CRN Interview: Doug Burgum and Orlando Ayala, Microsoft

In reorganizing the leadership of its business applications division, Microsoft last week said that Doug Burgum, senior vice president responsible for Microsoft Business Solutions (MBS), will report directly to CEO Steve Ballmer and that Orlando Ayala, senior vice president responsible for the Worldwide Small and Midmarket Solutions and Partners group, will add the title of MBS COO and report to Burgum. In an interview with Industry Editor Barbara Darrow, the two executives discussed Microsoft's decision to outsource Solomon Software development and new resources aimed at driving more business applications sales, including new field personnel dedicated to the corporate space.

BURGUM: Just some quick thoughts, and then Orlando [Ayala] and I will jump to questions. Microsoft is very committed to the business applications space. We think there's a great opportunity to achieve even more synergies for customers through how we bring together the servers and tools business, the Windows business and the Office business with business applications and do a superb job helping customers and partners reach their potential. We also think there's a market opportunity, and we've demonstrated the last couple years that we can outgrow our competition and think we can do an even better job of creating business opportunities for partners.

As part of that last year, we did a nice job of the first step in that journey, bringing together what was the old MBS field-sales and marketing organizations with the former Microsoft SMB [group] under Orlando and putting it under the new Small and Midmarket Solutions and Partners [SMS&P] group. We achieved a number of goals in that integration, but as Orlando and I worked through that, we knew there are more goals to achieve going forward. One of the things we've decided is to tighten alignment even further between MBS and SMS&P and, as a result, SMS&P will be hosted within MBS' P&L [statement]. And in addition to retaining his success in leadership of the SMS&P business, Orlando will also become COO of MBS. We'll continue to partner together deeply and, also as part of this switch, the MBS group will report directly to [Microsoft CEO] Steve Ballmer.

CRN: So, before, both of you reported to Jeff Raikes [Microsoft group vice president of Productivity and Business Services], and now you are reporting to Ballmer?

BURGUM: Well, technically, Orlando's reporting to me and I'm reporting to Ballmer. Before, both Orlando and I reported to Jeff [Raikes].

CRN: So as COO, Orlando, will you be a day-to-day operations guy?

AYALA: Here's the lineup of direct reports. Allison Watson continues to head worldwide partners and reports to me. John Lauer is the new leader for midmarket, reporting to me, and he replaces Lindsay Sparks. Steve Guggenheimer is the vice president of small business, reporting to me. Kurt Kolb, vice president of system builders, reports to me. Tami Reller heads product marketing, and Dave O'Hara is doing business incubation like Microsoft Retail Management System, or RMS, which is very important for ISVs in MBS. [We will also] be hiring a high-level senior executive to drive MBS sales, who will report to me. Bill Landefeld, who was basically head of our licensing team before, will be operations vice president. I will also work closely with Doug on strategy, and Doug will be very focused on all of the R&D. And all of those teams will report directly to Doug. Plus, Doug will take a very proactive stance of being 'Mr. Business Apps' for Microsoft. In many ways, the audience buying business applications cuts across P&Ls, and Doug is the best person at Microsoft [to handle that].

CRN: Can you talk about some of the new leadership on the product side?

AYALA: Yes. I'm super-excited. I tell you, this will provide a lot of direct focus by very senior people. One of the things that we believe in strongly is that [business applications] are the most distinctive thing the company can have. Of course, operating systems and tools are important, but bringing all of that stack aligned with SMB is a very, very important step. And that will be aligned with very senior people running the product lines. [In many cases] we'll be having new senior leadership underneath Tami [Reller], who will drive product lines more aggressively.

BURGUM: A few names I would mention that would be familiar to the channel: Jeff Young will be leading the Great Plains and Solomon business, reporting to Tami [Reller], and he'll run that business globally. Rene Stockner--who is a very senior guy, the No. 2 guy from Navision who was in a business group field role--is going to be the general manager for Navision, based out of Vedbaek [Denmark] and, again, driving that business globally from the product side. Mark Jensen, a new hire of about six months ago, formerly with i2 and Dell, will be relocating to Copenhagen [Denmark] and will be driving the Axapta business.

AYALA: Just to follow up, we'll also have some positions, a very senior CRM person, and David O'Hara will be in charge of what we call incubation products-- RMS is one of those--and also ISVs. These are very senior marketing people.

CRN: What about the overall head count at MBS? Are there any reductions in the workforce?

BURGUM: There's going to be some rebalancing. We've made some tough decisions around the globe in terms of balancing internal marketing head count vs. variable marketing, and we've made adjustments relative to what kind of people we have in the field, with the right amount of technical capability. We're making some adjustments relative to support organizations to make sure we've got the right people deployed on the right products in the right places around the globe. The net effect of that is about 100 positions will be affected within MBS across Findlay [Ohio], Vedbaek and other locations.

CRN: So you'll be down 100 people net, or are people being shifted around?

BURGUM: I think at the end of the day, we're going to be down. We also have other exciting news that I want to preview with you. We are making a decision, effective Dec. 30, to close the Findlay site [headquarters of Solomon Software]. That's a Microsoft decision that I made, but it's more than MBS. We had 77 people there doing support and 47 people there working on Microsoft Business Framework, which is in [Microsoft Senior Vice President, Servers and Tools] Eric Rudder's group. This is independent of the organizational changes relative to Orlando and I. This is getting ourselves set up for fiscal year 2005 at MBS. As part of the announcement, specifically in Findlay, there will be an announcement going out about a new startup called Plumbline Software, a company backed by [Solomon co-founder] Gary Harpst and the two other founders of Solomon. They're entering a three-year contract for development and support of Solomon with Plumbline. Microsoft will retain all the [intellectual property], marketing and the customer experience. We will still be accountable for the revenue but will outsource development and support to Plumbline. Plumbline will also become a MBS ISV and do additional development beyond what we contract to them for development and support. It could take the form of verticals around Project Green, and the form of add-ons for any of our four ERP lines, including Solomon.

CRN: One partner complaint about MBS is that it's hard to distinguish between the various product lines and that there's overlap. Are you de-emphasizing Solomon to alleviate that?

BURGUM: It's not about downplaying Solomon. It's about gaining operational efficiencies because we are going to be doing site consolidation. Last year, I think we consolidated nine sites sprinkled around the country for MBS. This is part of a site consolidation to get to three major sites--Redmond, [Wash.], Fargo, [N.D.], and Vedbaek. But we remain committed to the Solomon product line; [we've committed] to support it through 2013. Solomon 6.0 is going to market in the next month. We've publicly committed to Solomon 7.0, which Gary Harpst's team will be intimately involved in crafting and creating. I guess I'm making a bet that a group with deep knowledge--long-term Solomon people in an entrepreneurial environment--will do some great things for partners with this line. [Editor's note: Great Plains bought Solomon Software in 2000, and Microsoft bought Great Plains some 15 months later.]

CRN: Last quarter, MBS had just 4 percent revenue growth. How much of that stemmed from macroeconomic factors vs. execution problems?

BURGUM: We hit our external numbers for the quarter as per expectations. I think [Microsoft CFO] John Connors commented on this. We had strong growth rates in EMEA [Europe, Middle East and Africa markets], and we did fill last year post-Momentum, the name for our integration of two U.S. sales forces. And we did have execution issues, which we acknowledged. The U.S. team has also made changes relative to strengthening the number of focused roles around MBS. Orlando and I are deeply involved in working with the U.S. team and feel good about how they're positioned for fiscal year 2005. We did have execution issues, and we're driving through those. Separate from that, we do want to acknowledge that this continues to be a fragmented, highly competitive market. There are some very strong players in this space--country by country and in the U.S.--and we have to do a great job every day earning the business of our partners.

AYALA: The best indication is our pipeline, and pipeline has started to build. We're happy with that progress. Clearly, 20 percent growth outside the U.S. I wanted to take your point about reduction in head count. It's very important. You asked us before how much we'd invest in the MBS business. I can tell you that today as we close our planning, we've added additional investment to the tune of $50 million. So don't go away with the feeling that we're retracting. This is all about putting the right people in the right places.

Let me give you the buckets where the dollars are going. No. 1, we are increasing resources for MBS, especially on the sales and technical sides. We're creating jobs in the field--what we call solution specialists. These would be people highly specialized in CRM and ERP. We don't have those resources today in the right amounts. We are investing in partner coverage and recruitment for MBS. I feel super-excited that we have clarified the structures internally, especially appointing leaders for MBS who will lead in the corporate accounts space. MBS cuts across SMB and enterprise. Last year, we didn't have a leader dedicated to corporate within the enterprise team. Now those will be in place. That's a very important move. We are still very focused on scenarios where our products fit well, which for the most part is not really the hub but the spoke. So the strategy is not to change the ERP at Ford; we're really on the spoke side. That's important to have leadership in the enterprise space, mostly in corporate accounts, defined as 1,000 employees or more. They will be very focused with quotas. I've changed compensation, too. This team, for next year, will be one of the few teams in the company with a highly variable compensation plan. It matches the industry better. We're going to have a lot more people whose pay is going to depend heavily on delivery of this business.

CRN: Are you talking specifically about corporate accounts or across the board?

AYALA: Both SMB and corporate accounts. Specifically, on corporate accounts, people will have very variable compensation. This will help us attract people who grew up in this business that can do the job. The number of people with quotas in MBS last year was in the neighborhood of 200. This year, we're pushing that to 600 people. If anything, this is great news. We are putting the pedal to the metal here.

BURGUM: These are not direct-sales people. They are people who work in the field with our partners.

AYALA: We don't sell direct; we are not changing our model. I sometimes don't mention it because to me it's crazy to think that we'd hire a thousand people to talk to customers directly. Corporate account people actually go with partners to customers--day in and day out--just for MBS. Other important investments will be in marketing. We'll get more precise down the road, but you'll see marketing more targeted at scenarios and verticals--more targeted at scenarios well-supported by our products, with emphasis in certain industries. [We're also planning a] campaign with MBS in the press. Partners want more precise calls to action. We're investing deeply now in recruiting partners, a double-digit number in the millions, to help us build capacity for CRM and Axapta, which are products that have huge potential, especially in the U.S. [We're investing] double-digits in creating capacity, including underwriting some of the training for partners. Another heavy investment is on the RMS side in the U.S.

CRN: You've mentioned retail a lot. Is that a high-growth area?

AYALA: It is high-growth, but I think the opportunity there is that that market is at a crossroads--a lot of old, POS-type systems that, frankly, can be a great business. We see that as an opportunity not only for Microsoft but also for customers. I can say that from the heart, because my own brother just installed Small Business Server and multiple MBS applications in his retail store.

CRN: We've seen a ton of MBS partner mergers-and-acquisitions activity. You had expressed concern that if it's just a consolidation of players, with no new net bodies selling MBS, it's not going to help Microsoft. What do you see happening with these mergers?

BURGUM: Consolidation in any business can be a natural economic evolution. To the degree that some of these organizations are merging and then cutting out overhead costs associated with leadership management teams, [which sometimes results in more] resources or feet on the street and consulting capabilities, that's fine. In some of those consolidations, we're seeing increasingly efficient organizations that can serve broader and more complex customers. There's actually quite a bit of capital flowing into the segment. This is something that hasn't happened. You've seen deals with EYT, with $10 million to $20 million of new capital coming in. Tectura announced another round [of financing], and some others are pending. When you see that kind of capital flowing into MBS partner organizations, it tells me that we're on the right track because these VCs wouldn't be putting money in unless they thought there was a business opportunity. And that's what we want to create, an opportunity for partners. That I like.

Orlando talked about partner recruiting. We do want to add some capability. If we talk globally, we don't have the capacity we need to sell CRM around the globe, and in some markets in the U.S. we're still short of capacity in the number of ERP systems our partners can install in a year. We'll continue to do some pretty aggressive partner recruiting. For some of that, we'll be recruiting people to sell business applications who haven't sold them before. We'll recruit CRM resellers from people who traditionally sold Microsoft Exchange or infrastructure products. Also, Orlando talked about the technical capability we're putting in the field. I think we can actually expand the number of people who sell if we can back them up with strong technical people in the field. In the U.S., there will be an effort to rejuvenate the Great Plains/Solomon base of partners in fiscal year 2005, in conjunction with the Great Plains 8.0 and Solomon 6.0 releases.

AYALA: No. 1, we're seeing more classic partners very interested in getting into CRM. No. 2, we are up in terms of MBS partner recruits year over year. There is no shrinkage.

CRN: Is there any movement now on how CRM margins are determined? Some partners are still upset that margins have shrunk when the product went through broad distribution.

BURGUM: There's nothing to announce today, but we continue to take a hard look at that to make sure we have the right economic package in place. We have seen some good momentum in CRM for the last quarter. It's always units times volume, and if we actually can start getting some traction in terms of customer-adds because of our participation in volume licensing, then that's another way to put more dollars in partners pockets and to have more deals flowing through. So we're going to continue to monitor the situation, but we do remain committed to the new program we have in terms of certified software adviser fees that kick in after the fact. That will enhance the profitability of partners who are really engaged with customers.

AYALA: I want to make this absolutely crystal clear: This [MBS reorganization] announcement does not represent a merger of MBS and SMS&P. In many ways, I'm taking two jobs--the job I used to have, and now I'm covering MBS. There are synergies we're going to go for. Certainly, the partner side is one that we'll continue to leverage. It's important to realize that these are two distinct types of businesses that we'll leverage. It makes more sense to align this way than with the previous Information Worker alignment.