Microsoft Working To Quell Partners' SaaS Fears

Whenever a discussion about Software-as-a-Service breaks out among solution providers, one issue that immediately pops up is where the channel will not only fit into -- but also profit from -- a scenario in which applications are delivered by vendors to end users as services.

Microsoft, which in the first half of the year plans to roll out Dynamics CRM Live, a Microsoft-hosted version of the Dynamics CRM 4.0 offering it launched last month, finds itself under the increasingly hot gaze of channel scrutiny. Partners feel they've been patient as Microsoft has worked to develop and articulate its own SaaS strategy, called software + services. But this year, partners are going to demand real answers.

With software + services, Microsoft gives customers the option of deploying their own on-premises servers, buying services from hosting partners, or -- in what will likely be the cheapest option -- buying 'in the cloud' services directly from Microsoft.

Microsoft executives say they're aware that some partners are worried that the latter option gives Microsoft a powerful customer-facing position that it may have no compunction about leveraging in the future. To assuage partners' concerns, Microsoft's top channel executives have been busily circulating amongst their partner base as part of a campaign to explain how the channel fits into a software + services world.

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Allison Watson, corporate vice president of Microsoft's worldwide partner group, has been out in the field with partners in recent months, working hard to drive the software + services vision. "Software + services is a big opportunity for us and our partners to rock the world with the launches that are coming up," Watson said.

"We hear concerns about SaaS all the time, but we believe this opportunity gives customers and partners more choice in the way they address their business," said Robert Deshaies, vice president of Microsoft's U.S. Partner Group. "We need to continue to ensure that partners understand that they are absolutely part of the equation of software + services."

Arnie Bellini, president of ConnectWise, a Tampa, Fla.-based solution provider and Microsoft Gold partner, says it makes sense from a business model perspective that Microsoft would want to move away from selling new versions of their software in favor of a recurring revenue model in which updates are delivered to customers automatically.

For partners, one area of potential concern is how far Microsoft ends up taking its software + services strategy, according to Bellini. "If I'm Microsoft, why would I stop at hosting the Office suite or Exchange or Sharepoint servers -- why not take on the entire line of business applications?" Bellini said.

In this scenario, Microsoft clients who choose the software + services route could eventually end up with very little IT infrastructure in their offices, Bellini said. "That's the concern. As a reseller, I look at that and I'm not sure if I like it. I probably don't like it," he said.

Within the industrywide SaaS model, partners with domain expertise in various verticals that can integrate SaaS systems with legacy on-premise solutions will find the most long term traction, according to industry experts.

In serving its small and midsize customers, San Francisco-based Microsoft CRM specialist Workopia has found success by offering vertical expertise; for example, by offering a version CRM specially tailored for the publishing industry. "We try to build vertical templates, and even though we are a reseller, we also build vertical expertise from our consulting practices," said Frank Lee, president of Workopia.

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But in Lee's opinion, in order for SaaS to really take off, the whole SaaS ecosystem, from resellers and vendors that rent their offerings to end users, needs to be modified. And because the end user can log in and access applications without interacting with the VAR, the channel will have to develop new strategies for engaging with customers, Lee said.

"The challenges exist around who's going to get control and profitability. In the traditional channel model, vendors go as much as possible through the VAR. But with Microsoft's CRM Live, what is the balance of control there? Who's the first person to call?" Lee said.

Partners that have based their businesses on large upfront software license sales will likely encounter difficulties as they transition to the annuity model on which SaaS is based, and disagreements over which party 'owns' the customer are also likely to create some friction.

ConnectWise's Bellini advocates a strategy that recalls the old football adage, 'The best defense is a strong offense.' ConnectWise has its own data center and has been hosting entire networks for its clients for the past two years, but Bellini isn't worried that this part of his business will be usurped by Microsoft with software + services.

"Will we be competing with Microsoft? Sure. But I think it'll be a while before Microsoft becomes the complete outsourced answer," said Bellini. "As a VAR, I think this is just one of those changes that you have to deal with. Here's another big change coming at you, and the question is, how will you survive?"

Another reassuring aspect of software + services is that many end users rely on solution providers to customize Microsoft applications for their particular environments, said George Brown, CEO of Database Solutions, a Cherry Hill, N.J.-based Microsoft partner.

"That hasn't been an area that Microsoft has focused on, and that's where opportunities exist for partners," said Brown. "The majority of Microsoft partners make their money from services, and that's not likely to change."

Workopia's Lee agrees that the services part of software + services will remain under the control of Microsoft's channel partners. "Microsoft isn't in the business of services. They've built their partner channel to deliver the necessary services, and I feel comfortable with Microsoft because resellers are woven into its business model," Lee said.

Mitch Cannady, president of Spinnaker Network Solutions, Irvine, Calif., says Microsoft has a proven history of learning what's going on around them and reacting in ways that end up changing the market -- and that benefit the channel.

For example, Microsoft's decision to sell its CRM products through distributors was a "huge development" that affected how quickly partners were paid, said Cannady. "We get paid on our software purchases faster today than we ever have in 11 years of doing business with Microsoft," he said.

"They're constantly studying and looking at what the effects are going to be from any strategy. That's why I think Microsoft has the best shot at providing a channel environment that's effective for software + services," said Cannady.