Microsoft Acquires Great Plains Software
Written by John J. Xenakis for
CFO.com,
Jan 10, 2001.
The deal should strengthen the midrange accounting software industry,
but can Microsoft really adapt?
Microsoft's proposed acquisition of Great Plains Software indicates
how the computer industry is changing and how Microsoft itself may
have to change in order to maintain its leadership position. On
December 21, 2000, Microsoft said that it would acquire Great Plains
Software Inc. in a $1.1 billion stock purchase.
"The combination of our two companies will accelerate small and
medium business efficiency and agility by offering software solutions
for automating interconnected business processes," said Jeff Raikes,
group vice president of Microsoft's Productivity and Business Services
Group in a statement. "Together we will bridge the gap between
on-premise[s] software and next- generation software and services."
This last sentence concisely states the opportunities associated with
the merger. Small and medium-sized businesses typically purchase
midrange accounting software from local resellers (also called
value-added resellers, or VARs) who install the software on a
particular customer's premises and customize the product for the
customer's business needs.
However, many businesses today are choosing to use a hosting service,
also called an ASP (Application Service Provider).
The software is installed on the host service's computers, instead of
the customer's computers, and the customer accesses the software
remotely, over the internet.
Tami Reller, Great Plains' CFO, agrees that developing the ASP
marketplace is the point. "We currently have a little over 200 ASP
customers, which is small compared to our 35,000 total customers," she
says. "But in five years, we expect that a large majority of our
customers will have some hosted services."
This strategy also involves a change in GP's target marketplace,
according to Timothy Tow, an analyst with Stamford, Connecticut-based
Gartner Group. "In recent years, Great Plains had been positioning
[itself] to move up-market, but now that's changing significantly, as
they're moving down-market to Microsoft's sweet spot in the midrange,"
he says. "That makes GP less competitive for other competitors, such
as Sage and Epicor, who have been moving up- market."
But the risk that Microsoft is taking is represented by the element
that's missing from Raikes's statement: Whether the software is
on-premises or hosted, it still requires a VAR to do an installation
and custom modifications.
And more than half of Great Plains' installations require software
modifications, according to Charles Chewning of Solutions Inc., a
Richmond, Virginia-based consultant who evaluates accounting software
products.
"There's something that doesn't make sense to me from what Microsoft
is saying," says Chewning. "They want to go after the small to
mid-sized market, but Dynamics [Great Plains' accounting software
product] is too big, too complex for that. And if they integrate [a
small version of] it into their ASP hosting initiatives, then Great
Plains' current ASP resellers are going to get hurt."
Indeed, some of Great Plains' competitors seem quite sanguine about
the pending deal. "We've seen some pretty positive implications of the
fact that Microsoft is buying into the marketplace that we're in,"
says Randy Keith, president and CEO of NavisionDamgaard US. "We expect
Microsoft is interested in going after smaller companies, instead of
the bigger companies that we go after, and the response that we're
getting from our [resellers] is not one of fear."
Keith indicates that he's also heard from a couple of Great Plains'
resellers expressing concern that they'd have to change products if
Great Plains changed its market.
Ben Tse, president and CEO, Accountmate Software Corp., sees it a
little differently. But he reaches the same conclusion. "Microsoft
will increase awareness of the necessity for smaller businesses [who
often do accounting on very low-end financial packages like Peachtree,
DacEasy or Quicken] to get more sophisticated business software like
ours," he says.
Tse is in fact not very impressed with the acquisition as a whole.
"The way I look at it, Microsoft is a very high-profit-margin company,
and in the accounting software business, traditionally, profit margin
isn't that great," he says. Indeed, Microsoft's profit margins have
run around 40 percent, while Great Plains' have been at a much more
modest 5 percent. "Their business models are different and the
corporate culture is different, so Microsoft may not do so well."
This could be wishful thinking by a competitor, of course, but there's
good reason to raise questions.
There's a massive shakeout going on in the midrange accounting
software industry right now.See sidebar.
And there's no reason to believe that Microsoft will be immune from
the same pressures.
Microsoft may well be the world's master at creating software in a
shrink-wrapped box that a customer buys, at which time the software
almost jumps out of the box and installs itself. No other company,
including even IBM, has been able to beat Microsoft at that game.
But accounting software is like that only at the very low end, with
packages that sell to companies with $1 million to $50 million in
annual sales. But Great Plains systems are targeted to $100 million to
$500 million companies and frequently require lengthy sales cycles by
the reseller.
Microsoft would like to make an accounting system available on its
bCentral (http://www.bcentral.com) service, which is a Microsoft hosting
service for small businesses, and one possibility would be to develop
a self- configuring ASP version of that a business could run on
bCentral.
But this would undercut Great Plains' resellers, and Great Plains'
Reller says that this definitely will NOT happen. "Microsoft's
bCentral is more like [low end ASP-only accounting software vendor]
Intacct," she says. "Today we have a hosted offering through our
partner [reseller] channel. Once the acquisition is complete, we'll
look at how bCentral and our strategies come together, but we will
always continue to leverage the partner model."
So Great Plains may not use bCentral at all? "It's too big a leap to
say that bCentral would not be a leveraged component," says Reller.
"There could be some great bCentral components that add value to our
customers and partners."
In other words, Great Plains expects to continue doing business pretty
much the same as before, without risking anything that might disturb
its valuable reseller channel.
So it's easy to see what Great Plains is getting out of this deal:
access to Microsoft's vast assets and resources. But what is Microsoft
getting out of it?
"We have tremendous domain expertise in business applications and the
mid-market, and that's where Microsoft sees value," says Reller. "They
don't have domain expertise in the business application area, and they
need that to serve the mid-market."
Microsoft's public statements suggest that it may tap Great Plains'
expertise to develop its own bCentral-based accounting system, which
would compete with Intacct and NetLedger.
If Microsoft can be happy with so minimal a return from its investment
in Great Plains, then things may go well. But if, as expected,
Microsoft is going to demand substantially greater growth and further
product integration than that, then Microsoft will have to deal with
the same channel-contention issues that every other firm has had to
deal with, and which have caused more than one of these firms to
founder.
(This is a modified version of an article that originally
appeared on
Jan 10, 2001
on
CFO.com
at
this location.
)
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