And Microsoft this year introduced a new program called the Industry Builder Initiative that lets a handful of partners whose customized modules for Business Solutions apps pass muster add their software to the Microsoft price list that's available to all its resellers. "It gives us a chance to put our product in the strongest channel in the world," says Iteration2 VP Carter.Microsoft's role-based apps could also give it a financial lift by letting it sell more licenses for users who don't traditionally touch such programs. "In the past, you'd have a supply-chain optimization system for the operations management pencil heads. Now you can deliver some of it to the call-center rep who can say, 'Where's my order?'" says analyst Greenbaum. "This is Microsoft catching up to the rest of the industry."