Paul Hamerman By Paul Hamerman

Microsoft announced today the acquisitions of vertical extensions for its Dynamics AX ERP product. The acquisitions are of intellectual property (i.e., software code) developed by four Dynamics AX partners, which are natively compatible with the ERP system’s code base. The extensions consist of solutions for process manufacturing (from FullScope, Inc.), professional services (from Computer Generated Solutions, Inc.) and retail (from LS Retail EHF and To-Increase Denmark A/S).

The code acquisitions reflect an overall trend that Forrester has been following in ERP, as discussed in “ERP Applications 2008: The Battle Goes Vertical”,7211,44001,00.html. As customers demand more industry-specific functionality from their ERP vendor, the vendors must respond in 1 of 3 ways: 1) Build the functionality natively within their suite; 2) Acquire the functionality, typically by buying a software firm; or 3) Use partners to provide the industry-specific extensions.

The first two methods have been characteristic of SAP and Oracle respectively. SAP often builds the vertical apps natively, but more recently has made some relatively small industry-specific acquisitions. Oracle has been acquiring many industry-specific vendors over the past few years in insurance, telecommunications, retail, banking, etc., and building integrations to its ERP systems using its AIA integration framework.

Microsoft’s approach typically has been to rely on its partner channel to build industry extensions. The acquisitions announced today by Microsoft have the advantages lower cost of acquisition and integration over buying software firms outright. The partner-developed code is compatible to the AX product and there is no overhead (i.e., employees, facilities) related to the acquisition. It is likely that Microsoft will add more additional industry extensions to the code bases of its Dynamics ERP products in this manner. It must do so carefully, however, in order to avoid adverse impacts to its partners offering similar extensions or industry expertise.