Navigating the Evolving Microsoft Dynamics 365 Partner Ecosystem

60The Microsoft Dynamics 365 partner ecosystem has transformed significantly over the past decade. As someone deeply involved in this space, I've witnessed significant shifts that have redefined how partners operate, innovate, and deliver value to customers.

The Expanding Role of Dynamics 365 Partners

Traditionally, Microsoft Dynamics partners specialized in narrow areas — either ERP or CRM, and often within a single ERP solution like NAV or AX, for example. Today, however, partners are offering broader portfolios, including multiple ERPs like Business Central (BC) and Finance & Supply Chain Management (F&SCM), in addition to other offerings such as D365 for Sales, Marketing, Customer Service, Power Platform, Fabric, Azure, AI, and more. This expansion reflects the growing demands from customers who now seek comprehensive solutions leveraging the full Microsoft stack. Moreover, it reflects the push Microsoft has made with its ERP partners to uptake more of the platform. I see this as the evolution of the Microsoft Dynamics channel.

While this offers immense potential, it also presents challenges:

• Talent Costs and Retention: The need for expertise across numerous products and platforms has escalated the cost of hiring and retaining skilled professionals.
• Shrinking Margins: Microsoft’s reduction in license margins means partners must rely more on activity-based incentives, reducing profitability. Margins have decreased at a time when partners are investing heavily in the full stack, and the math is becoming difficult for some partners to understand.
• Consolidation and Competition: Smaller, niche partners have been acquired, creating larger entities. Private equity investments have increased in the space as well, transforming the competitive landscape. Large System Integrators (SIs) and GSIs, as well as the Big Four, have grown their influence within the Microsoft Dynamics ecosystem.

Partner Adaptations and Challenges

These shifts have brought new strategies into play, but not all changes have been positive. Many partners, facing tight margins, are adopting risk mitigation tactics that may not always align with customer needs:

• Many platforms and applications mean less flexibility in resources, which can cause a higher push for focus on utilization: Partners used to be able to do a full ERP implementation with a small team who could do all tasks but divided the work. Now, with more platforms and specialists, it becomes harder to drive high utilization rates. This may push some partners to focus on utilization over true customer value.
• Pushing Data Migration onto Customers: In an effort to reduce risk, partners are increasingly asking customers to handle data migration — despite the fact that this is one of the biggest risks in ERP projects. This transfer of responsibility often leads to increased project failure risks though it is on the client side instead of the partner.
• Underutilization of ISV Solutions: Although many partners aim to minimize customizations, there’s a growing trend to avoid ISV solutions, often in favor of custom work. This tendency arises from a desire to control the project outcome but can lead to more expensive, less efficient solutions for the customer.
• Over-Customization of Applications: Despite partners' efforts to avoid excessive customizations, many end up implementing extensive custom work to meet specific client needs. While these customizations may address immediate requirements, they often introduce long-term complexities, higher maintenance costs, and reduced scalability. Over-customization frequently bypasses industry best practices, leaving customers with outdated and less flexible solutions compared to those offered by specialized ISV software.

The Risks of Customization

Relying heavily on customizations can introduce significant long-term challenges:

• Maintenance Costs: Custom solutions might seem less costly in the short term but often result in higher maintenance expenses as the system evolves. Especially in the cloud, with frequent updates, a customized system can have significant cost implications.
• Lack of Industry Best Practices: Customizations often miss out on industry-wide best practices, which ISV solutions are designed to incorporate. Being a global ISV, you have access and input from many customers from whom you can learn, whereas customization mostly lives within that project realm.
• Outdated Systems: Customizations frequently become obsolete as technologies evolve, unlike ISV solutions that regularly update and improve with market needs. A partner that does 5 to 15 deals per year cannot compete with an ISV in terms of scaling the investment and innovation of its products when the ISV is doing hundreds of deals per year.

Though most SIs will talk about how they don't do any of what I mentioned above, I recently talked to an SI's Service director, and he said, "I am told to use standard products and not customize, but I have a team sitting on the bench, and my main KPI is utilization, so we customize to keep them busy rather than using standard software."

Partners Developing Their Own IP: A Double-Edged Sword

Another trend in the marketplace is that in order to mitigate shrinking margins, many partners are developing their own intellectual property (IP) in an attempt to differentiate themselves. However, this approach carries inherent risks:

• Lack of Scale: Unlike ISVs, partners deploy their IP only within their own projects, limiting its scalability and the potential for broader learning.
• Development Structure: Partners typically have a service-oriented structure rather than a product development mindset, which can lead to inefficient, fragmented code and higher long-term costs for customers.
• Innovation Gaps: Without the breadth of customer interaction that ISVs enjoy, partners may lack the insights needed to drive consistent innovation.

Insights from the Industry: Trends and Realities

Here are some further important insights from our observations:

1. Partners Are Facing Intense Competitive Pressures: Much of a project’s value is captured by Microsoft, making it harder for partners to justify the added expense of ISV software unless it is absolutely essential. Customers looking to maximize the value of their investments often seek to avoid additional expenditures, putting pressure on partners to deliver comprehensive solutions with minimal external costs. Large ISVs, like STAEDEAN, have a price advantage due to their scale, making this less of a problem.
2. Risk Aversion Among Partners: Many partners aim for simplicity and predictability in their projects, which has led to a preference for fewer ISV solutions per project. This "less-is-more" approach is intended to minimize risks but can lead to missed opportunities for customers to leverage more innovative, specialized solutions.
3. AI is the Next Frontier: While mid-sized businesses are not yet fully leveraging the power of AI-based features at scale, we know of AI’s importance as a differentiator. ISVs that incorporate AI into their solutions will find AI capabilities to become more essential to staying competitive in the ecosystem.

Embracing Collaboration with ISVs

Despite these challenges, collaboration between partners and top-tier ISVs continues to drive strong outcomes for customers. The examples below do not happen with every partner, and we certainly work with a number of partners who do not fit that mold. By leveraging specialized ISV solutions, partners can offer more value without the overhead of developing and maintaining custom code. Here are examples of some top high-quality ISVs in the marketplace today:

• Experlogix specializes in CPQ (Configure, Price, Quote) solutions, helping partners deliver tailored, efficient quoting processes that enhance the overall customer experience.
• STAEDEAN focuses on industries like rental, life sciences, and manufacturing, offering deep industry solutions and no-code data solutions that simplify data management, helping businesses adapt quickly without extensive custom development.
• SK Global specializes in fintech solutions, providing advanced banking and treasury automation for MS Dynamics 365. Their expertise allows businesses to optimize financial operations and improve cash management.
• Annata is a leader in the automotive industry, providing cutting-edge solutions that streamline dealership operations and improve customer experiences.
• Flintfox: Flintfox’s pricing and rebate management software is embedded within Dynamics 365, helping companies manage complex pricing models and improve financial performance by automating pricing calculations and rebate processing in real time

Of course, there are many great partners out there working with these ISVs and ourselves. It is working through and with partners who have embraced working with us as an ISV that makes us successful. I would like to take this opportunity to thank those who have helped us drive our 69% new customer order growth year over year in our new business in 2024.

A Path Forward for the Dynamics 365 Partner Ecosystem

The Microsoft Dynamics 365 partner ecosystem is at a critical juncture. To navigate this evolving landscape successfully, partners should:

• Leverage ISV Solutions: Embracing specialized ISV products can reduce the need for customizations, lower long-term costs, and offer customers innovative, industry-leading solutions. By integrating best-in-class ISV offerings, partners can deliver tailored solutions that address specific industry needs, ultimately enhancing the customer experience and reducing future maintenance costs.
• Invest in Talent and Training: Developing teams with cross-platform expertise ensures partners can deliver high-quality, comprehensive solutions that address complex business challenges. By prioritizing ongoing training and certifications, especially in emerging areas like AI, Data, and Power Platform, partners can stay ahead of the curve and offer more value to their customers.
• Innovate Through Collaboration: Working closely with ISVs allows partners to harness the full power of Microsoft’s ecosystem, driving innovation and delivering superior results. Partners can leverage the deep industry knowledge and ready-made solutions ISVs bring to the table, reducing time to market and improving project outcomes. This can also lead to more value for their customers and bigger margins.

How Partners Can Work Better with STAEDEAN

• Utilize Our Industry Expertise: STAEDEAN specializes in delivering deeply embedded, industry-specific solutions within the Microsoft Dynamics 365 environment for Life Sciences, Rental, and Manufacturing. By collaborating with us, partners can reduce the need for custom developments and instead offer scalable, ready-to-deploy solutions tailored for rental, life sciences, and manufacturing industries.
• Leverage Our No-Code Solutions: STAEDEAN provides no-code tools that simplify data management, migration, and integration. Partners can reduce their development costs and streamline implementation and data migrations by offering these solutions to clients, ensuring quicker ROI and less reliance on custom code that can become costly over time and create more risk.
• Drive Joint Go-To-Market Efforts: We encourage our partners to engage in co-branded marketing and joint sales efforts. This helps create a unified narrative that highlights the combined strengths of STAEDEAN’s solutions and the partner’s service capabilities, enhancing market visibility and customer trust. Our partners find that knowing the measurable value our solutions deliver to customers can help them differentiate and win more deals.
• Participate in Partner Enablement Programs: We offer partner enablement initiatives, including technical training, pre-sales support, and co-selling opportunities. By taking full advantage of these resources, partners can improve their understanding of our products, ensuring smoother implementations and more successful client engagements.

The Dynamics 365 ecosystem will continue to evolve, and partners who adapt by fostering strategic collaborations, embracing innovation, and delivering maximum value will thrive. By working closely with ISVs like STAEDEAN, partners can overcome challenges related to reduced margins, rapid technological change, and increasing competition to build a stronger, more innovative future for their customers.

At STAEDEAN, we’re committed to building these partnerships, offering intelligent, industry-specific solutions that drive growth and success for all involved.

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Follow me for more articles on leadership and technology: Luciano Cunha | LinkedIn