Microsoft’s on-demand quandary

Microsoft, the global software giant, isn’t beholden to many people, but it is heavily reliant on its partners and resellers. And when it comes to selling software-as-a-service (SaaS) over the Internet, that dependency poses the company with a tricky conundrum.

For the past five years, Microsoft has been painstakingly building up a credible midrange business applications suite, with customer relationship management (CRM) and various enterprise resource planning (ERP) applications now selling under the Dynamics brand. But with SaaS delivery growing ever more popular, rivals can lure customers with a promise to ‘cut out the middleman’.

Microsoft can’t do that. It needs the middleman to reach the far corners of its global market, and anything that appeared to threaten that relationship would not be well received.

But it cannot ignore SaaS. Microsoft’s Internet service infrastructure, developed to support its consumer instant messaging and email services, gives it a head start on any would-be SaaS contenders.

When asked about this, Microsoft has until now appeared cautious, even non-committal on the subject. But at the Convergence 2006 Dynamics partner conference in November in Munich, the software company seems to have resolved the issue and demonstrated a new-found conviction.

Bill Gates, who has in the past appeared to be the principle sticking block in Microsoft’s SaaS conversion, expressed, in his characteristically muted way, “excitement” at the implications of ‘Live’ Internet delivery for the Dynamics applications.

“While there will always be cases where on-premise is the more sensible option, the Internet approach allows Dynamics to be more flexible,” he told the conference. Although CRM is the only Dynamics component to have been released as a ‘Live’ service, more are certain to follow.

“The Internet approach allows business applications to be more flexible.”

Bill Gates, Microsoft

And for a company that has, in recent years, sometimes appeared to be one step behind the times, its grasp of the peripheral benefits of Internet application delivery are surprisingly progressive.

One example is the ‘Dynamics community’, through which users can consult counterparts at other companies signed up to the service, in a way that is seamlessly integrated into the applications. It is as mature an example of ‘Web 2.0’ functionality for the business as has so far been demonstrated.

So how has all this been squared with the resellers? By offering them the chance to be their own SaaS providers (midrange rival Sage, another supplier heavily dependent on resellers, is doing something similar with its on-demand CRM products).

With service provider licensing agreements already available for the CRM product, and soon to be available for the ERP lines once known as Axapta, Navision and Great Plains, Microsoft has opened a new opportunity for its channel partners. They now have the chance to offer their industry specific knowledge to customers looking to use hosted applications, and take a cut in return.

With this approach, Microsoft can participate in the SaaS revolution while keeping everybody happy. If it is an inspired piece of diplomacy, however, it is less clear if it is an inspired business model. The Dynamics range of applications, pieced together through acquisitions, is already confusing, and to simultaneously add a new reseller channel and a new service may further confuse buyers and partners.

James Utzschneider, marketing manager for Dynamics, explained that while no pricing plan has been agreed for the ‘Live’ version of applications, the intention is to make all formats roughly equal in total cost of ownership. He also said that there would be no service agreements for users of ‘Live’ applications.

Both these assertions are likely to raise questions about Microsoft’s prospects as a SaaS supplier, and suggests that it remains wary of upsetting its resellers. A lower total cost of ownership is usually touted as one of the main benefits of SaaS, while most service operators will wave their SLAs as a way of overcoming their customers’ aversion to risk.

All this has left the analysts wondering: Does Microsoft still have some lessons to learn about SaaS – or do the early SaaS providers still have some lessons to learn about dominating software markets?

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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