Where is the Microsoft Dynamics ERP Cloud Strategy Headed?

The Microsoft Dynamics ERP product team pushed two major releases - Dynamics GP 2013 and NAV 2013 - and one minor (but still pretty major) one, AX 2012 R2, in the final two months of 2012. For some ERP watchers, these releases  were more notable for what was missing - advances in a Microsoft-branded cloud ERP offering - than what these releases actually bring to the Dynamics product line in a range of other areas like pricing, user interface, architecture, and technology platform.

The lack of progress on cloud offerings in this round of Dynamics ERP product releases does not necessarily indicate a lack of interest on the part of Microsoft R&D.  But with no visible progress in 2012, the pressure builds in 2013 to show partners, influencers, prospects and competitors something interesting.  Competitors can continue to hammer at the Dynamics product line, especially in SMB, for its lack of a mature, Microsoft-branded cloud offering, perhaps even more so in the shadow of the company's massive investment in the Azure cloud platform.

Dynamics GP & NAV on Azure: The Current View

Dynamics GP and NAV will be the first of the Dynamics ERP products to touch Azure.  Indications so far point to an approach that uses Azure virtualization technology  to allow partners to host solutions on Microsoft's cloud infrastructure much like they would host them today on-premise or in a SaaS model at a partner-hosted data center.  One of the first public examples of such a deployment is the sample architecture that Dynamics GP Mariano Gomez is documenting on his blog.  It involves a virtual network built with machines for an Active Directory Domain Controller, the web server, SQL Server, and so on.

Windows Azure architecture for Microsoft Dynamics GP 2013

Microsoft has also launched a TAP program for NAV 2013 in Azure.  From what Microsoft has revealed so far, this effort, as with the GP 2013 Azure architecture, is primarily an exercise in proving out the robust virtualization capabilities of Windows Azure rather than the development of a cloud ERP offering by Microsoft; it demonstrates that the existing releases of Dynamics GP 2013 and NAV 2013 can run in Azure, with the cloud platform serving as a potentially limitless virtual network and VM server farm.  This approach appears to be a step back from earlier plans with NAV 2013 that had Dynamics NAV R&D updating the architecture to allow Microsoft or its partners to manage NAV clients in a  multi-tenant environment.  When that architectural capability was pulled from the release (if it was ever truly there), it appears that the Azure virtualization option became the new story.  And while there has been unconfirmed talk of plans for a version of GP that could run natively against a SQL Azure database, that goal doesn't appear to be part of any near term plan.

Allowing partners to host instances of Dynamics GP or NAV on Azure will require some updates to the way Microsoft and its resellers manage licensing.  "To do it on a commercial basis, they need a commercial hosting licensing option: some legal way to license running NAV instances on Azure and collect money from customers for access to the instances," says Rob Helm, managing vice president at Directions on Microsoft.  Though he is not yet sure what approach Microsoft will choose, Helm explained that "there are several possibilities, including the Service Provider Licensing, license mobility (reassignment of customer licenses to instances on Azure), and pre-licensed Azure virtual machine templates."

Talk of Dynamics GP, NAV, or SL on Azure won't change one aspect of a Dynamics ERP investment: you're still going to need a partner to successfully go live on a new solution.  A solution hosted in the public cloud "can't replace the human element of supporting the technology," says Matt Casper of SaasPlaza, a leading provider of hosting for Microsoft Dynamics solutions.  "Hosting of [Microsoft Dynamics solutions] requires specialized skills and knowledge.  It needs to be supported, serviced, and maintained. That's the reason that end users of [Dynamics ERP] aren't going to a RackSpace and saying 'hey, put it up there'."

"Whenever an Azure based solution is ready, we intend to help partners plan for it," says Casper.  He predicts that for customers that move ahead with Azure-based deployments, many will also want to maintain private cloud components as well.  And for those more complex needs, as well as in planning for unexpected issues and concerns, veteran hosting partners like SaaSPlaza will still be the trusted guides that provide solutions.

Does Microsoft need a better cloud ERP story today?

In the SMB realm of Dynamics GP, competitors still find success in attacking the product as lacking a SaaS delivery option.  While this claim is obviously false - a range of providers can spin up a new Dynamics GP 2013 instance in a matter of minutes - Peter Joeckel of TurnOnDynamics makes the point in a new series of articles on competing against NetSuite that Microsoft's inability to support its partners with a compelling SaaS story has weakened its competitiveness in the past:

"What [NetSuite] have done well is establish that there is a market for the SaaS delivery model for ERP software. Microsoft and the Dynamics GP delivery channel has suffered from being a late adopter to that business model and from presenting a confusing array of 'SaaS' options that in many cases have not been as cost effective or technologically desirable as the NetSuite solution."

In Joeckel's view, the lower level arguments about cloud technology hold little interest for most buyers. He adds:

"If I am able to safely and securely process transaction in my ERP application locally and remotely in a price effective manner does the underlying technology really matter? My experience is that it does not but technology folks love to argue about what is 'the best' even if it is irrelevant to the user... My educated guess is that NetSuite will release information on how the underlying technology on their software delivers their application in a superior manner. Let the tech wiener braying commence. The line starts to the right for bets on how long we need to wait for this 'sales messaging' to start. I'll wait."

Analyst Josh Greenbaum of Enterprise Applications Consulting believes that the rate of Microsoft's progress on cloud ERP does not present a problem for the company - yet. "In general, the marketplace is not desperate for a range of core ERP functionality in the  cloud - not today," says Greenbaum. "It's not a big demand so they're not being impacted by that.  I think what they're doing is clearly giving strong direction in [the next] a year and a half and I think that is good enough for now because you want to appeal more to the developer side than the customer in terms of what can you do that's unique with Azure and Dynamics."

AX on Azure and enterprise engagements

The more compelling - and also the more long range - of the promised cloud offerings for the Microsoft Dynamics product line is the next major release of AX.  Microsoft has advised that the next major release will have a new user interface and a range industry-specific flavors, available as native Azure solutions.

"I had always expected AX to be the first ERP application for which Microsoft would offer a Microsoft-managed multitenant service analogous to Office 365," says Rob Helm.  "In general, AX has gotten a lot of investment to increase scale and reach. For example, Dynamics AX 2012 R2 delivers 'global single instance' capability, the ability to run more than one set of country-specific variant on a single instance of the application, something that will make it more competitive with Oracle and SAP for companies operating globally. And Dynamics AX has large customers who will benefit from anything Microsoft does to scale the product up in its own data centers."

So could future releases of Dynamics AX represent a greater value in its components rather than as a monolith?  Josh Greenbaum thinks so.  "The real value is that when Microsoft get around to it, they will deconstruct AX and allow developers to build custom or next gen ERP systems that leverage components of AX," he says. "You'll have this Lego-style construction capability inside of Azure to build a highly specialized ERP system, stage it in Azure and build it in bits and pieces with AX, and that's a very powerful capability."

For example, Greenbaum envisions solutions that use AX services along with the Azure Marketplace datamart - things like a next generation talent management system that uses data services, grabbing raw data from Azure, and building on the back office financials and payroll to build net new capabilities in a custom solution with none of the complexity of custom software today. "That's a big opportunity. That changes the market in terms of how you build and control software.  We're going to make ERP components part of a cloud-based solution," he says.

A vision as forward thinking as the one Greenbaum lays out will require both imagination and technical prowess to be realized. Microsoft will need to court development shops, especially those with enterprise software chops and business process savvy, and help those firms to see the opportunity as well.  For its part, Microsoft Consulting Services' own Dynamics AX service team is becoming a big component of the strategy in 2013 by engaging in more AX deals

"They won't own the entire project, but they will provide technical services, take responsibility for success, and have skin in the game," says Greenbaum. "And that is in Microsoft's interest. It's something they should have done ten years ago.  It's how you approach the enterprise customer on their terms."

About Jason Gumpert

As the editor of MSDynamicsWorld.com, Jason oversees all editorial content on the site and at our events, as well as providing site management and strategy. He can be reached at jgumpert@msdynamicsworld.com.

Prior to co-founding MSDynamicsWorld.com, Jason was a Principal Software Consultant at Parametric Technology Corporation (PTC), where he implemented solutions, trained customers, managed software development, and spent some time in the pre-sales engineering organization. Jason has also held consulting positions at CSC Consulting and Monitor Group.

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