Microsoft Takes On Salesforce

The world's biggest software company plans to directly challenge the leader in online customer-relationship management programs

As growth slowed in recent years at Microsoft's Office division, which specializes in such business productivity applications as e-mail and spreadsheet creation, the software company looked for opportunities in other areas. Customer-relationship management (CRM) software seemed an ideal candidate. The programs help sales staff track leads and fit well with the contact lists and calendar applications in Office's Outlook program.

But Microsoft (MSFT) initially stumbled in its CRM effort, attempting to build the business from scratch while at the same time trying to absorb two large acquisitions. And just as Microsoft began gaining traction in CRM, creating software that businesses used, an upstart, (CRM), pioneered a new way of doing CRM, hosting the application as a service online.

A new report from market research firm Gartner (IT) lists and Oracle's (ORCL) Siebel CRM as the "leaders" of the salesforce-automation business, relegating Microsoft to a "challenger" role.

So, at its worldwide partner conference July 10 in Denver, Microsoft unveiled the pricing for a new version of its CRM software that it, too, will host online, something only its partners have done up to now. The new iteration, due later this year, puts Microsoft in direct competition with Salesforce. And Microsoft, which analysts expect to post $51 billion in sales for the fiscal year that ended June 30, has come out with aggressive pricing, beating the competition by 40% or more in some cases.

The president of Microsoft's Business Division, Jeff Raikes, talked with BusinessWeek Seattle Bureau Chief Jay Greene about his goal to take momentum from Microsoft's offline CRM business and amp up the competition with online. Edited excerpts of their conversation follow.

Why are these products so important for Microsoft?

We've always felt that that intersection of bringing together how people use their office tools with business process systems is a unique opportunity for us to create value. So, being in customer relationship management is extremely important. We think this will be one of the things that really show to people what we mean by the combination of software plus software-based services.

Microsoft has been somewhat late to the online CRM party. Why was that?

Well, we did put a real emphasis on being able to have a strong offering in the on-premise (packaged software) area, and that's been excellent for us. We've developed great momentum. We're over 400,000 users now, approaching 500,000. I think that was the smart way for us to come at that.

I would turn it around, though, and say if you think about what customers really want, we are not the one who's late to the party. What customers really want is that ability to have a choice in terms of the implementation. And so if we are correct in that view of the market, the ability to have a very, very strong CRM offering that can be hosted by Microsoft, hosted by our partners, or implemented on-premise by our partners is really the triple play.

Is that really what customers want? If you look at the success that has had, I think you could argue that customers really want something that is simple, lightweight, and not expensive.

We've developed a lot of momentum on-premise, and they've developed some momentum online, but now we're going to really see what customers want. Simplicity of use, ease of implementation, low total cost of operation: Those are all very important things that customers want. And we have been offering that very successfully in on-premise. We now have a great offering that is both online and on-premise.

You have been very aggressive in terms of pricing. Help me understand the strategy behind that.

It's in our DNA to be the high-volume, low-cost provider of software solutions.

This is one piece of a much bigger business for Microsoft. Is this a loss leader?

No. This is a great business for us. Our Dynamics business now overall is about a billion dollars [a year]. And CRM is a very important part of it, it's growing 100% [year over year]. Because we bet on big volume, we can afford to invest broadly.

Gartner recently put out a report on this segment, and Salesforce as well as Oracle's Siebel CRM business were at the top. Microsoft is described as a "challenger." Is Gartner's analysis right?

Well, certainly I think the trajectory that we're on will position us as a leader, and it's just a matter of time.

Microsoft executives have been saying that with regard to this market for years. What's different this time around?

The key is we've got a great product, and we already have a lot of momentum with the product. The user experience from within Outlook is something that people love, and they've been gravitating towards that; the simplicity, the ease of use. But one thing I should be clear about: I'm very satisfied with the success we're having in this business. We've got a business that in a couple years has gotten up to more than 400,000 users. It's got terrific growth, and it's getting even better. Another way of saying it is there's nobody else's position in the industry that I would want.

Does this put you in any competition with your partners, who have been hosting CRM services online on top of Microsoft software?

I think there may be some partners that will want to migrate their solutions to be more specific to some customer segments. The partners who host will do the best if they decide to go ahead and focus on a given industry. So, the partners that are doing more horizontal things will probably change their strategy. We've been very clear with the partner channel about our plans so that they can make those kinds of adjustments.

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