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Convergence is the Microsoft Dynamics business software user group’s meeting. Dynamics’ core applications are mainly in the accounting and ERP category, descendants of products Microsoft acquired: Great Plains (now GP), Solomon (SL), Navision (NAV) and Damgaard’s Axapta (AX), to which Microsoft has added its own CRM application. It has been more than a decade since the acquisitions of Great Plains (which itself had already purchased Solomon Software), and Navision, Damgaard and the software applications family has evolved steadily if slowly since then. More recently, Microsoft has added cloud services that simplify and improve the connection between remote users and the on-premises core systems, as well as integration with Office365.
Despite being one of the top five ERP software vendors with sales of about $1 billion, Microsoft faces several business and competitive challenges. It is selling into a fully saturated market for accounting and ERP software designed for midsize companies and divisions of larger corporations that have their own systems. Functional innovation in the core applications is difficult in this mature category where the essential functions long ago became commodities. Moreover, from small businesses on up, most companies already have financial systems in place and usually are reluctant to change them until it’s absolutely necessary.
The strategic issue confronting Microsoft and other accounting ERP software vendors is how to differentiate beyond core functionality in order to win sales, keep customers on maintenance and – even better – capture additional share of wallet through incremental sales of complementary software and services. Adding to the difficulty is the seismic shift taking place in the accounting ERP software market as companies increasingly choose to deploy this software in the cloud, where companies such as FinancialForce, Intacct, NetSuite, Plex and Workday, among others, are growing rapidly. Our research shows that more than half of companies are using cloud computing, and more intend to. An important segment of the ERP market is companies outgrowing entry-level accounting packages or replacing on-premises software. The costs of an on-premises system for a midsize business can be daunting, so the cloud can offer more functional and useful systems that are easier to manage and less risky to commit to.
To address its strategic challenge, Microsoft insists that it’s not just selling ERP software – its marketing message is that it is providing tools to run businesses better. So while ERP is the core technology for record-keeping and process management, the theme throughout the Convergence user conference was using the full range of available software to enable companies to grow their business, manage more intelligently and perform more efficiently. Microsoft CRM, the Web-based sales, marketing and social application that is a core part of Dynamics, was front and center in the opening day keynote. Since most people are trained and comfortable in Microsoft Excel and Word, Microsoft has been increasing integration of the Dynamics business applications with its Office suite and in particular its Web-based Office 365. The integration of Office 365 into the suite has made it possible for Microsoft to improve productivity by melding Excel spreadsheets into processes to give users the efficiency and convenience of working with a familiar tool while providing sufficient controls to ensure accuracy and auditability. For instance, it’s now possible for an accountant to create a list of journal entries in a spreadsheet and use that spreadsheet to automate the process of posting them into the system.
One consistent theme across the Dynamics family now is a roadmap with more frequent releases. Along with this, Microsoft is promising to make upgrades far easier to implement. Cloud ERP vendors stress the ease of their upgrades because they do all of that work. With almost all of the essential functionality already in place in the four core ERP packages that comprise Dynamics, product enhancements usually come down to nice-to-have features. For instance, the latest release of GP adds capabilities that simplify bank account reconciliations, allow companies to make adjustments to already closed ledgers based on subsequent auditor recommendations, to manage vendor IDs and to maintain multiple types of fixed-asset ID numbers so that those for, say, computer equipment are visibly different from ID numbers for plants and equipment or vehicles. They’re hardly earth-shaking but highly appreciated by those who do the work. However, one new capability that was noteworthy is the ability for a company to do a one-click backup to store its accounting ERP data in the cloud-based Azure storage infrastructure. Online backup addresses a key disaster vulnerability for on-premises systems because in practice the backups are rarely stored in a physically separate location. Moreover, not all companies are backing up their data daily so a one-click routine makes it simple enough for anyone to do.
Microsoft also plans to include a new applications and service framework (currently called Project Siena) in the upcoming release 3 of AX to make it easier for business users to create relatively simple mobile apps without having to do any coding. This is likely the blueprint for all future releases of Dynamics; it facilitates the creation of smartphone and tablet apps that coordinate and monitor a relatively short set of steps to, for instance, push or pull a limited set of data to and from individuals. If, as Microsoft claims, it will require only Excel and PowerPoint skills to quickly create useful mobile applications, that could be an important product differentiator.
Microsoft’s market position will continue to be challenged by the cloud ERP vendors as these companies build their installed bases on the advantages of subscription-based services over on-premises deployment as well as other functional advantages. For example, in addition to full and easy integration with Salesforce, FinancialForce has a set of professional services automation (PSA) components (such as integrating project management, and time and cost tracking with billing), making it an attractive option to the large number of midsize professional services companies, as I recently noted. Workday, which my colleague Stephan Millard reviewed, is especially appealing as an ERP system for industries that must manage large workforces.
It’s clear that cloud software vendors in this market have been growing faster than on-premises ones. In 2013, Dynamics revenues increased 10 percent, according to Microsoft, while NetSuite’s revenues were up 34 percent and Workday’s doubled. Still, Microsoft’s gain was greater than its most comparable rivals, Sage Software, which reported a 4 percent rise on the top line, and Infor, which had flat sales.
Microsoft has no direct sales channel for Dynamics, and its resellers have been slow to adopt the cloud. But market forces are likely to change this, so in the longer term, Microsoft may evolve into a hybrid cloud ERP vendor, offering customers multiple options on how to deploy its software. For companies of all sizes, deploying software in the cloud offers potential advantages, chiefly lower costs and increased efficiency. To begin addressing the need to have more of a cloud presence, the upcoming release of Dynamics AX will make it easier for resellers to deploy the software as a single-tenant instance using a Windows Azure-hosted service. It’s likely that the other Dynamics applications will follow shortly. The single-tenant approaches addresses many but not all of the issues in on-premises vs. multitenant cloud-based systems. For instance, companies do not have to invest in hardware, are able to scale computing capacity as needed and do not have to hire staff to manage and maintain IT assets. Yet the direct cost of ownership may be higher than for multitenant because that deployment method can offer economies of scale relative to a private cloud. Still, customers will have more options as to how the application is configured, and for some a private cloud may be the better one.
Like all user group meetings, this year’s Convergence had many success stories. These demonstrated intelligent use of enterprise software enabling midsize companies to be more competitive with larger rivals that have more resources while improving efficiency by automating more business processes that are now done manually. Companies that are confronting the limits of their aging accounting and ERP systems must think past the limits of their current system and understand what’s possible today. Midsize companies have more choices – and more affordable choices – than ever in choosing an ERP vendor. They should consider Microsoft Dynamics in selecting new software.
Robert Kugel – SVP Research
When it comes to making a business case for software investments, many people fail to recognize that the case itself is just one part of what amounts to an internal sales and marketing effort that they must perform well to be successful. Focusing only on the numbers and assumptions in a spreadsheet is not enough. Making a successful business case requires an understanding of the audience’s perspective and motivations. Since the individuals who will review the business case may not be sufficiently aware of the issues that are behind it and their seriousness, it may be necessary to begin an awareness-building program before presenting the business case. And because the benefits of software investments can be difficult to quantify, executive sponsors are useful in achieving acceptance of these calculations. Unfortunately, many business cases founder because proponents do not realize the importance of taking a sales and marketing approach.
We usually ask participants in our benchmark research what software they use to manage or support a process and whether their company recently considered replacing it. Typically, two-thirds of companies have within the past year or two evaluated an alternative to the software they’ve been using for the subject of the research. However, only 15 to 20 percent actually acquire and deploy new software. The remaining number is divided between those that decided not to replace their software and those that are still considering it. Those that have opted not to replace the software typically give as the main reasons a lack of resources (47%), of budget (45%), and of awareness of the problem (40%), as well as no executive sponsorship or support; they also often say the existing software works well enough and the business case wasn’t strong enough. We get much the same responses from those that are still considering replacement, as well as that they’re still in the evaluation process. Of course it may be true that there was no budget or sufficient resources, or that the existing software works well enough, but we think it’s more often the case that the business case wasn’t strong enough and so the investment was deemed a low priority.
One common mistake of advocates for new software is failing to consider how the proposed investment will meet the needs and motivations of all of the people who will be evaluating the project. Their needs might be different, or they may have different priorities. For instance, the advocate may want to make some process more efficient so that he or she won’t have to work so many nights and weekends, but this is likely to be of little concern to those who have to approve the investment. For those decision-makers, the ability to get information sooner, gain deeper insight or reduce their risk exposure may be the key benefits. In some instances, those evaluating a project may not be aware of what’s possible. Awareness-building may be a step that has to precede by weeks or months the formal presentation of a business case. For example, executives may not understand that they can get information in real time or the following day rather than having to wait a week, and that the competition is already able to do that. They probably haven’t given it any thought.
Another pitfall for advocates is failing to secure executive sponsorship before proposing an investment; lacking that substantially reduces the chance of success. This can be tricky because today’s software investments are rarely made for direct cost savings alone. In the early days of business computing, IT investments were made to eliminate the need for clerks and bookkeepers, so there was a direct, measurable savings involved. Today, these sorts of benefits represent a fraction of the value of software investments. Instead, the benefits include, for instance, getting information sooner or shortening the end-to-end length of a process. The end result may be improved customer service and, therefore, customer satisfaction – benefits that executives understand. When the business case presents an answer to the question, “What’s it worth to this company to cut cycle times from two months to one week?” It’s important that someone with sufficient stature in the decision-making process will vouch for the answer in the business case as well as reiterate the urgency for making that particular investment right away. It’s even more important to have the right sponsorship when the impact of the investment spans business units or functions; this should be either an individual with sufficient seniority or multiple sponsors from within these groups.
Probably for those reasons, participants asked to identify the most important considerations that lead to the successful presentation of a business plan most frequently cited executive sponsorship (67%) and an understanding of the potential value (that is, those making the decision were aware of the problem and the value of addressing it). Being able to demonstrate increased efficiency, reduced risk and enhanced effectiveness (such as by being able to meet audit or compliance needs) are also important.
Independent information technology research from a reputable source can help software advocates make their case more effectively. It can illustrate the common issues that companies face and quantify the impact of addressing them. At Ventana Research we design our benchmark research to be able to assess how well companies perform in executing core business requirements. Research is constructed to measure the connections between the people, process, information and technology components used and the results organizations achieve. Since software investments are rarely made solely on efficiency gains, our research measures effectiveness as well. That includes a range of topic-specific aims, such as customer satisfaction, cycle time reduction, deeper understanding of root causes, increased visibility, greater agility and improved coordination in responding to change, to name just a sample. This type of research can be helpful in making a business case as well as in creating awareness within an organization of the need for change, generating interest in implementing change, and justifying the investment in technology that enables information improvements to achieve the organization’s objectives.
I’ll repeat that building a better business case for buying software involves more than just putting numbers on a page. It’s a sales and marketing effort that begins with understanding the full range of objectives that the investment can achieve. It’s essential that the proponents understand the aims of all the decision-makers and influencers in the company, not just in their own department. They must be able to clearly communicate how the investment will address the needs of all concerned. Identifying others’ objectives should make it easier to gain the necessary executive sponsors while failing to secure sponsorship diminishes the chance that the investment will be funded. Moreover, having credibility at each stage in the process of making the business case is also essential. Please investigate some of our benchmark research that bears upon your work and business issues, and let us know how we can help.
Robert Kugel – SVP Research