Microsoft and SAP make sweet music together

Steve Hamm

Back in late 2003, Microsoft secretly approached SAP to discuss the potential of a merger that would have been by far the largest coupling in software industry history. After months of discussion, the two companies agreed to part ways. But all that executive time didn’t go to waste. They agreed ultimately to jointly develop a new generation of corporate applications that combine the capabilities of SAP’s products with those of Microsoft Office. The project was code-named Mendocino—since that quaint California coastal town is about halfway between Microsoft’s headquarters in Washington and SAP’s operations in Silicon Valley. On May 2, the two companies lifted the veil and revealed what Mendocino—now called Duet—is all about. It’s quite a nifty thing. For the first time, desktop PC applications are effectively integrated with heavy-duty run-the-business applications. And clearly it’s a win-win for the two companies. Duet makes Office even more valuable to customers, making it more likely that they’ll upgrade. For SAP, there’s the potential of dramatically expanding the company’s reach within giant corporations that are already using its products.

First the nuts and bolts. The initial Duet products, due out in June, all address common activities in companies involving many employees. They are budget monitoring, time management, leave management, and organizational management. In each scenario, the applications tap Outlook, Word, and Excel and draw data and functions from a wide range of SAP applications. Later in the year, applications will arrive for recruitment, travel, purchasing, and sales management. Microsoft and SAP will both sell the products. They wouldn’t reveal pricing, but analysts say they expect them to cost about $100 per user, and Microsoft confirms that’s in the ballpark.

Duet builds on a vision for corporate software that SAP’s Shai Agassi, now the company’s product development czar, first advanced four years ago. He envisioned a new generation of applications, called X-Apps, that would draw capabilities from a wide range of pre-existing applications and handle discrete processes in corporations. The X-Apps strategy proved to be a modest success. SAP has released a couple hundred of them (about 40 that are fairly substantial) and has so far landed 700 customers.

But Duet promises to take the X-Apps concept and turbocharge it. “The potential is huge. Look at our customer base (32,000 corporations). We have the ability to grow by fourfold the number of users we have within the accounts we already have,” Agassi says.

Microsoft and SAP have been collaboration to some extent for 14 years, but this is the first time they ever co-developed and co-marketed products. Still, they have to do a bit of a balancing act, since they compete in the mid-market for corporate applications. Plus, Microsoft has developing Duet-like applications that bridge between its Dynamics business applications and Office. Jeff Raikes, the Microsoft president in charge of both Office and Dynamics, says the collaboration has taken some getting used to, and he has to remind some of his lieutenants that it makes sense to both partner and compete with SAP. “We’re clear on where we come together and where we’re independent,” he says. Agassi is more blunt: “We can keep two thoughts in our brains at one time. That’s what differentiates us from the rest of the animal kingdom.”

That’s all well and good for now. But, in the future, it seems inevitable that Microsoft will expand its Dynamics product line into SAP’s core market of large enterprises. When that happens, it will be much harder for these two software giants to play the coopetition game.