Reality Check: Next Generation Gap

Next Generation Partner Program

The jury is out on that subject. Many partners privately say they believe Microsoft is overrecruiting new partners while existing players scratch by on thin margins. "The problem is that in the end, it's really all about Microsoft. They say it's about the partners, but they'd throw you under a bus in a heartbeat if another partner can get them more revenue in an account," said one currently disgruntled longtime "Classic" partner in the Northeast.

That sentiment—not so strongly expressed—is borne out in a recent CRN survey of 145 Microsoft partners. When asked to rate the statement that Microsoft products have excellent margins, survey respondents gave the vendor a less-than-positive score of 3.52 on a 7-point scale where 1 means strongly disagree, 7 means strongly agree and 4 is neutral. When respondents rated the statement that Microsoft is "genuinely concerned about my profitability and the success of my business," the vendor scored a 3.63.

Allison Watson, vice president of the Worldwide Partner Sales and Marketing Group, has heard these concerns but maintains that it is a matter of appearance, not reality. "For every partner that gives me that feedback, almost every time I've engaged or someone here has done outreach it's amazing how sitting down with Microsoft and hearing what it has to offer changes that perception," she told CRN.

She also draws a distinction between profitability and margins. "The reality is we don't think the model is on product margins with the exception [of the ERP products]. How do we support [partner] profit? By adding to their top line with more deals, more volumes and taking cost out of their business. [We] offload things like training [that have] real costs and opportunity costs, making it available online for free during off-hours and helping them get repeatable business with accelerators and blueprints."

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Indeed, Microsoft's challenge with its partner program is to somehow draw together two heretofore distinct classes of partners: authorized Microsoft Business Solutions (MBS) players used to relatively robust margins and a slower hands-on sales cycle of accounting and ERP products; and the more volume-oriented Classic partners.

It also has to deal with partners of every shape and size, from mom-and-pop shops servicing very small businesses to gigantic systems integrators—the EDSes, Accentures and Capgeminis of the world with their Fortune 500 customers.

A year into the program, it remains an open question whether Microsoft can meet its stated objective of coming up with a single program flexible enough to service all those constituencies, although most partners give the Redmond, Wash.-based vendor credit for making progress.

One problem is it's almost impossible to tell what the company's priorities are. MBS COO Orlando Ayala has said his group must attack the smallest of the small companies to get the volumes it needs. But to do so, partners say MBS must sacrifice its high- value-added services orientation. This is a matter of great concern to them. Meanwhile, Microsoft continues to push its wares into the highest echelons of the biggest companies, taking on Unix and Oracle and IBM Global Services. And then there is the whole retail-oriented consumer push. Where to begin?

Most partners say the battle starts with margins. And on that front, Linda Rose, president of San Diego-based Rose Business Solutions, breaks ranks with some of her MBS colleagues, saying Microsoft margins are not so different from the norm. "With the exception of CRM, their margins are as good as any," she noted.

The issue then is whether those margins can sustain a solution provider's business. Services-oriented partners say they cannot but that it doesn't matter. "Anyone who plans to make a killing adding value to bits by reselling them isn't living in the real world," said one Ohio-based Microsoft Classic partner. The real profit lies in billable hours spent customizing and implementing solutions atop the software, he and others say.

His sentiments echo Watson's own. The brutal reality is that, when it comes to software alone, buyers will find the best deal. "Customers tend to compete in an efficient economy to get the lowest possible price. They're smart at that, and if the partner doesn't cut their own margin, another partner will," Watson said. The dilemma is that as Microsoft struggles to maintain its traditional growth rate and profitability, it needs to push more volume at a time when many buyers see no reason to upgrade to its latest-and-greatest offerings. Customers are also stung by persistent security problems and tend to use the threat of migrating to Linux and open-source alternatives to force down Microsoft prices.

And every move Microsoft makes both on the technology and channel sides to achieve its goals often benefits one segment of its partner community while hurting another.

That dichotomy is illustrated in the survey. In one example, most respondents agreed that having to write interfaces between the diverse MBS code bases—Great Plains, CRM, Axapta and Navision—creates significant costs for them. That, ostensibly, is a negative. But others say that is not a bad thing.

"For us [that] creates an opportunity," said John McCartan, vice president of business development at Quilogy, a St. Charles, Mo.-based MBS and Classic partner. McCartan agreed with another finding, however. Most respondents agreed with the statement that rationalizing and integrating the various MBS code bases would be a big plus for their business. Microsoft had promised that in Project Green, but that effort has been pushed off into the post-Longhorn future. "I agree that they should simplify the MBS lines. They're very confusing for clients but it's a huge undertaking, we're talking maybe five years out," McCartan said.

Most respondents agreed that Microsoft's new partner program makes it easier to do business with the software giant. Glen Gulyas, president of Gigatrust, a Herndon, Va., ISV partner, concurred—with a caveat. "They've done a good job here, but they are still a big company and one that you need to study a bit so you can focus on what is good for your particular business—so it is easier, but lazy people won't notice the improvements," he said.

Quilogy's McCartan said the company has made strides but "there's still so much going on, so many things I would like to see simplified."

In many areas of the survey, partner responses differed by participation level. For example, Gold- and Certified-level partners tended to agree that their partner account manager has done more for their business this year than last. Higher-level partners were also more likely to agree that the total cost of ownership for a Windows solution is lower than for a Linux solution. In what may be a corollary to that, lower-level partners tended to agree that the cost and complexity of Microsoft's licensing programs make them more likely to recommend open-source solutions to business customers.

Higher-level partners were also more likely to agree than were lower-level partners that Microsoft product road maps and time lines are credible.

Partners at all levels tended to agree that Microsoft has made real progress in improving its products' security but they tended to disagree with the statement that Microsoft is a "leader" in security. The Ohio partner put that into perspective. "[Service Pack] 2 has been a big improvement, and the free antispyware tool is a big step as well. I think that they've improved tangibly. [But] will it take awhile for the tarnished reputation to be cleared? Absolutely," he said.

Watson acknowledges that security remains a top-of-mind concern. She said the company has seen huge interest among partners in obtaining the company's security competency. Some 15,000 partners are now working toward that goal. She also maintained that the company's focus on making products solid vs. getting them out on time is merited. "The big thing I hear from solution providers is they insist that we get things right from a quality and security perspective and they'll take delays in product cycles," she said.

Several Gold partners who spoke to CRN after the survey reiterated their fear that Microsoft is opening the floodgates to new Gold members. Even though he said it is harder now to get a Gold certification than in the past, McCartan said Microsoft is dealing with such a huge number of people clamoring for the Gold that he expects the company may open up a Platinum designation.

Asked if this were a possibility, Watson said, "Anything's possible, but the perception that everyone's getting Gold is not true. If anything, we think the bar for attaining Gold status is higher than in the past. We did add competencies for system builders and MBS so there will be Gold partners there, but the numbers are flat comparative year over year."

There are now 3,300 Gold partners, with that number expected to hit 3,500 by the end of Microsoft's fiscal year. That would be up from 2,500 last year, but the more recent numbers include partners in the new MBS competency.

And that gets us back to the crux of the issue. Microsoft partners—even many who are content with the company and its programs—worry about their profitability, even their viability over time. They worry that in its push to keep its growth rates and profitability at or near historic levels, the company will continue to recruit more and more partners, devaluing their expertise and fostering partner-on-partner competition. Some cite Novell as a precedent. Novell built its great NetWare franchise on a system of Authorized, Gold and Platinum partners. Over time, however, NetWare became so overdistributed and commoditized that Novell partners left the fold, many fleeing to Microsoft, which marketed its products better.

Watson and other Microsoft executives caution that partners who are willing to keep innovating "up the stack" have nothing to worry about. As MBS Senior Vice President Doug Burgum likes to state: There will always be plenty of "white space" atop Microsoft's software stack (and presumably its channel program) for third parties to innovate and profit. Many thousands of these third parties sure hope he's right.