By Chris Alliegro [bio]
Posted: Apr. 23, 2007

The following is the full text of an article published by Directions on Microsoft, an independent research firm focused exclusively on Microsoft strategy & technology. More samples of our content, as well as a list of upcoming articles and reports are also available.

The plan to consolidate Microsoft's overlapping line of four enterprise resource planning (ERP) applications remains intact, despite conflicting reports from Convergence 2007, Microsoft's annual conference for Microsoft Business Solutions (MBS) customers and partners. According to the plan, Microsoft will continue to update and support the four products for several years, eventually converging on a single product after 2013. However, immediately following Convergence, Microsoft announced that Satya Nadella, MBS's recently appointed lead executive, would vacate his spot. Although his departure probably will not immediately alter the group's course, the leadership change could trigger a change in plans.

Single Product Still the Goal

Since acquiring Great Plains in 2001 and Navision in 2002, Microsoft has wrestled with how best to consolidate the four separate but similar ERP applications netted by those acquisitions. An early plan called Project Green proposed replacing those products (Dynamics AX, GP, NAV, and SL) with a single, new product built with modern programming languages and based on the .NET Framework. That plan was replaced in 2005 by a more loosely defined, open-ended transition plan (referred to as Dynamics Waves) that calls for the company to support all of its existing ERP products while it gradually extends the Dynamics AX product, which will provide the foundation for a single strategic product in the future.

Although the nature and timing of these consolidation plans have evolved over time, converging on a single ERP product remains a goal for MBS, the group responsible for Microsoft's ERP products. Among other benefits, concentrating development, marketing, and partner efforts on a single product will help the group operate more efficiently and more profitably—MBS only recently attained profitability in fiscal year 2006, after five years of losses. However, convergence has thus far proved technically difficult and the group has opted to move cautiously to avoid stalling existing product sales, disrupting ongoing maintenance revenue, and damaging a partner channel that is essential to MBS's long-term financial health.

Timing, Deliverables Remain Vague

A highlight at MBS events over the past several years, the consolidation plan received little attention in executive presentations at Convergence 2007 in March. Combined with several ambiguous quotes by senior MBS staffers, this caused some confusion among partners, customers, and pundits about the future of Microsoft's ERP line.

Nonetheless, Microsoft has since reiterated that the plan remains intact with some minor adjustments. Although still vague about measurable deliverables and specific timeframes, the plan calls for the following:

Ongoing releases. Microsoft will continue shipping incremental releases of GP, NAV, and SL through 2013. These releases will update the products' features and bring some consistency to their user interfaces, increase their use of strategic Microsoft technologies, such as SharePoint and SQL Server, and modernize their programming interfaces.

More functionality for AX. Microsoft will gradually expand the application functionality of AX, its most advanced and most flexible ERP application, to match the unique capabilities and features of each of the other ERP products. For example, AX will eventually get the kind of project accounting capabilities that SL is known for and public sector accounting features that today are unique to GP.

Longer release cycles. MBS has typically released its ERP products on a 12- to 18-month cycle. At Convergence 2007, the company suggested it would increase the time between incremental releases to 24 months or more.

A new client foundation will provide common page controls, navigation methods, command and menu structures, and infrastructure for rendering forms. Incremental releases of individual ERP products will adopt elements of the foundation (such as controls) and will thus have a similar appearance. The foundation, which is based on the .NET Framework's Windows Forms technology for forms-based applications, will also allow Microsoft and partners to tailor product interfaces to specific job functions. Dynamics NAV 5.1, scheduled for the last quarter of 2007, will debut the new client foundation.

A single ERP product. Eventually, Microsoft will converge on a single ERP product. That product's internals (e.g., its business application functionality, programming interfaces, and data models) will most likely be based on the extended AX platform and its user interface will derive from the new client foundation. The company has not specified a timeline for convergence, but it will probably not occur before 2013.

Balancing Act

Microsoft finds itself balancing competing goals as it attempts to rationalize the MBS product portfolio and align it with other Microsoft strategies. On the one hand, pressure to reduce costs would push the group to quickly eliminate redundant development and channel efforts, which might allow it to become more profitable sooner. On the other hand, in the short-term, such a move could cost the group existing customers and partners and make it more difficult to acquire new ones.

For the moment, Microsoft appears determined to capitalize on existing opportunities—even if it means carrying the overhead of overlapping products for five or more years—with focus on the following priorities:

Growing market share. According to Microsoft, each of its ERP products is selling well and the company likely feels that continuing to sell those products is the best way to add new customers and expand its partner channel.

Retaining existing customers. MBS derives significant annuity revenue from maintenance contracts signed by customers. A strategy that officially deprecated its existing ERP products would probably cause that revenue stream to dry up. Worse yet, it could cause customers to jump to a competitor's product.

Boxing-out competitors. Each of the ERP products provides some defense against competitors, such Oracle, Sage, and SAP. Continuing to sell those products is probably the easiest way for Microsoft to prevent competitors from gaining ground in the midmarket for ERP products, a market that today lacks clear vendor leadership.

Minimizing internal churn. A decision to eliminate one or more of the existing ERP products could demoralize teams working on those products and cause MBS to lose valuable team members to other groups in the company or to competitors.

Although it minimizes short-term pain for MBS and its customers and partners, the current plan to support all four ERP products and gradually move to a single product carries some drawbacks. Eventually, existing customers will need to move to Microsoft's converged ERP product (or to a competitor's product) and this migration will undoubtedly be more difficult for some customers than others. For example, custom applications and extensions built using the legacy programming tools, languages, and interfaces of GP, NAV, and SL will likely need to be completely rewritten to work with the new product. As MBS attracts new partners and customers to those products, the scope of the problem grows.

In addition, developing and maintaining four overlapping products undoubtedly makes MBS a less nimble organization than it might be otherwise, which could slow the pace of innovation for customers and make it more difficult for Microsoft to compete with other ERP vendors. Evidence of this inefficiency may be found in MBS's decision to pare back the pace of releases and recent slips—each of the group's recent ERP releases shipped significantly later than originally planned.

New Leader Could Change Course

One recent development in MBS could portend a change in current course—Corporate Vice President Satya Nadella is leaving his post at the group's helm for a new position in Microsoft after only six months on the job. Announced in Sept. 2006 as the replacement for Doug Burgum, the longtime MBS lead and CEO of the former Great Plains, Nadella is responsible for much of the strategic direction for Microsoft's ERP portfolio (prior to assuming the top spot in MBS, Nadella was in charge of research and development for the group). For example, Nadella was likely a major influence on improvements in the Dynamics products' user interfaces and their increased use of Microsoft technology. However, the group's laissez-faire approach to consolidation also bears his imprint.

Vice president of marketing Tami Reller, another Great Plains veteran and longtime colleague of Burgum's, will take over for Nadella provisionally while the company searches for a permanent lead for the group. Until that search is completed, MBS will probably not alter its approach to product consolidation. However, new leadership could bring a change in focus and priorities: a new executive could accelerate the schedule for winnowing the current stable of ERP products, for instance. In any event, the time needed for Microsoft to recruit a new lead and for that person to plot a new course means that any shift in strategy is probably 18 months out or more.

Resources

The Dynamics home page is www.microsoft.com/dynamics/default.mspx.

The strategy and roadmap for MBS is outlined in the Oct. 2006 "Microsoft Business Solutions Roadmap."

The "Dynamics Waves" plan is described in detail in "Dynamics Wave Two Promises Consolidated Product" on page 18 of the Aug. 2006 Update.