Microsoft to Add "Encore" Functionality to MBS Great Plains 8.0 Part Two: Market Impact

Market Impact

On April 27, Microsoft Corporation's (NASDAQ: MSFT) Microsoft Business Solutions (MBS) division announced the acquisition of accounting products from a Winnipeg, Manitoba, Canada-based vendor Encore Business Solutions, Inc. that could be critical to the success of customers and partners in the public sector. The acquisition includes Encore's not-for-profit accounting products and the inter-company payables management and requisition management modules currently sold by MBS under an original equipment manufacturer (OEM) agreement with Encore. Namely, the only modules that have been OEM-ed so far have been the purchase order enhancements and cash flow management functionality, but these are not a part of the NFP solution.

The Encore acquisition has merits both in terms of figures and numbers, and of "philosophical/existential" reasons. Namely, although many have regarded MBS as an unquestionable leader due to its indisputable mind share, because of its parent company's technological prowess and pervasiveness, at least on the desktop level, Sage Group/Best Software will remain the small-to-medium applications market leader for some time in terms of inexorable numbers that determine the market share-based leader. Namely, Sage/Best's latest acquisitions of ACCPAC and Softline have created a company with over $1 billion (USD) in expected revenues, over 4 million users, and nearly 20,000 reselling and software development partners. If one is to juxtapose these against the MBS' approximately $0.6 billion in revenues, and its "only" over 0.27 million customers, and "only" over 6,000 partners, any debate about who the current leader is should cease for the time being.

Indeed, the combined Sage conglomerate still has the largest channel and market share in almost all small-to-medium enterprise (SME) categories (such as, entry level accounting products, small business solutions, contact management/CRM, especially within non-profit businesses, etc.) via its well-crafted strategy to both develop and acquire a very complementary slew of best-of-breed products and to develop interoperability and a reasonably smooth upward migration path within its portfolio. This "customer for life" mantra seems to have resulted in a rare persistent organic growth these days, and one should expect a similar rationale with ACCPAC and Softline's offerings. The vendor has long been posting profits and growth, and the biggest reason for this would be its prudent strategy of acquiring complementary products that lend themselves to cross-selling (including, FAS and ACT! to Peachtree customers, or Abra HR/Payroll, FAS and SalesLogix to MAS customers) and upward migration (for example from Peachtree to MAS 90 to MAS 500).

To be fair, MBS has PWA Group, FRx, and Forestar products somewhere in its fold through the once independent Great Plains Software which acquired these respective HR, financial reporting/consolidation, and fixed asset functionalities, but it still has the four, largely competing flagship ERP/accounting product lines. Even though FRx products seem to have been successfully cross-sold and integrated into almost all four of MBS' ERP products (and even into the dozens of ERP product from other vendors including Best Software, see FRx Poised to Permeate Many More General Ledgers), it has not been the case with other potential add-on products, like MBP or Forestar. Also, while Best is benefiting royally by mostly cultivating its large install base, MBS' and SAP Business One's emphasis on hunting for new licenses in an all-but-stalled economy has had a limited success so far.

Hence, one should not be surprised by MBS' recent and more upbeat results. These have come, in a great part, from up-selling so-called "surrounding" applications like Microsoft Business Network (MBN), Microsoft Demand Planner, and Microsoft Business Portal to its existing ERP users (see Microsoft Keeps on Rounding- up Its Business Solutions). However, a modest, single digit percentage of growth lately is by far insufficient to sustain Microsoft's lofty goal of ballooning MBS' operations to a $10 billion (USD) entity by 2010, which is nearly twenty times its current size and which would require annual growth rates of circa 60 percent. Thus, any acquisition that is not of a disruptive nature (such as imposing yet another ERP product assimilation and integration in an already "crowded house") makes sense, and one should expect many similar lateral acquisitions of ISVs with complementary products.

This is Part Two of a three-part note.

Part One detailed recent events.

Part Three will cover challenges and make user recommendations.

Public and Nonprofit Sector Markets

The Encore acquisition should bring the two former partners' complementary product offerings even closer and should enlarge opportunities within the public and nonprofit sectors under the Microsoft umbrella. The products' technologies are quite compatible and so the products' integration will not be terribly complex, if it is to be complex at all. Public sector and government agencies and nonprofit organizations have similarities in the fact that both require fund accounting and management capabilities, and have complex financial reporting requirements that are quite different from commercial, for-profit financial accounting.

For instance, dozens of separate government agencies in one state will logically use dozens of different formats to prepare their separate financial reports, but some standardization of the fiscal procedures and reporting structures may be needed when all these are sent to the US Department of Labor (DoL). Still, not-for-profit and government sectors differ at least by the fact that government agencies, ranging from the local police, school or transportation authority (via water or any other utility) to an expansive federal division, are funded by tax revenue, grants, and service revenues (where applicable), as opposed to individual or corporate donors as in the case of nonprofit businesses. Also, the public sector logically reports to regulatory authorities and taxpayers instead of to major donors, which is in the case of profit organizations.

Even so, many recent circumstances have rendered the nonprofit and public sector accounting markets as both a land of opportunity and of challenges. Accordingly, a slew of not-for-profit software vendors ranging from unavoidable Best Software, via the likes of Accufund, Executive Data Systems, Fund E-Z Development, and Intuit Fundware, Serenic Software, to stalwart Blackbaud, and their value-added resellers (VARs), have been penetrating the nonprofit and government markets. Meanwhile, MBS has so far not been exactly the forerunner in that segment. For a detailed discussion of these markets see Non-Profits and Public Sector: The Latest Hot Market.

Thus, the Encore acquisition is yet another company in the ongoing one-upmanship and catch-up game between MBS and its archrivals, especially Best Software. Namely, it has particularly been illustrated with MBS bolstering supply chain and distribution capabilities of the signature MBS Great Plains product, which ironically has had the weakest distribution capabilities of all the product lines. Thus, in addition to a much-belated native blanket purchase order support, inter-site transfers, and pick/pack/ship workflow functionality, at Stampede 2002 partner conference MBS announced the acquisition of the Myridas Advanced Distribution, Myridas Advanced Picking, and Myridas Available To Promise software modules from its UK-based, ISV partner Trinity Computer Services. These enhancements were part of the generally available Release 7.5 of MBS Great Plains in April 2003, while these modules for Version 6 and 7 have been available directly from Trinity along with the seventeen other Trinity modules for distribution. This has made the product a more formidable competitor within the distribution oriented customers.

On the other hand, Best Software has only recently extended its reach in the professional service automation (PSA) area, with recent project management enhancements to MAS 500. This with the acquired ACCPAC Advantage Series suite should make it competitive with the peers, although MBS Solomon maintains the edge due to its being continually enhanced within MBS (see Solomon Stands the Test of Time Despite Changing Masters). Best's recent acquisition of Timberline, a former provider of integrated financial and operations software and services for small to mid-sized businesses in the construction and real estate industries, has more than 20,000 active customers, predominantly in the US. Moreover, this, in conjunction with a blended distribution channel consisting primarily of independent solution providers and complemented by a direct sales operation, should complement and extend Best Software's existing construction-oriented solutions such as MAS, Peachtree, FAS Construction-in-Progress Accounting, and Platinum for Windows (PfW). Also, the ACCPAC acquisition should give it technological ammunition to spar with Microsoft's initiatives, especially in terms of provision of hosted and outsourced applications, and supply chain connectivity (see Will Sage Group Cement Its SME Leadership With ACCPAC and Softline Acquisitions?).

Therefore, it was only natural to expect next MBS's move to address the nonprofit segment inferiority by acquiring Encore, and to also look for more chess-like moves from SME application providers.

This concludes Part Two of a three-part note.

Part One detailed recent events.

Part Three will cover challenges and make user recommendations.