News item: Building on its acquisition of mid-market business application vendor Great Plains Software, completed in April 2001, Microsoft has continued its push into the market for business software

Microsoft is targeting small and medium enterprises (SMEs) with its recent acquisitions of Navision, a European mid-market ERP vendor, and Sales Management Systems (SMS), a specialized developer of retail software. Microsoft intends to integrate SMS point-of-sale and retail management applications with the Great Plains e-business software suite.

Situation analysis: While most other large software vendors are focusing primarily on selling to global enterprises, Microsoft is emphasizing the SME marketplace. Microsoft has built a large cash position, and is now investing some of it to buy smaller software vendors that target the mid-market.

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Microsoft's strategy is to add a .Net Web services interface to the applications it acquires. Microsoft can then sell the software as a package through its worldwide retail channels, and also through the Internet as a Web service that users can access, for instance, through Microsoft Office. Microsoft is already as much a packager and marketer as a developer of software. Each of its purchases gives it more software to market to large numbers of SMEs.

"Microsoft has taken a lot of criticism, but it has helped make it possible for small businesses to compete in many areas," says Meta Group analyst Dale Kutnick.

We expect the Web services model to have a tremendous appeal to smaller organizations. They will not have to install, run, and (especially) learn how to manage their accounting or other software. All they will need to do is learn how to deliver the raw information to the Web service in the proper format--probably in the form of a preformatted Excel spreadsheet that then connects to a Web service to deliver the data and retrieve the result at the click of a mouse. We expect Web services to be Microsoft's major means of product differentiation as it enters this market.

"Microsoft is the fast food of software," says Meta Group analyst Val Sribar. "It may not be the best in the world, but it is good enough and it offers consistent quality."

Microsoft will face considerable competition in the small business accounting marketplace. ADP and PayCheck offer automated payroll services online, and Intuit is rapidly growing its share of the SME accounting market rapidly. All of these solutions already use forms of Web services (though still based on proprietary platforms rather than Web services standards). To gain traction in this market, Microsoft will leverage the ubiquity of Office by providing built-in connections to its growing suite of Web services for small businesses, probably in a future Office upgrade.

This dynamic has already developed in the game market, where online play and the intense competition between Microsoft and the gaming hardware vendors has created a major boom.

User action: As Web services evolve toward large-scale deployment, the usual technology progression is being reversed. Large organizations can watch developments in the SME market to preview the services that will eventually be offered to them.

Microsoft's moves make it clear that enterprises which provide software or application services to the SME marketplace must thoroughly investigate the Internet as a medium for delivering those products. Larger companies should also investigate Web services for use by their telecommuters, small subsidiaries, and small offices. However, they should not expect these services to offer any financial rollup (e.g., of multiple subsidiaries) capabilities in the near future (due to complexity).

Meta Group analysts Dale Kutnick and Val Sribar contributed to this article. This article was first published by Meta on July 5, 2002.

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