Microsoft Program Changes: VARs Will Be Happy, LARs Less So

Microsoft plans to dramatically reduce funding to DMRs and LARs and give VARs more equal footing with those larger partners on opportunities of more than 250 seats, sources say.

"This is real, real positive for the channel. It's a more level playing field," said one distribution executive who asked not to be named.

Microsoft informed its DMRs and LARs of its intentions at a meeting last week, according to sources. "It was very poorly received by the LARs," according to the distribution executive.

Microsoft reportedly feels that those large partners are fulfilling demand but not doing an adequate job of driving it and wants to provide more incentives to solution providers to do so, according to the executive.

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Soon after the meeting, direct marketer Insight Enterprises said that changes to vendor incentive programs would negatively impact its earnings for 2009. On a conference call with analysts, Insight CEO Rich Fennessy said the Tempe, Ariz.-based direct marketer expects to earn $10 million to $15 million less this year in incentives from its largest software partner, although he did not mention it by name.

The changes come as Microsoft also revealed plans to open its own retail locations.

Microsoft has yet to inform solution providers about the changes, and executives at Microsoft declined to comment. A spokesperson issued a statement that read "Microsoft regularly evaluates its partner programs and incentives with the goal of rewarding partners for driving revenue growth and delivering value-added solutions and services."

A channel executive briefed on the matter said VARs will be pleased with the changes.

"Microsoft has always given a very unfair advantage to their LARs and the Dells and Insights of the world. They've really done a 180. They're investing dramatically more into the channel, through distributors and VARs," said the executive.

A second distribution executive who asked not to be named said Microsoft hasn't detailed the changes to distributors either but he noted that that could happen as early as next week. That executive said the strategy will be implemented on a worldwide basis.

The move could have a dramatic impact on the LAR landscape, said the second distribution executive.

"Those [LARs] that are financially and operationally minded, I think you'll see them make cuts. Others might be in a position to grow. They'll all start to look at consolidation opportunities. We'll see that this year," said the executive.

It's believed Microsoft is hoping the changes could foster partnerships between VARs and LARs, but the second distribution executive is not so sure. "I don't see a VAR doing business with a LAR. That's like letting the fox into the hen house," he said.

In these tough economic times, Microsoft is making changes it believes necessary to drive more demand, said the first distribution executive. "They're reducing investment on those [partners] that are just fulfilling demand. Anyone that is good at driving demand, that can increase the average invoice of a customer, should benefit," said the executive.

Some Microsoft solution providers lauded the news, saying moves to help SMB partners are overdue.

"They've had the same pricing structure for a long time. Times have changed, with netbooks and Linux taking hold. It's good for them to re-evaluate this," said Todd Swank, vice president of marketing at Nor-Tech, Burnsville, Minn. "All we ask for is an equal playing field. We're good at taking care of customers, delivering innovative solutions. But certain people can take advantage of different programs not available to the rest of us. That's not fair."

Tim Howard, president of Rmon Networks Inc. Danville, N.H., said back-end incentives from Microsoft to large partners have been a sticking point for a long time.

"Those larger companies, they live by those and pad their earnings by hitting those volumes. As smaller VARs, we don't have that volume because we're constantly competing with the Insights and CDWs," he said.

However, some customers still turn to VARs to implement the Microsoft applications even after the end user buys them from a LAR. "We make our money in services, but if they can make it an even playing field, or at least lessen the gap between the larger and smaller VARs, it will be better for the industry," Howard said.

KEVIN MCLAUGHLIN contributed to this story.