Dynamics 365 ERP MCP Server - Simply Explained

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Today's topic is one you've probably heard about,

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but maybe don't fully understand.

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The model context protocol for Dynamics 365 ERP.

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You've seen the acronym, MCP, and Microsoft announcements,

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partner webinars, and community posts.

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But what does it mean for someone

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who works with Dynamics 365 every day?

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Here's the thing, your ERP holds your most important data.

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Finance records, supply chain transactions,

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inventory levels, vendor info, customer histories.

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It's how your company runs.

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But getting that data into AI tools has always been a headache.

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You needed custom API, special connectors, security workarounds.

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Every time you wanted to connect an AI assistant to your ERP,

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you had to start from scratch.

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By the end of this episode, you'll understand

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what the MCP server is, why Microsoft built it,

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and how it turns your ERP into a system AI agents

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can talk to directly.

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No custom code needed.

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So grab your coffee and let's dive in.

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What is a model context protocol?

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Here's the simplest definition.

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MCP is an open standard that lets AI applications discover

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and call tools and data sources in a structured way.

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Think of it like a universal remote.

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Without MCP, every AI agent needs its own custom wiring

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to each system, one cable for your CRM, another for your ERP,

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another for your data warehouse.

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Every time you add a system, you run another cable.

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With MCP, you plug in once and get access to everything,

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one connection, one protocol, one way of working.

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Before MCP existed, connecting an AI assistant to your ERP

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was a full project.

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You had to build custom APIs, maintain connectors,

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deal with security headaches, and update everything

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whenever the ERP changed.

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It was expensive, slow, and fragile.

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MCP changes all of that.

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Instead of building a custom bridge every time,

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you get a standard interface that any MCP compatible tool

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can use, the model context part is important too.

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The AI agent doesn't just get raw data.

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It gets detailed info about what tools exist, what they do,

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how to use them, and what data is available.

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So when an agent needs to do something,

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it can look at the tools, understand which fits the task,

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and call it correctly.

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That's how it makes smart decisions

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because it understands the system.

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So why does this matter for Dynamics 365 specifically?

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Microsoft built an MCP server for finance and operations apps,

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and that means hundreds of thousands of ERP functions

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become tools AI agents can discover and use.

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From creating a purchase order to posting a journal entry

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to running a financial report,

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every function is exposed through a single governed interface.

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That's the big idea.

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But what exactly does that MCP server look like inside Dynamics 365?

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Let's break it down.

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The two flavors of ERP MCP, when Microsoft first released

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the ERP MCP server, they didn't have the full vision in mind.

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The initial version came with a fixed set of 13 tools.

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You could do specific things like find approved vendors

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or release purchase requisition lines, it was useful.

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But it was also limited.

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Think of it like a vending machine.

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You could only pick from what was stocked.

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If you wanted something that wasn't on the menu,

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you were out of luck.

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Then Microsoft evolved it.

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The new Dynamic MCP server, now in public preview,

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is a completely different beast.

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Instead of a fixed tool list,

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it lets agents navigate ERP forms just like a human user would.

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The agent can open forms, set field values,

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click buttons and run actions.

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And it works through the same business logic

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and validation rules that apply when you do it manually.

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The difference, night and day.

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The static server was a vending machine.

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The Dynamic server is a full supermarket.

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You can browse every aisle and pick anything

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your security allows.

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And I mean anything.

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We're talking hundreds of thousands of ERP functions

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across tens of thousands of forms,

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finance supply chain, human resources, project operations,

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every form, every action, every button

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that a user can access becomes available to the agent.

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Here's the part that really matters

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for organizations that have customized their ERP.

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Customizations and ISV extensions

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become automatically visible to the agent.

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You don't need to write special code

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to expose your custom fields or custom processes.

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If it's in the ERP and a user can interact with it,

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the MCP server makes it available.

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No extra coding needed.

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But MCP isn't just about taking actions,

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it's also about understanding your data.

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The analytics MCP server.

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So we've got this Dynamic server

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that can take actions inside your ERP.

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But actions without data are blind.

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You need to know what's happening

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before you can decide what to do.

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That's where the second piece comes in.

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Microsoft also announced a separate analytics MCP server.

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It entered public preview in December 2025.

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This server connects to something called

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Business Performance Analytics or BPA.

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Think of BPA as the analytical data store for your ERP.

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It brings together data from all your ERP instances

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into one unified schema with pre-built reports

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and dimensional models.

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Instead of having to pull data from five different environments

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and figure out how to join it yourself,

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BPA does that work for you.

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Now the MCP layer on top gives AI agents a way

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to query that data.

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And here's the elegant part.

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It only needs two tools.

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You get data set schema and execute DAX query.

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That's it.

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The agent first asks for the schema

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to understand what data is available,

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what tables exist, what measures are defined.

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Then it writes a DAX query to get exactly the data it needs.

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Why does this matter?

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Because instead of building complex power BI dashboards

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and waiting for someone to refresh them,

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you can ask natural language questions

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and get answers instantly.

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What are my top 10 vendors at risk?

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Show me this bike in cost of goods sold by quarter.

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Which customers have the highest outstanding balances?

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The agent figures out the schema, writes the query,

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and brings back the answer.

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No dashboard building required.

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But the real magic happens when you combine both servers.

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Imagine an agent that uses the analytics MCP

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to identify a vendor with more than five overdue invoices.

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It flags that vendor as high risk.

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Then it uses the action MCP to automatically put

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that vendor on hold in your ERP.

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No human needed.

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Insights lead to actions all in one continuous flow.

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That's the vision Microsoft is building toward.

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So what does this actually look like in practice?

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Let's look at some real examples.

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Real-world use cases.

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Let's start with a real demo Microsoft

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showed during their tech talk, the vendor risk management agent.

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This thing monitors open invoices in your system.

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And when it spots a vendor with more than five overdue invoices,

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it puts that vendor on hold in the ERP automatically.

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No one has to lift a finger.

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The agent checks the data, makes the decision,

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blocks any new purchase orders with that vendor,

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and then sends an email to the accounts payable team

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explaining what happened and why.

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All of that runs without any human intervention.

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Next up is prepayment invoice automation.

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And this one comes from Ted Olsen at Cap Gemini.

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A user asks an agent to create a prepayment proposal

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for a specific sales order.

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And the agent just navigates through the ERP forms on its own.

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It sets the prepayment type to percentage,

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sets the value to 50%, confirms the sales order,

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creates the prepayment invoice, and posts it.

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That's multiple steps across multiple forms,

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all handled by the agent walking through the interface

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just like a person would.

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The user only described what they needed in plain English

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and the agent handled the rest.

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Now for the wild one.

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Scott Gaines, a solution architect,

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built a team of AI agents inside VS Code

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that configure an entire ERP environment.

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He set up a project manager agent

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that orchestrates the work, a solution architect agent

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that reviews the requirements, a consultant agent

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that runs the actual setup, creating legal entities,

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chart of accounts, and fiscal calendars,

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and a data migration agent that uploads master data.

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These agents pass work between each other.

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The project manager hands off to the consultant,

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the consultant configures the ERP,

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and the data migration agent loads the accounts.

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A complete ERP implementation,

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partially automated by a team of AI agents working together.

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These aren't PowerPoint concepts.

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They're real demos from real partners.

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Capgemony, Scott Gaines, Aventico, Microsoft themselves.

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MCP is not theoretical.

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It's working today in preview environments.

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The key takeaway is simple.

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MCP turns natural language into ERP actions.

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You don't need to memorize menu paths or write code.

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You describe what you need

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and the agent figures out how to do it.

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But how do you actually set this up?

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Let's walk through the basics.

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How to get started.

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So you're interested in trying this out.

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What do you actually need to get started?

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First, the prerequisites.

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You need a Dynamics 365 Finance and Operations Environment

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running version 10.0, 38 or higher.

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If you're on the Analytics MCP,

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you'll also need Business Performance Analytics

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installed version 2.5 or later.

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And you need an MCP compatible client to talk to the server.

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That's it.

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Three things.

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Now you have two main options for how to connect.

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The easiest path is co-pilot studio.

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You go there, create a new agent, and add a tool.

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Search for Dynamics 365 ERP MCP, connect it to your environment,

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and you're ready to start prompting.

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It's a low-code experience.

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No coding required.

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Just configure and start talking to your ERP.

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The second option is Visual Studio Code.

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If you're more technical or want to test things directly,

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this gives you more control.

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You use the VS Code MCP client,

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paste in the ERP MCP endpoint URL,

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provide your credentials, and you're connected.

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It's a few more steps than co-pilot studio,

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but it's still straightforward.

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And Microsoft has documentation

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that walks you through the exact URL format.

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Here's something important to understand about security.

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The agent uses the security permissions

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of the user identity that's connected.

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So whatever role-based access controls you've set up

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in Dynamics 365 apply automatically.

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If a user can only see their own legal entity,

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the agent can only see that legal entity.

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If a user can't post journals, the agent can't post journals,

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your existing security model becomes the agent's security model.

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No separate configuration needed.

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A few tips for writing good prompts.

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Always specify the legal entity you're working in.

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The agent doesn't assume, if you don't tell it,

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it might pick the wrong company.

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Use clear natural language.

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You don't need to speak in technical terms

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and break complex tasks into smaller steps.

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Instead of asking for a 10-step process in one prompt,

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ask for one step at a time.

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The agent is smart, but it's more reliable

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when you keep things focused.

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One honest note about limitations.

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This is still in public preview.

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There's a 120-second execution time

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out so long-running operations might fail.

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Each query can return about 10 megabytes of data,

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which is plenty for most questions,

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but not for massive data dumps.

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And the AI is not perfectly consistent yet.

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It might handle a task perfectly one day

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and struggle with the same task the next day.

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Test thoroughly before you trust it with anything important.

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So what's coming next?

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Microsoft has a clear roadmap for MCP.

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Roadmap and future direction.

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So where is Microsoft going with us?

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They're all in on MCP.

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All new ERP agents will be built on it.

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And existing agents will migrate by December 2025.

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This isn't a side experiment.

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It's the strategic direction for the entire platform.

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For the analytics, MCP specifically, several features are coming.

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Granular schema retrieval is on the way

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so the agent can request smaller pieces of the data model

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instead of pulling everything at once.

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That's better for performance

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and for managing the AI models context window.

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Agents will also be able to create and update dashboards

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and measures directly, not just query existing ones.

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A native integration into co-pilot and teams

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is on the roadmap so you can ask questions about your ERP data

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without leaving your everyday tools.

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Here's where Microsoft sees this going.

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Imagine a CFO opens a dashboard in business performance

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analytics and clicks an analyze button.

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An agent immediately scans the data,

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finds a spike in cost of goods sold and flags it.

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It drills into vendor spend, identifies the supplier,

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driving the increase, pulls in external data

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like tariff changes and news stories,

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builds a slide deck explaining the root cause

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and flags action items for the team.

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All of this happens in seconds.

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From a dashboard click to a complete analysis

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with recommendations without anyone writing a single query.

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MCP is also expanding beyond finance and operations

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to commerce, business, central and customer service.

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That creates a unified AI agent layer

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across the entire Dynamics 365 ecosystem.

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An agent that works with your ERP can also talk to your commerce

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system and your customer service platform

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all through the same protocol.

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The partner ecosystem is growing fast with RSM, HSO,

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FellowMind, KPMG, Crow, and others already building agents

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on MCP for specific industry needs.

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Think shop floor automation for manufacturing,

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invoice payment agents for accounts payable,

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inbound load processing for logistics,

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quality impact recall agents for product safety,

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each taps into the same MCP foundation,

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long term MCP becomes the standard way to integrate ERP systems.

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You'll hear the phrase, headless ERP plus

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agente workflows, meaning the ERP runs in the background

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as a system of record and AI agents

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handle the front end interactions.

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So instead of clicking through forms,

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you describe what you need and agents make it happen.

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Let's wrap up with what this means for you.

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What this means for you?

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If you're a Dynamics 365 user, here's what changes.

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You'll soon delegate routine tasks

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like posting journals, creating purchase orders,

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running reconciliations and checking vendor balances

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just by describing what you need.

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Instead of navigating through menus, you tell an agent

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and it handles the steps, your job shifts from doing the work

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to supervising it.

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If you're an IT professional, MCP simplifies your life.

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No custom APIs for every AI integration,

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no separate connectors for every tool.

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Your existing security model applies automatically,

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so the agent inherits the permissions you've already set up.

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That means less custom code, fewer maintenance headaches,

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and faster delivery of new capabilities.

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If you're a partner or ISV, MCP opens up new opportunities.

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You can build reusable agents that work across multiple tenants.

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Your customizations become agent-ready by default

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with no special exposure layers needed.

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If it works in the ERP interface, it works through MCP.

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Here's the bigger picture.

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This isn't just a new feature.

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It's a structural shift.

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We're moving from systems of record to systems of action.

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Instead of storing information and waiting for humans

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to act on it, the ERP becomes a platform

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that AI agents use to execute business processes directly.

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The data is still there, but now it's connected to action.

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One word of caution.

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Governance still matters.

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Plan for human in the loop for high-risk actions

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like posting large financial transactions

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or changing supplier terms.

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Monitor agent behavior and keep audit trails.

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The technology is powerful, but it needs responsible oversight.

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Start with low-risk tasks, build confidence, and expand from there.

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So that's the MCP server in plain English.

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It gives AI agents a governed way to talk to your ERP.

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Kind of like turning Dynamics 365 into a toolbox,

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any smart assistant can open and use.

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Here's your homework.

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If you're on a supported version, try the public preview.

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Create a simple agent in co-pilot studio

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that reads your top five open invoices.

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See how easy it actually is.

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I'm Mirko Peters.

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And this has been a Microsoft Knowledge Nugget.

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Subscribe on your favorite podcast platform

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for more plain English explanations.

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Next time, we'll look at how MCP works with Power Platform agents.

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Share this episode with someone exploring AI in ERP.