In-Depth

Under Nadella, Microsoft Dynamics Steps Out of the Shadows

The Microsoft business application suite has a new lease on life -- with major investments via 2015 acquisitions, important new cloud components, new management and new partnerships with former rivals.

• By Gladys Rama
• April 20, 2016

Microsoft has had a fairly stable nucleus of products that are deemed its "core." There's Windows, of course, though that star has dimmed in recent years with the ascendance of non-PC computing. There's Office 365, the fastest-growing business in Microsoft's history. And there's Microsoft Azure, which is self-explanatory given CEO Satya Nadella's trademark mantra of "cloud-first."

In recent years, however, and particularly since Nadella was named CEO in 2014, another product has moved into that core: Dynamics. Once a background player in Microsoft's cloud- and devices-focused strategy, Dynamics has lately been the focus of significant investments by Microsoft. In 2015, the company made three key acquisitions aimed at bolstering the product: FieldOne, Adxstudio and Incent Games.

It's been a money-in/money-out transaction for Microsoft, too. The company has enjoyed significant boosts to its bottom line because of Dynamics, which was a $2 billion business in its fiscal 2015. In Microsoft's second-quarter earnings report, Nadella credited the 11 percent revenue increase in the Dynamics unit with "contributing to our growth in the cloud" -- a significant mention, given that a few years ago, Dynamics wouldn't have been likely to merit any mention at all in a Microsoft earnings call.

How has Dynamics made the transition from bit player to starring role? And what new dilemmas are partners experiencing because of it?

The Azure (and Guthrie) Effect
Microsoft shuttled Dynamics around a bit over the past few years. In 2013, as part of then-CEO Steve Ballmer's "One Microsoft" restructuring, Dynamics ended up moving under the newly formed Applications and Services Engineering group, led by Executive Vice President Qi Lu. Then in 2015, in a reorg spearheaded by Nadella, Dynamics found its latest and current home under the Cloud and Enterprise group, alongside key Microsoft products like Azure, SQL Server, Windows Server and Visual Studio, among others. Dynamics also got a new leader out of that Nadella-led reorg -- Scott Guthrie, the longtime public face of Microsoft's various cloud and development efforts.

In announcing the 2015 reorg, Nadella said that repositioning Dynamics under the Cloud and Enterprise umbrella "will enable us to accelerate our ERP and CRM work even further and mainstream them as part of our core engineering and innovation efforts."

"[Dynamics AX] really rounds off what we refer to as our business cloud, and brings together a lot of our individual cloud assets into a single offering for our customers."

Christian Pedersen, General Manager, Enterprise ERP, Microsoft

Microsoft had already been taking steps to integrate Office 365, Power BI and Cortana -- a cornerstone of Microsoft's emerging machine learning portfolio -- into Dynamics CRM. Being folded into Guthrie's team seems to have accelerated the pace of that integration beyond Dynamics CRM. Nowhere is this more apparent than in the newest release of Dynamics AX, Microsoft's flagship ERP solution that the company completely re-architected earlier this year as a full-fledged cloud product. The new Dynamics AX (Microsoft nixed the year designation for this release to underscore its cloud-first approach) became available from the Azure Marketplace as a Platform-as-a-Service (PaaS) solution in late February. Besides being built for Azure, Dynamics AX also leverages a number of Azure-based technologies developed under Guthrie -- namely Azure Machine Learning, Azure Internet of Things, Cortana Analytics and Power BI -- as part of Microsoft's overall Big Data push.

"It is really a milestone release for us as a company," Christian Pedersen, general manager of enterprise ERP at Microsoft, told RCP last month in an interview. "It really rounds off what we refer to as our business cloud, and brings together a lot of our individual cloud assets into a single offering for our customers."

"In terms of Microsoft being able to differentiate the options people have, from a Microsoft-managed cloud service to a private cloud deployment to on-premises -- there's not really anybody else in the ERP space that can touch that."

Mike Ehrenberg, Microsoft Technical Fellow, Microsoft

The Dynamics team worked extensively with the Azure team throughout the development of Dynamics AX to ensure that those various cloud assets were well-integrated into the product, said Microsoft Technical Fellow Mike Ehrenberg in an interview about the new release. "There's definitely a lot of co-innovation going on," he said.

Because of that co-innovation, Dynamics AX is also set to become the beneficiary of a key component of Microsoft's emerging cloud technologies: Azure Stack. First unveiled at last year's Ignite conference and expected to become generally available later this year, Azure Stack has been touted by Microsoft as a solution that would enable organizations to run Azure cloud services from their on-premises datacenters -- essentially, a more streamlined version of Microsoft's old "Cloud OS" platform. Sometime this year, Ehrenberg said, Azure Stack -- in concert with Windows Server 2016 and SQL Server 2016, which are both in varying stages of development -- will enable organizations to run the PaaS-based Dynamics AX from their own private datacenters. It'll essentially be the same product, Ehrenberg explained, the same code base as the Dynamics AX that's available on Azure, but with the ability to support a hybrid experience.

This is a different approach than what Microsoft has taken with Dynamics CRM, an on-premises product from which Microsoft has spun out a cloud-based counterpart, Dynamics CRM Online.

"In the CRM world, there's the CRM on-premises product, and we take that and we wrap it to create a service. What we're able to do in the new world -- and a lot of this is honestly based on capability that's there in Azure -- is flip that [process] around, so that our product is going to be the service," Ehrenberg said. "The whole concept of Azure Stack is the thing that allows us to get to a world where we can build one product and not have to have a second thing for on-premises."

He added that Microsoft is also working on a third deployment flavor for Dynamics AX, one for organizations that want the "extra level of isolation" that the private cloud provides.

Ehrenberg touted this ability to deploy a single product across public, private and hybrid cloud environments as a competitive advantage for Dynamics partners, and one that's down solely to Dynamics' deep involvement with Azure. "Honestly, in terms of Microsoft being able to differentiate the options people have, from a Microsoft-managed cloud service to a private cloud deployment to on-premises -- there's not really anybody else in the ERP space that can touch that," he said.

'Dynamics at the Center'
Tony DiBenedetto, chairman and CEO of Tribridge Inc., sees Microsoft's re-categorization of Dynamics as a cloud business as part of Microsoft's effort to integrate Dynamics into the company's overall vision -- a way to knock down those business divisions that have had many Dynamics partners feeling marginalized since the Great Plains and Navision acquisitions of the early 2000s. Particularly for Tribridge, a systems integrator focused on Dynamics but that also offers solutions around the rest of Microsoft's cloud stack, the cross-innovation between the Dynamics and Azure teams has given the company "an opportunity to be a little more creative with core Microsoft [products] when we're developing solutions," according to DiBenedetto.

"I believe that [Microsoft] positioned Dynamics well, both ERP and CRM, to be much more of a cloud solution. It really fits Satya's goal of being a cloud company. I think most partners probably like the fact that it's sitting in [Guthrie's] organization and that it's tied to Azure and those other cloud solutions," DiBenedetto says.

"But," he adds, "it's still very siloed. ... You're still having to have multiple people agree on a lot of things [when closing customer contracts], where if it was one, truly one, group, we'd probably all save a lot of time."

DiBenedetto notes that Microsoft is a vast organization; silos are inevitable, and not necessarily unique to the Dynamics business. However, it's exacerbated for Dynamics because the relationship between Microsoft and Dynamics partners has been, historically, a touchy one. It has not helped that Microsoft has tended to treat Dynamics as a second-string player compared to its star products.

That has changed since Nadella took the helm, however. In his past two Worldwide Partner Conference (WPC) keynotes, Nadella has made pointed, if not extensive, mentions of Dynamics, touting its growth as a business and as a partner opportunity, as well as its interconnectedness with other cloud products. At the 2015 WPC, Nadella took the message one step further, saying that he is very focused on "the mainstreaming of Dynamics," and, "It's not about Dynamics on its own. It's Dynamics at the center of the company."

With the reorg, Nadella has certainly put Dynamics in a more central position within the larger Microsoft ecosystem, much to the relief of its partners. However, recent moves have also caused some consternation among partners; see Microsoft's overtures to its biggest CRM and ERP competitors in a bid to improve its competitiveness in the business-applications market.

Openness Is a Double-Edged Sword
In May 2014, Microsoft announced a partnership with Salesforce.com Inc., the leading CRM platform even by Microsoft's admission, to integrate Salesforce.com's technology with several key Microsoft products, including Windows and Office 365. In the media briefing following the announcement, Nadella couched the collaboration as a way "to bring more value to our mutual customers, and to be each other's customers in relevant areas." Today's business customers are seeking out solutions that work in heterogeneous environments, he said, indicating that Microsoft would increasingly pursue partnerships that meet that requirement.

"We want to be a broad platform provider in this mobile-first, cloud-first world, so partnerships like the one that we are talking about with Salesforce today is very, very important to us," he said. "With that spirit in mind, I want to approach partnerships that really add value to the entire industry. And that's, I think, the spirit you can expect more from us."

That "more" came about a year later, when Microsoft announced a similar partnership with another Dynamics rival and ERP market leader, NetSuite Inc. As part of that deal, the two companies said they would integrate NetSuite with Microsoft's Azure Active Directory product, as well as with Office 365. Steve Guggenheimer, Microsoft executive vice president and chief evangelist, said in an announcement that the NetSuite partnership was "all about giving people the freedom to get more done through the broadening set of devices they interact with."

Nadella's tenure as CEO has been marked by a level of openness and collaboration that was once considered anathema at Microsoft. Under Nadella, the company has become an unlikely champion of open source, inking partnerships with companies like Red Hat Inc. and Docker, and open-sourcing components of its .NET stack. Microsoft has also made significant strides at extending Windows to non-Windows platforms since Nadella took the helm. Examples include Microsoft's "Universal Windows Platform" concept of creating easy ways to port Windows apps to iOS and Android, partnerships with Android OEMs to pre-install Office apps on their laptops and tablets, and continued investments in its Office mobile apps to ensure they work well on iOS and Android devices.

In this latter-day Microsoft, the Salesforce.com and NetSuite partnerships just seem like business as usual. Tribridge's DiBenedetto, however, sees the Dynamics collaborations as "a double-edged sword."

"What, exactly, does it mean to a customer that Dynamics will work with Salesforce? In other words, did AX come out with connectors connected to Salesforce? Is Salesforce going to become the CRM platform for Microsoft? It creates some objections we didn't have before."

Tony DiBenedetto, Chairman and CEO, Tribridge Inc.

"At a very holistic level, I would say it's refreshing," he says. "But it does create confusion both in the field, as well as with customers."

Using the Salesforce.com collaboration as an example, DiBenedetto explains that the confusion stems from a lack of clarity regarding what, exactly, is being collaborated on. At last year's Salesforce Dreamforce conference, the two companies released a dizzying string of products that have either been integrated or are on their way to being integrated ("Salesforce App for Outlook, Salesforce Exchange Sync, SharePoint and OneDrive for Business integration with Salesforce, Salesforce1 and Office integration, Salesforce1 on Windows 10, Power Query Integration with Salesforce, Power BI for Office 365 integration with Salesforce, and Salesforce Wave Connector for Excel"). However, for Dynamics partners looking to fit these solutions with their own, there has been precious little guidance.

"What, exactly, does it mean to a customer that Dynamics will work with Salesforce? In other words, did AX come out with connectors connected to Salesforce? Is Salesforce going to become the CRM platform for Microsoft? It creates some objections we didn't have before. ... Now we're having to answer a question that no one's answered about where does Salesforce really fit into this strategy of a customer's journey working with Microsoft. It's not crystal-clear," DiBenedetto says.

"I think the message [from Microsoft] is, find solutions, make solutions that apply to your business -- whether it's services, whether it's manufacturing, whatever it is. If that happens to incorporate some outside technology, so be it."

Seth Zarny, Partner, Raffa

For other partners, Microsoft's embrace of competing solutions presents nothing but opportunity -- lack of specifics notwithstanding.

"I think the message [from Microsoft] is, find solutions, make solutions that apply to your business -- whether it's services, whether it's manufacturing, whatever it is. If that happens to incorporate some outside technology, so be it. But the issue is, become experts in these industries," says Seth Zarny, who runs the technology practice at Raffa, a professional services firm based in Washington, D.C. Raffa's offerings include support and implementation services for Dynamics GP and Dynamics SL.

Zarny concedes that Microsoft's best interest is for its partners to sell customers on the value of the full Microsoft stack. However, he welcomes the laissez faire attitude he's heard Microsoft executives express while attending partner-focused events: "'We want to do business. We'll do business that brings us business. And if that means integrating with something that's a non-Microsoft [brand], we're willing to work to do that and figure it out.'"