Analysis: the mid-market phoney war is over

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The enterprise market is at a stand still. Given the current political and economic uncertainties, it could be several years before there is a resumption in high-end corporate spend. Consequently, the market is increasingly - and depressingly - accustomed to hearing a litany of woes, self-justification and 11th September fall out excuses from the likes of Oracle, SAP, Siebel and PeopleSoft.

Around 70 per cent of the profits of the IT industry go to five vendors - Microsoft, IBM, Oracle, Sun Microsystems and Hewlett-Packard – and the lion’s share of those profits is shared between Microsoft, IBM and Oracle. These are the companies that decide what is important and once they aim their marketing dollars at a particular target, it becomes a priority for everyone else. So it is telling that as the high-end enterprise is diagnosed as sick, that this most unholy of triumvirates should set their sights on the largely untapped, but promisingly well-endowed midmarket, targeting their R&D and marketing dollars at that space.

A recent example came when JD Edwards announced that it has signed what it modestly postioned as “the most significant technology partnership in its history” with IBM. It will incorporate IBM middleware in its own applications, including IBM’s DB2, WebSphere Application Server and WebSphere Portal. Nice publicity for JD Edwards certainly, but the real winner is IBM which finds itself with a substantial new foothold in the mid-market, complementing its close, higher-end relationship with E.piphany and hopefully screwing up JD Edwards relationships with the likes of Oracle in the process. It's great when a plan comes together!

Does this mean customers have less choice? Maybe, but there's an answer to that one too. "Typically, mid-market customers have just one primary vendor for their enterprise solutions because it simplifies the buying, deployment, and total cost of ownership issues for them,” said Lenley Henaring, vice president of product management at JD Edwards.

And there will be a integration centre as well, which is always nice to have. "About half of that [$150 billion in the next three years] spending will be driven by solutions,” said Marc Lautenbach, vice president in charge of IBM's small and midsize business unit. “More and more midsize customers are simply demanding these solutions integrate with both recently purchased software and their legacy platforms.”

Now, this integrated software won't preclude customers from using databases from Oracle or Microsoft, but those customers that don’t use IBM software may - for which, CRM Forum suspects you should read "will" - find themselves paying twice for the same functionality. That’s a pretty big incentive to follow JD Edwards’ lead and sell their souls to Big Blue.

For IBM, it must be quite like old times when software vendors ran around desperately trying to jump on those Big Blue coat tails. It's a dangerous policy though - successful companies like Synon tried it in the 1990s and went to their corporate graves in the process.

So much for IBM. We saw another contender declare itself with the announcement that NetLedger, Oracle's applications partner, will offer NetCRM. Timed to coincide with Microsoft’s big push into the same space, the new application service builds on the CRM functionality found in NetLedger's flagship Oracle Small Business Suite. It gives Oracle a stronger foothold in the mid-range market.

"Microsoft is talking about CRM plus enterprise resource planning," sniped NetLedger’s president and COO, Zach Nelson. "They [Microsoft] are talking about CRM plus accounting. This is the Version 8 release of that strategy. In a year, integration between your accounting package and your CRM package will not be a 'nice to have' it will be a 'must have'."

As for Microsoft, the mid-market represents both its foothold into the promised land away from the desktop and a way of proving that .Net works outside of a PowerPoint slide.

The latter may be even more tempting than the former. According to Preben Damgaard, formerly president and CEO of Navision, and now director of Microsoft’s Business Solutions EMEA, .Net is the long term strategy that underpins the new generation of Microsoft Business Solutions. Pity then that it's just so damned intangible at the moment...

But the future is pure .Net and Microsoft believes there is huge potential for its .Net based business solutions, particularly the CRM applications suite. “The sweet spot is the core mid-market,” said Damgaard.

He's not joking, The numbers boffins at Redmond have done their sums and reckon that according to their Excel spreadsheets the total mid-market comes in at around $30 billion. So no surprises then that Microsoft's business applications push is focused on a space where CRM penetration is in single diigts.

Why should mid-market companies turn to Microsoft for their CRM and business solutions software? Others have been in the CRM space for much longer and their applications offer far richer functionality. Microsoft argues that single digit penetration means they’re not getting what they want, that the current CRM leaders are simply not providing what the mid-markets need.

“Companies with between 25 and 1,000 staff are our target market. We decided that’s where we’re going with this software and the developer tools and functionality are being developed with that marketplace in mind. We will see some very small and large enterprise customers but the core is mid-market,” said Alex Simons, Microsoft CRM Product Manager.

Siebel Systems defined the enterprise CRM market but that vendor is looking beleaguered and its future direction unclear. It had a lucrative relationship with Great Plains, which claims to have sold more Siebel systems into the mid-market than its other partners combined, but that was abruptly cancelled recently. That might be assumed to mean that Siebel will have no truck with this pretender to the CRM throne, but that analysis might be overthrown next month if Siebel comes out of the closet as .Net oriented, out and proud.

For the moment, all lips are tightly closed. Doug Burgum, formerly CEO of Great Plains and now senior vice president at Microsoft Business Solutions, said he expects, “a lot of collaboration with Siebel… and to leverage that Great Plains relationship into the Microsoft relationship. We want to be the leader in midmarket and small applications and… Tom [Siebel] hasn’t declared war on the mid-market.”

Steve Ballmer, speaking in London last week, confirmed that a major ISV would commit to .Net within six weeks. He declined to identify the company but the smart money has to be on Siebel. Given the previous relationship with Great Plains, and Siebel’s higher-end mid-market capabilities, there’s a rationale for building a new relationship - one that could span the whole SME space and accommodate both J2EE and .Net.

Politicians, as H.L Mencken observed, are animals that can sit on the fence and still keep both ears to the ground. If Tom Siebel proves similarly dexterous, than that could be highly dangerous for many rivals.

The mid-market is the new battleground but dominance is not a done deal. Apart from the strong competitive challenges, Microsoft faces a number of internal issues, including the channel strategy for Great Plains, Navision and the rest of the product line.

The problem is that Great Plains and Navision operate restrictive channel policies whereas Microsoft favours a free-for-all approach – one that is unlikely to work across the SME board. There’s potential for damaging channel conflict and Microsoft must clarify how it plans to meet the support and services needs of the mid-market. It may have to make another acquisition to fill in the consultancy and services gap if it is to compete effectively across the entire SME spectrum.

That said, Microsoft is offering attractive incentives to its channel partners, exhorting them to focus on specific industries and vertical markets. It is providing billions of dollars of financing via Microsoft Capital to encourage the partners into new markets and providing a range of marketing initiatives tailored to mid-market requirements.

And then there’s the technology timeframe. The Yukon release of Windows is planned for 2004, followed by Longhorn in 2006. These are being positioned as definitive, both technologically and strategically Inevitably, the foundation is .Net, but Ballmer confirmed that .Net won’t be fully deliverable for three years. This creates potential for further misunderstanding of .Net.

Nonetheless the phoney war is almost over. Ever since the purchase of Great Plains, CRM companies have had their collective heads stuck in the sand. Microsoft only wants the desktop, they said, we'd be more worried if they bought Navision. Then Microsoft went and bought Navision....oh dear, does anyone think they might be serious about this CRM thing?

Well, it's time for a wake-up call. The mid-market hasn’t looked so interesting in years.

Janice McGinn is a freelance journalist and analyst with 15 years experience of covering the IT and technology sectors

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