Will Microsoft buy into Dynamics or sell it off?

To anyone who follows vendor strategies in the enterprise applications space, one of the most intriguing aspects of Microsoft's management reshuffle this week has to be the carving up of its Dynamics business unit. Taken alongside other announcements coming out of Microsoft's Redmond headquarters over the past few months, to this observer it suggests further upheavals ahead — including significant acquisitions or sell-offs.

The departure of Microsoft Business Solutions chief Kirill Tatarinov  (who we'll miss at diginomica) has been noted in some of the coverage and ZDNet's Mary Jo Foley today posted some useful further detail on the changes.

But I haven't yet seen any other commentators pick up on a much more telling detail of the restructuring. Read through Satya Nadella's email that told staff of the reorganization and you'll find the Dynamics business that Tatarinov led is quite literally being carved in two:

• Today, we are ... moving the development teams who build our Dynamics products to Cloud and Enterprise [led by Scott Guthrie], which will enable us to accelerate our ERP and CRM work even further and mainstream them as part of our core engineering and innovation efforts.
• Kevin Turner, Chief Operating Officer will ... now take responsibility for the Dynamics sales and partner organization.

How this carve-up will work in practice is yet to be seen. It could simply be a matter of having the sales organization report separately from the engineering teams — which as Mary Jo Foley reports, was already happening to some extent. Or it could signal more disruptive changes ahead.

Engineering leads strategy

The separation of sales from engineering is a natural evolution of the strategy that Satya Nadella has been following since he took up the reins as CEO.

In the past year the strategy has evolved into a rapid thawing of relationships with vendors that directly compete for customers against the Dynamics business unit. Most notable was Salesforce, which sealed a fresh friendship a year ago and more recently was the target of a potential acquisition offer.

As the undisputed CRM market leader, there was a compelling logic to the tie-up with Salesforce. Perhaps even more surprising was the announcement last month that NetSuite is now partnering with Microsoft to connect Office365 and Azure analytics into its cloud ERP application. This was a big step further into the 'co-opetition' arena, bringing a direct competitor of the core Dynamics ERP products into the home camp.

This week, European ERP vendor Unit4 announced a similarly hitherto unthinkable alliance to plug Microsoft's predictive analytics, machine learning and event stream analysis from Azure and Office365 into its ERP platform, which is built on Microsoft technology. On the same day, Box confirmed the trend towards vendor collaboration with a step up in its integration with Office365, similar to the deal hammered out late last year with Dropbox.

These announcements show that Microsoft's new management has firmly decided that the interests of its product engineering strategy are best served by inserting its platform services into other vendors' products, even when they are direct competitors to Microsoft's own product portfolio. As Dynamics CTO Mike Ehrenberg (who, along with CRM product chief Bob Stutz is staying on in the move to Scott Guthrie's unit) told me last November:

Especially for the Dynamics products, where people have to work with their customers and with partners, you can't draw walls around our products and chose what you want people to use.

Or to put it another way, becoming the primary collaboration, analytics and user interface platform for as many enterprises as possible is far more strategic for Microsoft than winning a battle to be the midmarket CRM or ERP application of choice.

Out on a limb

All of this leaves the sales and partner arms of the Dynamics business division somewhat out on a limb. That's why I suspect that having them report to COO Kevin Turner portends further developments. This could go one of two ways.

The first possible outcome would be an acquisition of further application vendors to build out a more broadly based application division. We know now that Salesforce will not be the acquisition target (unless Microsoft is intending to up its offer, although my personal assessment is that CEO Marc Benioff is not in the mood to sell up just yet and will always find a way to keep the company independent). But one of the reasons I always felt that Microsoft was a credible bidder was the win-win of fusing Microsoft's long-established partner ecosystem with Salesforce's cloud platform strengths.

Giving that partner ecosystem a broader range of products to sell — for example, acquiring some HCM and spend management offerings into the portfolio — would produce incremental revenues and margin with little extra effort. It would also sweeten the pill of allowing the channel to become more neutral about selling non-Microsoft products such as Salesforce, Unit4 and Box. Thus Microsoft's partner ecosystem would become the primary channel not merely for selling its own products but an entire portfolio of third party vendor offerings that have Azure and Office365 linking them all together.

Up for sale?

The other possible outcome is to put the Dynamics sales and partner organizations up for sale. This alternative strategy would allow Microsoft to focus on its core platform and product engineering strategy without the conflict of having a sales team intent on winning business away from its growing army of third-party partner vendors. Some or all of the ERP products would doubtless be part of that transaction, while Microsoft would likely prefer to retain the CRM product because of the tight integration that's possible to its Office properties. But the ultimate decision may depend on who the buyer will be.

Among the contenders, as I've indicated above, I think Salesforce lacks partner skills and experience that Microsoft has in abundance. In theory, therefore, it could get value from buying up the Microsoft organization. But in practice it's probably unrealistic to imagine that DNA could be transplanted successfully into Salesforce.

I think it's more likely that Microsoft would look to sell off some or all of its legacy ERP portfolio to a 'friendly' competitor — one that's committed to the Microsoft stack. This would remove a source of conflict with other partners while sustaining market presence for its platform.

So perhaps the newly struck alliance with Unit4 is a prelude to a sell-off of some of Microsoft's ERP assets to Unit4's private equity owners. Or perhaps Sage, which also runs its ERP products on a Microsoft stack, will be the ultimate home of one or more of the Dynamics ERP products.

This is wholly speculative on my part. I may have this completely wrong. But I would not be surprised if we learn in the weeks or months to come that Microsoft is finally unwinding some of its ERP acquisitions as it refocuses on a platform strategy in which a ragbag of historic, legacy client-server acquisitions no longer have a place.

PS: Frank Scavo of Strativa has taken a diametrically opposite view of the reorg, concluding that it "should put to bed any thought that Microsoft intends to sell or spin off the Dynamics products." Let's see who's right.

Disclosure: Salesforce and Unit4 are diginomica premier partners.

Image credits: Satya Nadella on stage by @rwang0. Tatarinov on stage by Microsoft.