Microsoft Takes Short-Sighted Approach to On-Demand CRM

By John Pallatto  |  Posted 2005-11-05

Microsoft Takes Short-Sighted Approach to On-Demand CRM

Microsofts views on on-demand line of business software became clearer Friday with its pronouncement that it will not introduce a hosted version of its brand-new CRM 3.0 package.

Whatever it may do with on-demand software in the future, offering hosted versions of major business applications isnt in the cards--at least in the near term.

The on-demand Web services that Microsoft announced this week, Windows Live, and Office Live, are essentially add-on information, collaboration and communication services for individuals or small and midsize companies, not enterprise line-of-business applications.

On Thursday, Microsoft announced the acquisition of a file-synchronization technology vendor, FolderShare, a subsidiary of ByteTaxi Inc.

FolderShare provides an online service that allows users to synchronize data from multiple computers that they access through a Web browser. This is likely a service that Microsoft will add to Windows Live.

But none of this looks like the start of a large-scale effort to offer on-demand business application services.

There had been much speculation that Microsoft would inaugurate its move into on-demand software distribution with the introduction of CRM 3.0, which was released to manufacturing Monday.

Click here to read about Microsofts "Live" Internet services.

It seemed like a natural move for a company that might want to diversify its product distribution options by offering a hosted version of a major application such as customer relationship management.

Some of its biggest CRM competitors, Siebel Systems Inc., and NetSuite Inc., among others, are demonstrating that there is money to be made from by offering on-demand CRM applications.

The time seemed ripe for Microsoft to adopt this business model in a serious way before these smaller competitors had a chance to get too much bigger and start significantly cutting into Microsofts sales of on-premise software.

Brad Wilson, Microsofts general manager of CRM, succinctly explained why the company wont make this otherwise obvious move: "We dont need to play somebody elses game."

On the face of it, this seems like a sensible position. Microsoft has become one of the richest and most successful companies on the planet by selling on-premise licenses for operating systems, servers and business applications.

Next Page: Sitting on the sidelines.

Sitting on the Sidelines

Wise executives dont meddle with success by making radical moves to a bifurcated business model that gives customers the option of paying subscription fees for hosted applications or continue to buy licenses to install application and server software on their premises.

That raises the question of whether Microsoft could offer a hosting service at prices that would be attractive to customers without seriously cutting into its huge revenue streams from on-premise software.

Microsoft has apparently decided that the safer move, at least for the short term, would be to leave it to the little guys to play their on-demand game. Microsoft will protect its riches.

To read why executives at major on-demand application service companies believe that Microsoft is playing catch-up with their business plans, click here.

Thats the kind of move that one would expect from a rich and long-established company.

But not from a far-seeing company that would recognize the long-term potential competitive threat those little on-demand software companies pose to its markets.

They might not be much of a challenge now, but if on-demand software subscriptions continue to grow in popularity, in time they might start cutting into the revenue of Microsoft and other large software companies.

And its not just the little companies that are getting into on-demand software.

Siebel was building its own on-demand business model to complement sales of licensed software.

Oracle officials have indicated they will continue Siebels on-demand sales model if it gets federal clearance to close its proposed $5.85 billion Siebel buyout.

Saying that it is content to give partners the opportunity to resell Microsoft CRM as a hosted service is a remarkable cop out.

The software industry landscape is littered with the wreckage of companies that failed trying to resell client-server business applications as hosted services.

It didnt work in the late 1990s, and there is no reason to believe it will work now.

The companies that are making a go of it today are mostly offering applications that were built from the ground up as hosted, on-demand services with features and performance that are optimized for access over the Web.

Even Microsoft itself would stand a good chance of failure if it just offered a hosted version of CRM 3.0 out of the box.

But Microsoft is merely postponing an inevitable move to hosted business applications. By staying out of the game, Microsoft is giving its competitors more time to prove the value of the concept.

It cant sit on the sidelines forever, because the day when competing on-demand software and services start cutting into its bottom line will come sooner than it expects.

John Pallatto is a veteran journalist in the field of enterprise software and Internet technology. He can be reached at

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