Microsoft nudges ERP into the cloud

Profile picture for user pwainewright By Phil Wainewright November 12, 2013
Summary:
Microsoft's ERP installed base is ambivalent at best about moving to the cloud. The vendor's strategy lets them move at their own pace.

Microsoft Mike Ehrenberg
Mike Ehrenberg, Microsoft

In contrast to the gung-ho fervour of the cloud vendor events I normally frequent, there was a far more cautious atmosphere at last week's Microsoft Convergence EMEA event in Barcelona.

There were a handful of cloud converts, some of whom I'll be writing about at greater length separately. Matthew Baumgartner, CIO of serviced offices group ServCorp, happily spoke of Microsoft as "our engine in the cloud." Stefan Truthaen, CEO of German fire safety engineering specialist hhpberlin, explained why cloud was important for his 150-employee company:

"The cloud is evergreen. We haven't got enough energy and knowledge and experts to keep perfectly on the latest version. We need the coolest IT permanently."

But these were the exceptions. Most attendees displayed a surprising diffidence about cloud adoption. You'd expect a small global brand like headset maker Jabra to be a natural candidate to benefit from the scale economies of cloud applications. Ole Grooss, director of commercial excellence, conceded there could be advantages for the Danish company, which sells in 60 countries and has offices in 20:

"When you sit in locations far away from Copenhagen, I expect the lines into the Microsoft datacenter will be better than anything we can do."

Even so, Jabra is only at the initial stage of investigating cloud options. Although it will look at the multitenant Dynamics CRM application, its preference for its core ERP system is to host on Azure so that it remains "in control" of the application.

Inching to the cloud

Microsoft's cloud strategy reflects the ambivalence of its customers. Dynamics CRM, which was Microsoft's first foray into multi-tenant cloud applications, remains available to this day in an on-premise guise for customers and partners who insist on running it in their own datacenters. Meanwhile, its ERP products are inching their way to the cloud at what seems like a snail's pace.

It was not until summer this year that Dynamics NAV and Dynamics GP became available for hosting on the Windows Azure infrastructure-as-a-service platform — as single-tenant instances. The high-end Dynamics AX will join them on Azure next spring with the availability of AX 2012 R3 (the running joke from MBS executives last week, meant as a dig at SAP's flagship product, was: "Finally there's a great R3 product in the market.")

Multi-tenant ERP won't surface from Microsoft until 2015 (and even that depends on your definition of multi-tenancy, which we'll come to in a moment). That's the target date for Dynamics AX to become available as a multi-tenant service. Apart from some heavily customized multi-tenant Dynamics NAV instances that serve specific markets, such as accountants doing BPO for small customers, there's currently no plan to offer multi-tenant versions of NAV or GP more generally.

Hybrid environments

At first glance it seems Microsoft is missing a trick here — there ought to be a bigger opportunity to leverage cloud economies of scale in the broader market targeted by GP and NAV. One might assume the decision has been taken to avoid upsetting partners or cannabilizing license revenues, whereas a multi-tenant AX may open up new 2-tier opportunities at larger enterprises.

Microsoft technology fellow Mike Ehrenberg, a key architect of the ERP products, told me last week the decision had a more pragmatic basis:

"In order to get there it's a pretty significant technology investment. We're changing the technology in a very significant way to make this work. We tend to take those technology bets on AX."

With enthusiasm for the cloud hardly rife among its customers, Microsoft is in no hurry to push them there. Instead, it is focusing on supporting hybrid environments, conscious that most of them will continue to have at least some of their IT on-premise for a good few years to come. Ehrenberg commmented:

"There's other features of that understanding of hybrid IT that make this a really complementary offering for those customers that happen to be on-premise."

Thus Windows Azure offers a convenient, cost-effective backup and disaster recovery option as a complement to on-premise instances. It also plays a big role in supporting hybrid strategies, for example providing services that support single sign-on with federation to an on-premise Active Directory instance, or VPN connections to Azure instances.

For customers that no longer want the burden of operating their own server infrastructure, having the company's ERP products hosted on Azure is a significant benefit, he added:

"For a midsized business to get that managed for them is really helpful to them."

What would I do?

My personal beef with this is that it's taking products that were architected for an on-premise computing model and simply 'forklifting' them to run on cloud infrastructure. There's no significant re-engineering to take advantage of the cloud environment beyond a few small tweaks. Whereas it takes an extra year's development to prepare a product like AX for multi-tenancy.

But if I were in Microsoft's position, I would probably make the same choice. Having heard what their customers and partners are saying about the cloud, it's clear that the majority will continue to demand on-premise versions. Meanwhile, most of the minority that want to move to the cloud will do so as a single-tenant instance hosted on Azure simply because that's the style of IT they're used to working with.

What I would do differently is that I would also develop a pureplay cloud offering to make sure of capturing the emerging market for cloud-native applications. But then that's the essence of the innovator's dilemma, and it's almost certain that such a project would not survive within Microsoft (qv SAP Business ByDesign).

Hybrid multi-tenancy

The difficulties of nudging the installed base cloudwards explains Microsoft's hybrid approach to multi-tenancy. Not only does it continue to offer single-tenant versions of the same products; its flavor of multi-tenancy stops short of having multi-tenant database instances. In Dynamics CRM, for example, the shared application server accesses a server farm of SQL Server clusters in which each tenant has their own separate database.

This differs from the approach of pureplay vendors such as Salesforce.com or Workday, where a single database built out of a very small number of very large tables stores all the data for many different tenants. I put it to Ehrenberg that this approach gives those vendors greater flexibility in how they engineer and operate the database layer. He disagreed that this gave them an advantage:

"We want to use the database the way that it was designed to operate. Isolated tenancy gives us that."

He pointed out that the Azure infrastructure provides automated resource management, adding or removing virtual machines according to configurable policies.

"In an automated way we can give people the elasticity — the Azure platform gives us a tremendous fabric on which we can build systems like this."

Upgrade timing

Another benefit of designing an architecture that runs on the vanilla Azure platform is that it's easier to license it if Microsoft chooses to do so. Although Ehrenberg wouldn't make any definitive commitment, he did hint that Microsoft is still actively considering making the multi-tenant codeline available, and not only for partners:

"Doesn't even a single customer have those same needs for that benefit of instant provisioning of an instance a hoster might have?"

One aspect of multi-tenancy that Microsoft shares in common with other cloud application vendors is the ability to roll out upgrades more frequently. Dynamics CRM gets a significant refresh every six months, although the nature of the architecture allows Microsoft to vary the timing for individual customers. Ehrenberg explained:

"We deploy the new release first for new customers. Then we notify existing customers of when they're scheulded to be upgraded — we allow them to opt out. We're trying to tune what is the right window for them to be able to opt out ...

"We've shown we can manage this on the CRM side. Our customers are very quickly on the latest version. We understand the challenge around that's a bit more complex in the ERP environment."

Verdict

With financials users, Microsoft faces the same challenges that Workday confronted in its recent change from three to two annual updates. But an all-cloud vendor like Workday doesn't have a laggard installed base holding it back. Maintaining both multi-tenant and single-tenant versions of its applications adds significantly to Microsoft's development and support costs — though maintenance revenues presumably cover that extra cost.

It's that 'isolated tenancy' database architecture where I think Microsoft is most exposed — many would-be SaaS vendors have tried and then abandoned a similar path. In Microsoft's case, it's an architectural choice that flows from continuing to offer customer- and partner-hosted versions of the application. Of course the vendor does not want to cut off the huge revenues that continue to flow from those sales. So long as the installed base continues to edge so hesitantly towards the cloud, it has little choice to do otherwise.

Disclosure: Salesforce.com, SAP and Workday are diginomica premium partners. Microsoft funded most of the author's T&E to attend Convergence EMEA 2013 in Barcelona.

Image credits: Snail © slb - Fotolia.com; Mike Ehrenberg portrait courtesy of Microsoft.