“Mid-Market Companies do not switch Mid-Market ERPs. Ever.”
The mid-market ERP space is fascinating right now. Oracle (who is an enterprise player) just bought NetSuite for $9.3 billion. Sage (who likes to buy and rename software) just purchased Intacct for $850 millon. Microsoft who dominates mid market ERP on-premise software after purchases in the early 2000’s with Dynamics GP ($1 billion) and Dynamics NAV ($1.4 billion) has spent hundreds of millions building a new cloud tool called Dynamics 365 Financials.
Mid-market companies are often defined as companies that have between 50 and 1000 employees, or sometimes defined as companies with revenue between $100 million and $3 billion. This is a very large market segment with well over 200,000 USA-based businesses in that category. If you add in the top-end of the Small market down to companies turning over $50 million, the market gets wildly larger.
I explain this to show the size of the mid-market that ERP vendors are working with. These companies have complex business processes and compliance requirements that require the purchase of ERP software solutions to manage and keep control of running the business.
A couple of interesting observations in the mid-market ERP software space are that:
- NetSuite has been trying to steal GP/NAV customers for at least 7 years with little success.
- Intacct and Acumatica are the relatively new kids on the block and have grown a solid customer base. The growth is attributed to growing businesses, and neither has had much success in stealing their competitors’ customers and growth has been organic.
- Sage likes to snap up vendors (like Intacct, most recently acquired) to grow their portfolio of offerings. Sage has traditionally played at the smaller end of the market.
- All mid-market players have been trying to infiltrate each other’s’ customer bases for a long time and other than the occasional anecdotal case study, success has been minimal.
- Microsoft dreamed that their massive on-premise base would transition to Dynamics 365, but a year into the experiment, there has been no mass migration and in fact, not even a trickle.
The only conclusion I can come to, one that all those that play in the mid-market ERP industry already know, is that mid-market companies do not switch mid-market ERP’s, ever. Any strategy built around converting competitor’s customers is fatally flawed from the start, and can only be the brainchild of an MIT graduate armed with a colorful PowerPoint and an over worked Excel model based on fiction.
Here are a few of the reasons why a mid-market company will passionately avoid moving from one mid-market ERP to another mid-market ERP.
- Functionality is the same: Mid-market ERP’s provide business solutions to manage the accounting, budgeting, invoicing, inventory management, HR and payroll, sometimes customer relationship management (CRM) and other key business functionality. The reality is that despite huge technology advancements over the last decade, the large majority of business practices have not changed. This means that all mid-market ERP’s provide almost identical core functionality. Sure, there are things each one does differently, but none of these differences are enough to make you change software once you are already using one of these ERP’s.
- Business Interruption: Anyone that has been involved in a mid-market ERP implementation knows that they are complex and difficult. A new ERP takes hundreds and sometimes thousands of hours of time from the employees who already have full-time jobs. Starting the entire team on new software is a massive undertaking. There is always an impact on your business and customers when you change ERP software. You would not do it unless there were major gains to be achieved.
- Already Defined Processes: Mid-market businesses are, by definition, successful; they started small and have grown to be a middle-size company. These companies know what they are doing, have business processes that work, and have people that know and execute the process. Moving all those processes to new software, while fixing and changing some of those processes, is either impossible or challenging at best! Given each ERP performs the same task differently – squeezing that functionality into a new ERP transition will be painful.
- Cost of transition: Whether you are moving to the cloud and paying monthly via a SAAS offering, or staying with an on-premise ERP, the cost of transition is expensive. Moving all your data, training the team, rewriting the business documents and reworking your BI generally requires external consultants and the costs will build up very quickly.
There are many more reasons why a company will try NOT to change their ERP software. It was suggested to me recently by a staff member here at eOne that we should change out our ERP and CRM software. The thought made me shudder. We sell online via our custom eCommerce website, we have 50+ integration points, we have a detailed CRM process, we have timesheets, we have many daily reports and a full set of management reporting, and we run multiple entities and currencies. Could we change software? Yes. Would we? No – unless there was some very major advantage to be gained from the cost, effort and business disruption. Like most businesses we have a process that works and until it is ‘really broken’ we will not be trying to fix it.
So, if mid-market companies do not switch software, who is buying mid-market ERP software? There is clearly a large and growing market that ERP vendors need to be targeting. There are a few triggers that cause a company to start exploring a new ERP.
- Outgrowing your Small company book-keeping system: These are companies that have been using QuickBooks (or a bunch of others possibilities, but QuickBooks is by far the largest player) and have reached a point where it no longer serves their needs. This usually occurs when they hire their first full-time accountant/controller, who demands a more complex accounting structure. As a business grows you need divisional reporting, segmented P&L’s, cost accounting, asset management and multi-company management. This is a big transition phase as a company grows.
- Really Old Software: Over the years there have been some major trigger points that cause software to become ‘legacy’ software. If you think back to the switch from DOS to Windows, this was a point where companies eventually decided they needed to upgrade their ERP. You will still find many businesses that still run a green screen ERP and have never changed! I first sold ERP software in Australia and the introduction of a new tax system called the GST triggered many companies to upgrade their ERP to meet the changing compliance needs. Software that could not support GST calculations had to be replaced. There needs to be a large technology shift to trigger a company to replace their ERP, and I am not seeing anything that would trigger this in the market right now.
- Can’t get their data: Back in the old days it was really hard to get access to your ERP data for all your reporting needs. Moving to a better reporting solution was often a trigger point for a full ERP upgrade. Despite the adoption of relational databases, SQL Server, advances in OLAP cubes, business intelligence and a myriad of reporting options, the greatest complaint in business is that it is too hard to get reports! This can be a trigger to upgrade but there are many generic reporting solutions that will work across any ERP, so an unlikely trigger in 2017.
- Change of Business Model: When a business changes direction or changes how they do business, this is a trigger for a change in software. The advent of ecommerce and selling online has been a big trigger for new ERP software. Building recurring revenue streams is the current trend, and this can be one trigger to change software that supports better your new business direction.
- Bad implementation or poor use of an existing ERP: This is a big reason for people to switch ERP’s. I have met so many companies that hated their existing ERP environment and wanted to change when in reality, they simply had never given enough time, energy and money to make their existing solution work. If management is not fully behind business systems, processes and the software that drive them, it does not matter what ERP you choose, management will always be disappointed. It costs money to manage, maintain and grow your business ERP solution. In my experience, these are not the companies I wanted to sell a new solution to, as the project was destined to be a struggle and never get the attention and funding it deserved.
So, if I owned a mid-market ERP vendor, I would be focused squarely on how to convert these customers to my solution and use the above trigger points in my marketing. I would not be trying to steal customers from other Mid-Market ERP software.
I want to talk briefly about Microsoft’s Dynamics 365 Business Edition Financials offering (I think this is correct name). Microsoft initially pitched this as a small ERP to compete at the QuickBooks or Xero. They also talked about also targeting a market segment that sat between QuickBooks and their existing mid-market ERP solutions (GP, NAV and SL), but it turns out Microsoft has come to the realization that this market does not really exist. Companies stretch QuickBooks to its limit before making a move, and when they move they are ready for the true mid-market ERP.
Despite this marketing message, Microsoft launched Dynamics 365 Financials at their existing customer conference (UG Summit) almost one year ago, which made many people think that Microsoft was hoping to convert their existing customer base. The ambiguity of the message caused some existing customers to sniff around the new offering, but there was never enough of a technology leap to warrant the business interruption of changing ERPs – especially when their existing solution worked perfectly well.
No one in the ERP space was surprised that there was no existing customer migration. Microsoft’s next move is to add more functionality into their Dynamics 365 Financials offering that makes its functionality on par with their existing offering of NAV and very similar to GP. This will position them to better target the QuickBooks upgrade customers, and I believe they think that it will enhance the migration of existing customers to the new mid-market solution.
Will any existing GP and NAV customers migrate?
Perhaps a few, but not many. Let’s review why you would change from one mid-market ERP solution to another mid-market ERP, and whether there is a trigger point in play.
Really Old: This does not really cut it in this scenario. Dynamics NAV and GP were originally developed 20 years ago, but have been developed and improved every year since. Both products perform well, are deeply functional and can help run a mid-market business. There has been no major technological leap that causes them to fall into the ‘really old’ bucket.
But wait, what about the cloud? These tools are not cloud; they were built for on-premise deployments. That is true, but I am not convinced that just being cloud is a technological advance worthy of changing your ERP solution. If cloud is important to you, there is absolutely no reason why you cannot take your NAV, GP or SL ERP and move it into a suitable cloud environment. There are many, many cloud providers that would love your business and provide a Microsoft Azure cloud solution. .
But wait Microsoft is building extra tools that are cloud-only, is that not the big differentiator? They are definitely working hard to improve their cloud offering, but there is nothing there that is a total game changer. Tools like Power BI are generic and available to NAV, GP and other non-Microsoft solutions, just like it is available for Dynamics 365 Financials.
Can’t get their Data: The existing on-premise solutions provides fantastic access to data. This is really a non-issue in 2017. IF you don’t have the reports you need it is not the software’s fault.
Change of business Model: There is opportunity here for Dynamics 365 Financials, perhaps. If Dynamics 365 Financials dominated the ecommerce market, had amazing game changing recurring billing functionality, provided super easy integration to other business software, or provided world leading workflow functions, then perhaps this would be cause enough for companies to make a change. While there are some nice features, I am not seeing anything that hasn’t been provided by Microsoft’s other solutions or their army of ISV’s for many years.
Bad Implementations: There will certainly be some CEO’s lured by frustration in their current software that will make the jump. Unless they invest in making the new solution a key part of the business, they will not be successful implementations.
Microsoft has something of a dilemma. They want rapid adoption of Dynamics 365 Financials, they want increased consumption on Azure, and they need to support and nurture their existing ERP customer bases. So what Microsoft’s next step will be is a mystery. Here are a few of their options and what I predict the outcome will be:
- Continue to market Dynamics 365 Financials to the existing customer base and hope they move in the short term: This is not going to happen. We have discussed above all the reasons why customers will not move.
- Pressure existing customers to move: This could be done by reducing support and development of Dynamics GP, NAV and SL. This move would need to be part of a 15-year plan. The current customer base purchased GP/NAV because they were really good solutions and that EPR selection now drives their business. These companies still belive GP/NAV/SL are really goos solutions. The biggest danger here is that if Microsoft encourages or pressures a move, there is absolutely no guarantee that these customers will move to Dynamics 365 Financials. As we discussed earlier, moving ERP is a big event and each customer would weigh up all their options. These customers will explore all of the ERP’s on the market and make an informed decision. Each competing vendor will be eager to target these customers with promotions, strong marketing and aggressively discounts. I do not believe Microsoft will have any advantage in winning these customers back.
- Microsoft could go as aggressive as sun-setting some of these products: As Dynamics SL has proven over the past decade after effectively being sun-setted, mid-market companies do not change ERP’s. There remains a very strong and passionate SL customer base. A move like this would truly disenfranchise many existing customers and when they did decide to make an ERP switch, they would research all of their options. Netsuite, Intacct, Acumatica, Epicor and a myriad of niche solutions would all be considered. Microsoft could easily lose a large percentage of these customers, which would be a disaster. The disaster would have a direct financial impact on Microsoft that could easily be the loss of many hundreds of millions of dollars in lost AEP.
- Boost Azure consumption by making it easy to move GP and NAV to Azure. Oh my, this makes a huge amount of sense. What if Microsoft made it easy to move your existing Dynamics GP, NAV or SL solution into an Azure environment? What if they supported those companies that re already offering this service? I have dedicated many hours of thought to this topic and have been unable to come up with any negatives to this model.
- This would mean that the existing customer base could slowly be introduced to Microsoft’s Azure cloud when they are ready.
- Over time, it would add a potential 150,000+ companies onto Azure.
- This would ensure Microsoft maintains the existing annual enhancement plan (AEP) revenue, or these customers could be grandfathered into a SAAS model replacing the existing AEP model.
- Increase Microsoft’s big goal in increasing Azure consumption.
- This would NOT disenfranchise their ERP customers, and proves that Microsoft are a customer centric organization that is investing heavily in the future of ERP.
- Microsoft could then build a long term plan to grow their Dynamics 365 Financials business and when the BIG trigger point comes along for these businesses, Microsoft is in a position to transition them to the Dynamics 365 Financials solution – not by force, but by choice.
- This would close the door on the competitors and not let them get access to these companies.
- Microsoft could maintain the existing ERP partner channel that can assist with the long-term plan. This is crucial as all successful ERP vendors need a strong and supportive reseller channel.
- Microsoft could offer up ancillary services to this customer base like Power BI, Flow and all the other cutely-named tools Microsoft is working on to boost revenue.
This seems like a massive Win/Win situation to me. In fact, as I reflect on this more, it seems like the only solution.
I firmly believe that Microsoft could and should own the mid-market ERP space. I am fascinated to see what they do next, and the next move will say a lot about how much they understand their existing customers and the needs of the businesses that use their ERP software.