Microsoft Dynamics Buys Its Vertical Expertise — Meeting The Challenges of a Channel Partner Development Strategy

Microsoft’s announcement that it was buying the industry-specific products and IP of three of its existing ISV partners reflects an important realization on the part of the mid-market enterprise software leader that partnerships alone cannot generate the industry expertise the Dynamics group needs to compete in today’s market.

These acquisitions are evidence of a shift in strategy at Microsoft that acknowledges the  impossibility of relying solely on partner products in order to push much-needed innovation into the market. I would expect more such acquisitions down the road as Dynamics strives to bake in as much industry-specific, and geography-specific, functionality as possible.

At the heart of this emerging strategy are two important facts: the main competitor-to-beat in the SME enterprise software market is still that ubiquitous “other”, typically a local company with some vertical industry expertise. This has made the fight for second place even more dramatic, and, even if it can dispatch “other” in a competitive situation, Microsoft is still taking on competitors that are more and more either baking innovation, particularly industry-specific functionality, into their core product lines and/or acquiring said functionality. That dual threat has made it hard for Microsoft to keep its current strategy afloat.

Until now, Microsoft’s industry-specific innovation strategy has relied largely on third party products and add-ons, provided by third party partners, who develop and bring to market the vertical and micro-vertical products – often geography-specific as well – that help Dynamics serve companies across a significant number of industries.

This strategy has always had two fundamental limitations, and more recently two more have been added to the mix. The first limit is simply one of development and support scope: many of these partners are small companies with limited resources, and have been unable to support their products across multiple geographies. So, while Dynamics was growing its catalogue of vertical products, it was having trouble getting them out to the broadest possible number of users. There is only so much a small ISV/partner can do to support a global development and support effort.

Limitation number two was on the sales and marketing side: even if there was the bandwidth for support at a given vertical partner, selling and marketing to the broadest possible Dynamics audience is extremely difficult for many of these partners. Localization of documentation, on-the-ground sales resources, lead-generation activities are always a problem for small companies, even though Microsoft’s traditionally strong partner program was there to lend a hand. And adding another vendor’s contract terms and conditions to a sale always makes things complicated, more than many prospective customers like.

These two limitations alone made it hard for Microsoft to compete with SAP and Oracle, both of which tend to either build or buy their industry expertise and release it to a global marketplace. And sell it and service it as a branded product, with the full weight of an industry giant behind the product, instead of the “industry giant + small ISV” combination that characterized much of Microsoft’s vertical industry efforts.

Then two other things happened to make life even more complicated for this partner-led industry strategy. The first was the recession, which hit many partners extremely hard, and made their triple role of reseller, developer, and after-market service partner even harder. Meanwhile, Microsoft announced at its Partner Conference last summer that it was, once again, asking its partners to bulk up (i.e. merge with one another) and get more business and industry knowledge (i.e. spend more time training their staffs).

What this all meant was that Microsoft was effectively stressing the part of the channel that it was depending on for a key competitive weapon – verticalization – while its competitors were building or buying internal capabilities and deploying thousands of programmers to solve their industry needs. This made it hard to imagine that Microsoft could keep up the competitive pressure against these competitors, when Microsoft’s key innovations were dependent on relatively small, and highly stressed, partners.

In other words, Microsoft needed to level the playing field by baking in more vertical industry functionality to its core products, particularly Dynamics AX, which is competing in a global market against global giants. While at the same time trying to differentiate itself from “other”, with its local appeal and industry-specific piece of software to sell. Talk about trying to be all things to all people.

Meanwhile, as Microsoft continues to do more acquisitions, SAP and Oracle will probably work on bulking up their partner ecosystems a la Microsoft in order to complement their baked-in industry functionality with even more specific vertical and geographic-based functionality. Microsoft is coming at the issue from one side, SAP and Oracle from another, and all three will converge in search of the same Holy Grail: the perfect combination of internal and external functionality needed to compete in all the major industries and all the major geographies. If there was ever a time to be a picky industry-specific customer – and a savvy industry-specific software developer – this is it.