Competitors eye Microsoft's CRM moves

Microsoft's long-anticipated entry into the CRM niche, announced in February, put it in direct competition with Onyx, Pivotal, and other software companies targeting small businesses.

So far, Onyx and Pivotal have said the entrance of the software giant just proves there's enough market demand for many companies to profit. However, if history holds, Microsoft is also likely to expand its strategy beyond current plans to cater to small businesses and take on Siebel Systems, SAP and Oracle in the more profitable area of selling CRM to large businesses.

"Microsoft...will inevitably move upstream. That's how the market works," said Joshua Greenbaum, an analyst with Enterprise Applications Consulting.

The reason Microsoft has to enter the business applications market and build an ever-larger and more enterprise-ready set of technologies is simple, according to analysts: The company needs to enter new software markets to increase its revenue.

Microsoft has a lock on desktop business software with its collection of Office applications, which controls more than 90 percent of the market. Office accounts for more than a third of Microsoft's overall revenue.

But the desktop application market is starting to mature, meaning Microsoft is looking for new areas of growth. And CRM is one of the few growth areas in the business software market. Research firm Meta Group expects the market for CRM software to more than double from $20 billion in 2001 to $46 billion in 2003.

"I think what Microsoft is doing in the enterprise software market is something they should have been doing a long time ago," Greenbaum said.

According to Greenbaum, it's inevitable that Microsoft will extend its reach and one day compete with the likes of CRM market leader Siebel because the potential profits are so great.

Know your place
Microsoft's plans to ship by year's end a new software package called Microsoft CRM, built on technology from its Great Plains unit, wasn't entirely unexpected. Speculation had run high that it would make an entry into the business software market since it acquired Great Plains, a maker of accounting software for small and midsize businesses, in 2000.

Microsoft says the CRM package is tailored for companies with between 25 and several hundred employees. Company executives insist they are focusing on an underserved market and do not intend to compete with partners such as Onyx and Pivotal.

Microsoft has also said the new CRM technology won't compete with an agreement inherited from the Great Plains purchase to resell technology from Siebel. That pact was intended to serve high-end customers with thousands of employees.

But the CRM market, which Microsoft once said it would leave to its partner software companies, is different from most niches the software giant has attempted to tackle. Competitors in the CRM market generally approach customers with a "vertical view" of the potential sale. In other words, they design applications for companies in a specific segment of a market. Siebel, for example, targets the financial services industry with a sales force automation program tailored specifically for that client.

In addition, the CRM market is highly fragmented, depending on the market a company is addressing. Siebel has the lead among large CRM customers, for example, but does not have the same hold in the lower echelons of the market. Most competitors slice the market into three distinct opportunities: large, global Fortune 2000 corporations; midenterprise companies with revenues of approximately $100 million to $3 billion; and small businesses with up to $100 million in sales.

"What makes a company a leader in one of those segments almost completely disqualifies it from leading in another market segment," said Divesh Sisodraker, chief financial officer at Vancouver, B.C.-based Pivotal. "Very clearly, there's been a segmentation. Microsoft will be very strong in the small-business market."

In this climate, few clear leaders have emerged, even though competition is stiff, as evidenced by the recent announcement of a hosted software upgrade from Oracle.

That's what Microsoft is counting on. In researching the opportunity, Microsoft executives said they found a niche in small businesses of 25 to several hundred employees that was ready for a sophisticated yet easy-to-use software program such as a CRM package that includes functions for marketing and sales.

"We haven't designed this for the enterprise, and it won't suit that market," said David Thatcher, general manager for Microsoft CRM.

The Novell lesson
Skeptics claim Microsoft has a history of initially entering a market with less-than-ambitious aims only to slowly gather steam and an ever-larger presence over time.

Former Novell CEO Ray Noorda, for example, complained constantly about Microsoft's server-based operating system efforts and related applications strategy. Now Novell has been rendered an afterthought while Microsoft's Windows 2000 Server operating system continues to gain market share.

By adding features to existing products, Microsoft has also altered large swaths of the market, such as when it introduced an online analytical processing (OLAP) server to its server-based software, cutting out various OLAP niche players.

But CRM may be different. Given the complex nature of the systems and the highly involved nature of the consulting services necessary to implement a large-scale system, some doubt Microsoft will be able to crack the territory now dominated by Siebel, SAP and Oracle.

Microsoft's "genetic makeup is set up to sell to a large number of customers," said Dwight Davis, analyst with technology consultants Summit Strategies.

At the same time, Davis said, the difference between Microsoft's initial CRM package for small businesses and those of its larger competitors will likely be "fleeting."

Some CRM customers are skeptical as well. "Our strategy for the foreseeable future is to use integrated" systems, said Gary Hensley, director of information technology for organic fruit juice maker Odwalla. "It would be challenging for a new entrant to gain market share in the large systems market."

"Acquiring or helping to promote a company that's used to handling small businesses and trying to scale that up to say, 'Look, we're running Chevron' seems like a bit of a stretch," added Hensley, whose company uses Oracle business software.

Great plans for Great Plains
Small competitors say they are undeterred by Microsoft's interest in the market. Salesforce.com, a San Francisco-based company that serves up CRM over the Net, claims that Microsoft will not deter its own ambitions to become the leader in hosting CRM software for customers who access those programs over the Web.

In an e-mail sent to Salesforce.com employees after Microsoft's announcement, CEO Marc Benioff went so far as to say, "If Hasbro had built a CRM product, it would look like Microsoft CRM."

Such cockiness may be premature, according to analysts.

"If I were (a small company like) Onyx and Pivotal, I'd definitely be sweating bullets right now," said Enterprise Applications Consulting's Greenbaum.

Companies like Siebel, PeopleSoft, SAP and Oracle, which are targeting larger CRM customers, have said they remain vigilant in analyzing Microsoft's competitive moves, but they're also confident that the company lacks the expertise to build a CRM system for a Fortune 2000 company that requires custom-built software components and training.

These competitors "know where the lion traps are in the forest," said Katherine Jones, managing director for enterprise business applications at the Aberdeen Group technology consultancy. At the same time, Microsoft "can't really go down, so they have to go up," she said.

According to Greenbaum, what should particularly worry competitors is the muscle Microsoft can now flex through the prodigious sales channel it acquired with Great Plains. That will have "an enormous impact" on the market, he said.

Earlier this month Microsoft Chairman Bill Gates highlighted Great Plains as "a key part of Microsoft's vision" of the computing future. "It's a big commitment for us," Gates told a crowd of Great Plains customers at their annual conference in Orlando, Fla.

It's a commitment that analysts say shouldn't be underestimated.

"It would be a mistake to think that in purchasing Great Plains, Microsoft was trying to nibble at a segment of a market it didn't have much of a presence in," said Paul DeGroot, an analyst with Directions on Microsoft, a technology consultant. "You just can't rule out Microsoft having larger ambitions for Great Plains."