Squeezing Microsoft

Why is Microsoft so accommodating these days? Not surprisingly, it's all about retaining customers. Amid a backdrop of Windows security woes, SQL Server 2005 and Longhorn delays, and Linux looking more and more like a viable contender on the server and eventually maybe the desktop, Microsoft is handing out licensing incentives like candy to its customers.

The software giant's flagship Software Assurance (SA) maintenance program is at the heart of its strategy to keep its customers doing Windows. So Microsoft, along with some of its channel partners, are campaigning hard for customers to sign up for the three-year program that includes free upgrades, technical support, training vouchers and a home-use program.

"SA is a key piece of Microsoft's licensing strategy--it's important to them because they get a guaranteed revenue stream [during the life of the contract]," says Julie Giera, vice president at Forrester, which works with a client that got the million-dollar plus discounts from Microsoft. "Its failure isn't an option."

Work In Progress
Some Microsoft resellers and systems integrators are already busy pitching SA to their customers, as well as filling the knowledge gap for the confusing array of Microsoft-licensing options. Microsoft channel partner Software Spectrum, for instance, helped sell Quadra Chemicals on an Enterprise Agreement/SA contract for Windows NT, 2000 and 2003 servers and Office 2000 desktops, which it signed last fall.

"They came in and developed a business case for us that proved it was more cost-effective for us to go with an Enterprise Agreement [than a Select license]," says Ian Zwirek, network and systems manager at Toronto-based Quadra Chemicals, the 11th largest chemical distributor in North America. A Microsoft Select license is a traditional volume license without the frills and doesn't include updates.

Zwirek says Quadra Chemicals is committed to Microsoft for the next three years, but may consider Linux when its license expires.

"Linux isn't an alternative right now, but maybe in three years. We'll have to decide whether it makes sense to develop that expertise in-house at that time," he says.

Microsoft's channel partners, meanwhile, are finding that SA is a steep learning curve.

"It raises the bar for firms selling it. You need to understand the multidimensional picture of SA to sell it to a client," says Ranny Grubb, CIO and managing consultant for Virtual IT, a Roanoke, Va.-based consulting firm that's currently helping a large subsidiary of a major conglomerate decide whether to go with SA or just stick with traditional licensing.

Grubb says a big selling point for SA is that customers can spread licensing funds over the three-year period.

"It's hard to swallow when you have to put up a lump sum of hundreds of thousands of dollars up-front [with a traditional license]," he says.

David MacDonald, president of Microsoft partner SoftChoice, says his firm's role is to educate customers about SA and how to get the most out of it.

"This fits hand-in-glove with the way we like to work with our customers," MacDonald says.

But resellers and analysts agree that customers can't just jump into SA. You have to weigh whether they need its features and conduct a financial analysis to see if you'll come out ahead with it.

"Can it save you money or not? You have to make an informed decision, and that's not just based on whether you'll get an upgrade or if any of the features add value to your organization," Forrester's Giera says. "The answer may still be 'no' for some companies."

Gartner, meanwhile, sees a cloudier outlook for SA. By the end of 2005, approximately half of Microsoft's Select and Open licensing customers won't renew with SA, according to Gartner research. At least 30 percent of Microsoft's Enterprise Agreement customers (pre- and post-SA) won't renew their agreements either, according to Gartner. Their biggest beef: not getting an upgrade during the life of the contract.

The latest glitch for SA came last month, when Microsoft announced that SQL Server 2005 wouldn't ship until the first half of next year. It was supposed to ship this year. That may deter SA renewals from companies that were counting on the new version of SQL under their contracts.

Sunny Jensen Charlebois, product manager of worldwide licensing and pricing for Microsoft, says customers will still get their money's worth because SA is not just about the free upgrades.

"We've added a lot more value besides the upgrades," she says.

So if a customer is only in it for the upgrades, SA may not be the right fit, analysts and resellers say. Still, many enterprises this year plan to stick with Microsoft one way or the other. To wit, findings from VARBusiness' enterprise-spending survey show 67 percent of enterprise executives ranked Microsoft as the most important vendor, ahead of Cisco (45 percent).

Cashing In
Those companies negotiating licenses this year are reaping the benefits of Microsoft being under pressure. Take Quadra Chemicals. Microsoft made sure the chemical distributor's $75,000 budget for this year was enough to cover the first year of its SA contract.

"Microsoft was very creative in getting me credits and financial recognition [as a previous customer]," Zwirek says. "We took those credits and applied them to our first year of the contract."

K2 Sports, meanwhile, turned to SoftChoice to decipher SA. The maker of skis, snowboards and mountain bikes was in the midst of an XP and Office 2003 rollout at the time, says Pius Oleskey, network/operations manager for K2, which is based in Vashon, Wash.

"XP and Windows 95 are different, and we were wondering how we were going to train our users," Oleskey says.

So the training vouchers that come with SA sold K2 on the program. "In the past, we didn't do training. We never had the money for it," Oleskey says. "The online training takes the pressure off of us [in IT]."

As for discounts, K2 got in on a limited rebate offer on Office 2003 for SA customers. Microsoft gave K2 rebates worth about $28,000, as well as some funding to help K2 hire third-party implementation help.

Decision Time
But the true test for Microsoft comes this summer when the last of the Microsoft Upgrade Advantage program licenses expire in late June and July, leaving $1.1 billion in Microsoft software licenses up for grabs. Microsoft isn't sure just how many customers will go SA when those license contracts expire.

"If we get 30 percent of them renewed on SA, that would be great. These are transactional customers who want a perpetual license and don't always need SA," Microsoft's Charlebois says.

Microsoft wouldn't reveal any SA numbers, but Charlebois says it's meeting and exceeding its projections. Microsoft has spent $20 million researching SA, she says.

"We went to our customers and asked, 'What else do we put in SA?' We built SA to be the industry-leading maintenance offering," she says.

The timing is ripe for customers to wheel and deal with Microsoft. "Between now and the end of June and July is a good time to put together an agreement... Customers will find Microsoft very willing to talk discounts and concessions, so it's worth looking at SA," Forrester's Giera says.

One large company found some leverage with Microsoft's security problems. "We told them their value proposition had diminished%85they heard that and helped us with some discounts," says a member of the IT staff close to the SA negotiations who requested anonymity.

Like many businesses, the company has taken a "hold and wait" strategy with its software platforms, stretching as much life out of them as possible. As a matter of fact, the company skipped XP on the desktop in anticipation of Longhorn.

"But if Longhorn gets extended, the Enterprise Agreement becomes less and less attractive," the source says. "I hope we get something for our money--at a minimum, we can get a new version of Office out of it since we're going Office 2003 this year."

Whether SA's support and extras are enough to sway cynical customers remains to be seen. For now, Microsoft is still the only option for many companies. So channel partners have to provide licensing expertise to customers, especially when it comes to SA. Their Microsoft business could be riding on it.

The transition to SA won't be easy. "SA adoption will be very slow this year," Virtual IT's Grubb predicts. "Having as much documentation out there to explain what it does tells me Microsoft is already facing an uphill battle," he says.

Much of the burden of SA will fall on solution providers.

"Our partners are critical to coming to our customers. They have a lot of training in the business and financial impact of SA," Charlebois says.