Depending on your outlook, CRM is either yet another three-letter abbreviation that should have died a death in the dotcom era, or the next big thing for small to medium-sized businesses (SMEs). Not surprisingly, Microsoft's Bill Gates is firmly in the latter camp, and after the small matter of a knighthood, he also took time last week to announce UK availability of Microsoft Business Solutions CRM 1.2 software. He believes this will drive the company into the lucrative world of CRM - something that, in theory at least, complements Microsoft's cash cow of desktop applications based on Microsoft Office.

CRM is misunderstood because it can't be explained by looking at one particular business activity. In practice, CRM stands for a hatful of related applications. The common thread is managing customers and potential customers better through applications such as automated call centres, sales lead or contact management, and automated marketing campaigns.

For example, when you phone your insurance firm to renew a policy, the chances are the telesales person automatically sees a screen of information about your account, which can be updated and amended when needed. That information is available to any sales person who takes your call, and it is probably used by the company to predict your and other customers' buying behaviour.

More sophisticated systems also offer reporting and analytics. The holy grail of CRM is to link where necessary into financials - no small feat when you consider the wide variety of financial systems in place.

But bearing in mind that the majority of SMEs spend next to nothing on CRM, because they perform basic customer relationship tasks using Outlook, Excel and Access, it is not surprising that Microsoft sees enormous potential for persuading its loyal customer base to consider buying extra software dedicated to CRM.

The arrival of Microsoft CRM is something of a watershed because it gives SMEs a significant new choice in a market dominated by ACT, with its eponymous software and Frontrange's Goldmine. It is also a market in which larger CRM vendors are increasingly evident with the arrival of low-end solutions from SAP, Oracle and Siebel. Siebel is aggressively providing hosted services through IBM and BT, for example.

Microsoft's big plus is its product's ability to integrate with key desktop applications, and most notably Outlook 2003. This will make it an obvious option for firms wedded to Microsoft Office who are looking for CRM that will integrate with their applications without too much up-front cost.

Microsoft CRM, aimed at firms of 10 to 1,000 employees, offers applications such as contact management, access to related information in a database, and reporting tools. But at around £600 per user, it represents a considerable investment to most small firms. However, it will also be available on a pay-per-use basis through software rental services, which may allow costs to be reined in.

Microsoft's plan is to let a host of partners develop and localise the software so it can fit into a number of business scenarios and vertical market sectors. For example, FlyingSpark will bundle CRM with mobile applications that offer better connectivity for mobile sales forces and the like. Another developer, Optevia, is integrating Microsoft CRM with a call centre suite. On the downside, "localisation" has only just begun, and there are few beta sites for prospective customers to inspect. And for the millions of UK firms that use Sage accounting products, integration is just being talked about at this stage.

But the big question is whether Microsoft can get SMEs to show interest in an area that is suffering from something of an image problem. Its research shows that only 10% of SMEs have any kind of automated approach to CRM beyond using basic software, and critics point out that some of the biggest IT disaster stories relate to CRM projects in large firms.

"Firms are afraid of the costs, despite liking the idea of CRM," says Vince Janhal, managing director of London-based reseller WEM Computers, "and SMEs are generally resistant to change. But the smart ones can see the need and know you have to do something about it". Janhal says that 90% of his customers do a form of CRM simply by making the most of the features in Outlook.

But Sage is in the process of beefing up its offerings with the imminent completion of a £110m acquisition of CRM vendor Accpac. This is one of Microsoft's biggest CRM competitors in the US, and has been active in the UK for two years.

Accpac marketing manager, Gerry Carr, is unimpressed: "Microsoft's arrival is a bit of a damp squid. This product hasn't gone down that well in the US and I don't believe they are really committed to this market."

Greg Carlow, managing director of IT developer Repton, disagrees. "If it were not Microsoft I would agree, but with its vast presence on the desktop, it has the chance to dominate with this. Existing products are fine, but you can't do things very simply. This will scale and integrate a lot better with fewer glitches. I think Sage will be disappointed it wasn't acquired by Microsoft when it was looking for CRM firms." (Microsoft bought Great Plains Software and Navision to underpin its move into business applications.)

Carlow believes the biggest barrier for CRM is the fact that it can also make firms more inefficient. "We are all fundamentally lazy, and a CRM system can be a problem if people find themselves spending more time inputting data than getting on with the business in hand. I have heard of cases like that."

But is there a fear that Microsoft will become too dominant on the desktop? Recent research by Yankee Group in the US found that 43% of SMEs were "concerned about becoming overly reliant" on Microsoft products and services. In addition, 72% said they were actively trying to lessen the dominance of Microsoft products in their operations.

Nevertheless, Ashim Pal, vice president of the Meta Group research company, says that curiosity has already been aroused. "Quite a lot of our clients are asking us about it so they can assess the opportunity. The UK market is fairly open because no one really dominates, and the fact that Microsoft CRM integrates with Outlook is a big pull. Because it is Microsoft, a lot of firms - even larger firms - will try it out for particular groups or departments."

There is little doubt that most of the firms being targeted by Microsoft avoid CRM because of existing investments or fear of the cost of a new system. How much effort Microsoft puts into getting this product accepted in the UK market may well determine the short-term future of all the CRM vendors.