How Microsoft is changing its strategy with Dynamics

Microsoft has an increasingly strong presence as a cloud infrastructure player. Now their back-office applications are aiming to create similar brand profile.

Microsoft cloud Dynamics Azure

Go back a handful of years and Microsoft was seen as a big, bad, monolithic vendor that was very much resting on its laurels. The change of CEO marked a turning point for Microsoft, however, and under Satya Nadella the company has shown itself to be innovative, nimble, and a pragmatic operator. This is perhaps best seen in Azure, Microsoft's cloud platform, which most commentators see as the most credible public cloud after Amazon Web Services (although, it has to be said, Azure is a distant second to the AWS powerhouse). The company has also done great work with its office productivity applications - Office 365 is now seen as a truly credible cloud office productivity and collaboration offering.

Where the company hasn't done so well, however, is in its back office applications. Microsoft has a large roster of CRM and ERP products that are relatively unknown, at least compared to the heavyweights in the space, Salesforce, and NetSuite. In the past, Microsoft had a very aggressive strategy of positioning itself as a better solution to these competitors. Under Nadella, however, the company has strongly followed a co-opetition strategy, recognizing that it needs to be a partner to companies that it also competes with. This was most dramatically displayed when we saw Satya Nadella give a keynote at Salesforce's DreamForce conference a few months ago - while the keynote was largely panned as an obvious product pitch, the very fact that the two companies agreed to play in each other's space was indicative of a shifting strategy.

Now that Azure and Office 365 are settled and well in their "cloudy groove," apparently Microsoft has determined that the time is right for the other applications to be modernized. To this end, a recent organizational change folded the Dynamics business application group into the main Microsoft cloud division under the leadership of Scott Guthrie. Many saw this as a final promotion of Dynamics to a first-class citizen for Microsoft. Additionally, it was obvious that the company intended to enable the Dynamics applications to take advantage of all the work being done on Azure - in particular, analytics and machine learning.

This was important since Microsoft has been virtually ignored in both the CRM and ERP spaces. Salesforce is the elephant in the room, virtually owning the cloud CRM space, while in the ERP space NetSuite sucks up most of the oxygen. Indeed, NetSuite CEO Zach Nelson often finds time in his presentations to deliver a stinging attack on the perceived backwardness of Dynamics ERP. The move to bring Dynamics in with Azure should give Microsoft the ability to address these criticisms. After all, Azure has the scale to deliver applications at excellent economies. Furthermore, there is a huge amount of development going on in Azure around the analytics and machine learning space. At an abstract level, Microsoft SHOULD be able to offer a more holistic solution given that it has all the components in-house (infrastructure, the apps themselves, and the analytics capabilities as well).

I spent time talking to Mike Ehrenberg, a Microsoft technical fellow who heads up the ERP division, about the situation for Dynamics. The conversation was interesting, coming as it did the week before today's announcement of new versions of software that Microsoft believes will allow it to compete more strongly with other cloud players. I started by asking Ehrenberg about the competitive situation and how he sees the changes in how Microsoft works with competitors that have occurred over the past few years.

"Satya [Nadella] has changed the culture within the company and the way we work within the industry," Ehrenberg told me. "A huge part of the fact that we have a partnership with Salesforce, along with other vendors that would have been unlikely to happen previously is down to him."

"Our job every day to compete with [Salesforce] and understand that it is good for Microsoft to have them as a platform partner," he continued. "The partnership between Salesforce and Microsoft around cloud technology is a validation of the progress that Azure has made as a cloud platform. Beyond Azure as a cloud platform, it speaks to the value of Office 365 as a connection point for business users."

One specific outcome Ehrenberg pointed to from the Dynamics/Azure tie up was the ability to now embed Power BI, Microsoft's in-house visualization offering, directly into Dynamics applications. Now users can generate flexible and powerful visualizations from within the platform. Ehrenberg sees this as helping Microsoft articulate a value proposition that sees them as a truly "high-fidelity" platform play. Having first-party visualizations and analytics within the platform is an arguably stronger offering than customers can get from competitors who need to rely on an ecosystem of third-party add-ons to deliver analytics and visualizations. It's a perspective that makes sense - the broadness of Microsoft's platform should, at least in theory, be an opportunity to differentiate itself from other vendors.

It was, as an aside, somewhat jarring to see Salesforce showing off Microsoft as a customer for its marketing automation solutions at DreamForce. Salesforce went to great lengths to explain how it is taking customer interaction data from Office 365 and analyzing it to generate actions within Salesforce's marketing automation solution. I questioned Ehrenberg about what this says about the value of Dynamics CRM when the company turns to Salesforce for this important function. Ehrenberg pointed out that Microsoft uses Dynamics CRM extensively within its own sales organizations. He did admit that they use Salesforce for some marketing automation, however. In an ironic twist, Ehrenberg pointed out that the marketing automation solution they use, Salesforce's ExactTarget, is, in fact, a .NET application and actually runs on Azure - so even if the business application comes from a competitor, it still runs on the Microsoft platform. Ehrenberg pointed out that the fact that Microsoft is using ExactTarget indicates that Dynamics needs to compete on a level playing field. I'd be interested to see whether, over time, Ehrenberg manages to convince the Microsoft sales operation to come back inside for its marketing automation needs.

The fact of the matter is that the Dynamics family of products is seriously lacking mind-share when compared to other cloud offerings. Ehrenberg told me that the entire company is focused on redressing that balance and pointed out that both Nadella and Microsoft founder Bill Gates are "all in" with Dynamics and very bullish about the progress the division has made in recent time.

"We're not just moving to the cloud," he said as a parting thought, "but we've fundamentally rethought what we're doing."

Time will tell just how effective that rethink is.

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Copyright © 2015 IDG Communications, Inc.

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