Microsoft starts banging the SME drum in earnest this autumn, which must be a little disconcerting for competitors given that Microsoft technology is already a default decision in many smaller firms.

But who exactly is Microsoft's competition? It could even be you, which probably isn't a good position to be in.

Microsoft is set to shake up established business relationships and channel networks as it attempts sell more of its technology to smaller firms.

It is going to fundamentally redefine customer relationship management (CRM) software in the process, which has major implications for independent software vendors (ISVs), value added resellers (Vars) and systems integrators (SIs).

According to Microsoft, it will maintain its current indirect approach, where 95 per cent of revenue comes through partners, so there still will be clear opportunities for channel players.

Microsoft won't suck all of the air out of the ecosystem, but life will be more challenging for packaged application vendors in particular, because many VARs and SIs are likely to move to selling Microsoft-based apps.

ISVs in Europe are nervously looking over their shoulders as the industry consolidates. Companies such as Sage are busily buying other smaller firms to bulk up against competition from bigger rivals. Critical mass is important to help overcome buyer caution.

Talking of critical mass, how do you fancy competing against BT? Telcos and accountants are two potential channels Microsoft is eyeing up.

Telcos have existing billing relationships with every SME and can use economies of scale to offer low-cost hosted Microsoft applications to these customers.

Accountants, meanwhile, are often asked for technical advice from clients, a process Microsoft wants to formalise. This will affect vendors of accounting packages.

So what about Microsoft? Fourteen companies in EMEA have already signed up to the Microsoft Business Framework, out of 400 or so that the vendor has spoken to in the past few months.

Meanwhile, Microsoft CRM is the battering ram that will take Microsoft into the SME space. As far as Microsoft is concerned CRM is a horizontal service, rather than a business app in its own right.

The Microsoft Outlook client is already used to managing relationships - the what, where, why of our dealings with contacts - whether customers, suppliers or staff. Microsoft CRM takes this and adds a back server for workflow, reporting and analysis.

Scala Business Solutions is one of the first European major packaged application vendors to wake up to this new reality. Rather than build its own module, it recently announced that the next version of its iScala Collaborative ERP system will be bundled with Microsoft CRM.

Scala was already a Microsoft partner, building its own apps on Microsoft technology and integrating directly with Office 2003.

Microsoft's approach has a strong message: if you are an ISV, then become a Microsoft reseller or get steamrollered. If you are a Var, then why not sell our stuff?

Lots of firms would love to ignore the Microsoft threat, but it won't go away. Microsoft is going to sell business applications; it didn't buy Navision for nothing.

It is already gaining ISV traction for Microsoft CRM. It has the deepest pockets in the world.

Microsoft has some major challenges on its hands, of course, such as its poor reputation in product security, and the growth of Linux, which increasingly is being mandated by buyers.

Many ISVs aren't willing to 'dance with the devil', but they should think about the impact Microsoft will have on their businesses. This goes for Vars too.

The Redmond giant can't be ignored when it sets its mind on a new market, and the drums are getting louder.

MONEY TALK

James Governor is principal analyst at RedMonk.
www.red-monk.com