The PC software giant is targeting distributors and manufacturers to replace their systems with its full-featured, fully integrated business solutions.

Using its $60 billion cash hoard, the 800-lb. gorilla of PC software is executing phase 1 of a plan to try to become the dominant player in the market for ERP (Enterprise Resource Planning) software. ERP software is the kind that PHCP, PVF and HVACR distributors use (as do manufacturers), so if Microsoft gets its way, many distributors and wholesalers will some day be using its software. This article provides an overview of the history of software for distributors, then explains phase 1 and how it has impacted distributors, and concludes by outlining phase 2 and the benefits and risks it could bring to distributors.

The History Of Software

Let's start by dividing software into two types, “operating system and utilities” and “application.” Operating systems include Unix, OS/400 and Windows; an example of application software is software that enables people to take orders, track inventory, maintain the general ledger, etc.

Prior to the mid-1970s a (“mainframe”) computer came with only an operating system and some utilities, no application software; packaged software as we know it didn't exist. To get a computer to perform a function like printing invoices required creating the application software from scratch, either by hiring one or more “programmers” or contracting with an outside firm. The cost of creating software could easily exceed the cost of the computer itself, so the total cost precluded most wholesalers from automating.

The form of software changed in the mid-1970s when relatively inexpensive mini-computers were invented with the intent of selling dozens of thousands every year. But manufacturers soon learned that prospects didn't want to create application software on their own. So the manufacturers formed alliances with numerous independent programming firms to offer prospects a total solution - a computer and application software. Initially, software was custom created for every new customer, but soon most programming firms started using software created for earlier customers as the base for software for new customers. By the late 1970s, many programming firms realized that they could make much more money by pre-assembling previously created pieces of software into a “package” and licensing it to many customers at a lower price.

In the late 1970s to early 1980s firms were established for the sole purpose of developing packaged software for specific industries (e.g., distribution); sometimes for specific niches within an industry (e.g., PHCP wholesaling). Some developers were firms that had assembled the first packages but saw the need for packages for specific industries/niches. Some developers sold their software directly to customers, while others used re-sellers to sell, install and support the software.

By the early 1980s packaged software had been created for every industry, and there were hundreds (maybe thousands) of firms that had developed or were re-selling software packages. The vast majority of these firms were small and undercapitalized. Along came the recession of 1991-92, which thinned the ranks of software developers and re-sellers - sales of software dried up, but the firms weren't getting enough revenue from ongoing support fees. There were bankruptcies, mergers and roll-ups.

When the economy recovered, packaged software evolved again during the boom years of 1992-99. Some developers used IPOs and other easy money to grow very large, sometimes by acquiring other firms. The ranks grew thinner, but everyone developing or selling software thrived during the rush to buy new software before the millennium. However, the tech wreck that started in 2000 thinned the ranks even more. Today, the number of firms developing software is measured in the dozens, and the number of re-sellers has also fallen dramatically.

The Microsoft Strategy

In the late 1990s, Microsoft realized (hoped?) that within several years it could saturate the market for the PC operating system, utilities and other generic PC software (e.g., Office). It needed new software and markets to continue growing, and identified the new software and market as: all the software (operating system, utilities and application, all tightly integrated) that a “small” business needs to function like a big business, but at a cost that a small business can afford. It identified distribution and manufacturing as the small business segments to target first. (“Small” is under $500 million/year.) Microsoft estimated that the small business market could generate nearly $10 billion/year by 2010, and it wanted to make businesses an offer they couldn't refuse and no one else could make: low-cost, completely integrated software that worked seamlessly. But Microsoft knew that it could take years to create integrated software, during which time Microsoft would get no revenue from this segment, and wouldn't “go up the learning curve” of manufacturing and distribution IT experience.

So the giant developed a two-phase strategy: first, buy software developers and their packages in order to gain entry into the target segments and learn about segment needs; second, while executing phase 1, develop a completely new set of integrated software - the kind that a small business really can “plug in” and start using immediately.

Phase 1

Microsoft started by setting up a distinct Business Solutions division, and then purchased Great Plains, an American developer and marketer of ERP software (called Great Plains Dynamics) meant for “mid-size to large” manufacturers and distributors. That deal also gave Microsoft a package aimed at small companies. Both packages are sold mainly in North America.

But Microsoft was missing a package for small to mid-size companies, so it acquired Navision, a European company whose two packages are Navision and Axapta - packages with far more users outside North America than here.

Business Solutions has allowed Great Plains and Navision to operate on their own, while helping them add “connections” to traditional Microsoft products (such as Office), to sell more traditional products.

All of the new packages had been marketed through re-sellers, an arrangement that Microsoft continued. But Microsoft believed there weren't enough re-sellers to sell the targeted number of packages. So in early 2003, the Business Solutions division set out to recruit an additional 20,000 re-sellers!

By mid-2003, Microsoft had invested over $2 billion on its Business Solutions division, which in the most recent fiscal year had sales of about $567 million. The sales rate continues to increase (sales for next year are targeted at $700+ million), but is deliberately being restrained because Business Solutions is following a strategy that Microsoft has used many times to gain market share: make the price of the software so low that competitors can't compete.

What has Phase 1 meant so far for typical readers of SUPPLY HOUSE TIMES? Little - mainly because none of the four packages is designed for any specific type of distribution (e.g., HVACR or PVF or PHCP ). That lack of specificity has meant that none of the four packages can compete with the software packages that were specifically designed to meet the needs of distributors of hard goods like PHCP. Furthermore, prospects are worried about whether Microsoft really will continue to enhance and support four different packages; worried that the one they choose would be discontinued. The intent of Phase 2 should intensify those worries.

Phase 2: Show Me The Green

The cliche is, “Show me the money,” but Microsoft's code name for the project to develop new business software is “Project Green.” Almost 700 people are involved in designing and developing seamlessly integrated software that will combine the following: the desktop operating system, the server/network management software, Office (Word, Excel, etc.), the browser and e-mail, and the ERP functions. The target date for first release is mid to late 2005, and Microsoft expects to add 400 more people to try to stay on target.

A first step toward the integration goal of Project Green is reflected in the recently released Office 2003 - it contains “hooks” designed to allow technical people to interface components (e.g., Word) with various brands of ERP software. In an interfaced environment, a user could create a letter in Word, using name and address data that reside in the ERP system, and then e-mail that letter, again using ERP data.

Why would they go to all this expense when they already own four packages? The answer is the answer to a question Microsoft raised rhetorically: What would make a distributor or manufacturer replace their system with this new fully integrated one? Answer: the increase in employee productivity and customer service, the very low price, a true plug-n-play package, the ability for a user-company to “tailor” the software to specific needs via software settings, and functions that permit user-companies to easily become part of a supply chain.

What could Phase 2 mean for typical readers of SUPPLY HOUSE TIMES? The answer to this question will depend on several factors: whether the new software can easily be user-tailored so it functions like the niche-specific packages used by many readers; whether software pricing will be irresistibly low (don't forget about the extra costs for training, education, system installation, data conversion, post-installation support, etc.); and if first users have easy conversions and quickly get benefits that justify the changes.

It's too early to tell whether Project Green will be a boom or bust for distributors and wholesalers, but, however the new software turns out, one thing is for sure - the landscape of software for distribution will never be the same.