After years of fanatical focus on large companies, Microsoft has rediscovered the midmarket and launched aggressive new strategies there. But CIOs remain smartly skeptical.

When John Lauer came back to Microsoft Corp. in 2004 after taking six years off, he discovered that the software giant's licensing process had not gotten any simpler during his absence. So the newly appointed vice president of midmarket strategy blocked off two hours on his calendar one day to try to get up to speed.

Microsoft, he discovered, offered some 40 ways to license software, and each came with 24 pages of paperwork. Two hours wasn't nearly enough time. "I couldn't figure it all out," Lauer admits, "and I knew our customers couldn't understand it either. You could get five different recommendations from five different resellers on how to buy our products." As David Burns, a partner at Universal Management Solutions, a Microsoft consulting partner, puts it, "You can get a Ph.D. in Microsoft licensing."

Last fall, Microsoft revamped its licensing structure, reducing the 40 models to nine and unveiling a program aimed at midmarket CIOs. The contract was slimmed down to five pages. "I've gotten beat up on licensing a lot," Lauer says. "We see it on our customer satisfaction surveys. I expect to see some real improvements in customer satisfaction."

Streamlining the licensing process, reducing pricing and bringing to market products such as Centro Server and the Dynamics suite of business applications are main thrusts of Microsoft's new midmarket strategy. In September the company unveiled its plans at the biannual Microsoft Business Summit in Redmond, Wash., where Chairman Bill Gates and CEO Steve Ballmer devoted hours to courting the assembled audience of midmarket CIOs.

It's Not Magic

This was an audience of executives from companies that are neither large enterprises nor small businesses -- a market that Microsoft defines as companies with 50 to 1,000 employees and admits it has long overlooked but now has squarely in its sights. In fact, the midmarket is Microsoft's fastest-growing segment, already a $6-billion business that posted 15% growth in 2004. Microsoft estimates that midmarket CIOs spend $162 billion a year on IT, a figure that it expects will grow to $235 billion by 2007. Worldwide, Microsoft reckons that there are 1.4 million midsized businesses -- 333,000 in the U.S. -- representing 31% of the economy and showing a 12% compound annual growth rate in IT spending.

A Dynamic Roadmap
Microsoft has mapped a course for its midmarket strategy, with products and enhancements rolling out over the next two years. The vendor promises greater focus on cost consciousness, resilience and scalability; improved system performance; and additional integration capabilities for products, such as the Great Plains modules and other software offerings. Here are the target dates for delivery:
    2006 Q1
  • Navision 4.0 SP1 e-business software
  • Support for SQL Server 2005
  • SharePoint-based employee portal
  • .NET data component to enable .NET partner solutions

  • 2006 Q2
  • Microsoft Dynamics CRM 3.0 marketing module
  • Field service-scheduling module
  • New subscription-based licensing for hosted deployments through partners
  • New CRM offering for small businesses
  • Microsoft Dynamics GP 9.0
  • Office role-based user experience
  • Excel, SQL Server 2005-based business intelligence
  • SharePoint-based portal and workflow
  • .NET and Web services development environment
  • Solomon 6.5
  • Microsoft Dynamics SL Business Portal 3.0, built on Windows SharePoint Services
  • Bank reconciliation module
  • Purchase requisition module
  • Microsoft Retail Management System 1.3
  • More secure credit card handling

  • 2006 Q3
  • Microsoft Dynamics AX 4.0

  • 2006 Q4
  • Navision 4.0 SP2

  • 2007
  • Microsoft Dynamics Navision 5.0
  • Microsoft Dynamics SL 7.0
Source: Microsoft Corp.

"The midmarket customer is the least well served across the spectrum of people involved in IT," Ballmer told the IT audience at the summit, adding, "I spent more time trying to understand the midmarket than any other customer segment over my years at Microsoft. It's not completely magic, but requires more work than understanding the consumer or the enterprise."

Microsoft's push hangs largely on building what it calls "higher-quality customer relationships" with midmarket companies. Yet many CIOs are still rankled by Microsoft's empty promises of the past. One is Bruce Hagen, vice president of corporate IS at Bemis Manufacturing Co., a $330-million maker of toilet seats based in Sheboygan Falls, Wis. Hagen knows firsthand the frustration of Microsoft's hot-and-cold advances. Recently, he's attended many of Microsoft's functions aimed at wooing midmarket CIOs, such as the summit and executive briefings, only to come away feeling slighted.

After one event, for instance, Hagen e-mailed two Microsoft representatives requesting more dialogue. He wrote: "The regional Microsoft groups, which have had short life spans, fail to establish and nurture meaningful, effective working relationships and opportunities that could deliver ongoing benefits to us. ... I do not know the names or roles of anyone we work with here in the local Microsoft region." More than a month later, he still hadn't heard a peep back.

Midmarket CIOs desperately want to deal more directly with Microsoft. Charles Livingston, vice president of technology at Exclusive Resorts in Denver, which manages luxury vacation homes for wealthy individuals, wants better access. "The ability to talk to the actual executor at Microsoft would be great," he says. "It still takes a fair amount of effort. Other vendors have excelled at getting the right people in front of the client quicker."

Or consider Peter J. Moore, director of IS at Arrow Group Industries, a $100-million Wayne, N.J., company that builds metal storage sheds. Moore praises Microsoft for improving its products but laments the fact that the midmarket can't get the same attention that large enterprises command.

"Microsoft says, 'We have this product, and it's going to help you,'" he says. "But how do they know that? How do they know our business? I wonder how much information feeds back to Microsoft from third parties and influences their development. ... I don't feel like Microsoft really knows what a company like us does."

Microsoft's response to these cries is a midmarket-specific Web site: The vendor claims companies can visit the site; map out their IT needs; and then find a reseller to help them get up and running, manage their IT assets and support their infrastructure. The site also provides technical information and tools such as chat to facilitate communication with Microsoft support.

While Microsoft has also spruced up its Web site and launched outreach programs, webinars and other support services, company officials say additional staff won't necessarily be assigned to deal directly with midmarket customer concerns about products and product development. All midmarket sales will continue to flow through Microsoft's 640,000 worldwide channel partners, says Lauer. Yet the midmarket CIOs interviewed for this story say they want a direct relationship with Microsoft, not a closer relationship with channel partners, which include independent software vendors (ISVs), resellers, distributors and systems integrators.

In fact, many CIOs dismiss channel partners as volume box pushers that ultimately hike up prices of Microsoft goods. "I would like to buy my licensing directly from Microsoft," says Michael Cammack, chief of information systems at Minneapolis-based law firm Bowman and Brooke LLP. "Right now I buy my licensing through [a reseller] because I'm compelled to buy it indirectly. [Resellers] don't have a compelling reason to do anything above and beyond, as far as I can see, because they can't charge more or less for the product. But for some reason there's a man in the middle."

Also, the horde of ISVs that tie their products to Microsoft Outlook often do more harm than good, say many midmarket IT executives. The theory is that desktop users live in Outlook, which is why ISVs hitch their wagons to it. But with so much poorly written third-party code, Outlook has become increasingly less stable. That could hasten a shift away from it. Even well-written applications end up cluttering Outlook, thus slowing the application's ability to execute functions. "I figure the only thing I need in the future is a browser to get to some hosted environment," Hagen says.

This was first published in February 2006

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