Microsoft: Office 365 Fee Changes Don't Mean We're Cutting Channel Investment

Microsoft said Friday that recent changes to Office 365 channel incentives, which will result in lower fees for some partners, do not mean that Microsoft is cutting back on its cloud channel programs.

"We are highly sensitive to how partners rely on these incentives," Stephanie Rodriguez, director of channel incentives in Microsoft's Worldwide Partner Group, said in an interview. "None of our incentives are going away."

Starting Jan.25, Microsoft is changing incentives for its Advisor Enterprise Agreement Deploy program, which lets traditional partners influence sales of Office 365 and other cloud service subscriptions as part of EA volume licensing contracts and get financially rewarded for their efforts.

[Related: Microsoft Partners In Uproar Over Cloud Sales Commission Cuts ]

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Sources told CRN earlier this week they'll be making less money with Microsoft after program changes, with Office 365 fees dropping 40 to 50 percent in some cases.

While many partners are upset about the incentive changes, and by the fact that Microsoft is making them in the middle of its fiscal year with just 30 days' notice, Rodriguez told CRN that Microsoft is simply adjusting channel incentives to match business goals.

"If there are products we want to push, we will increase the rates. If we don't, we might scale them back. Incentives will always be in a state of change," Rodriguez said.

Incentives, she added, "are always multidimensional, [and are based on] new products, pricing and what's being sold where."

Microsoft designs partner incentives to reflect the diverse array of partner business models, which includes "born in the cloud" partners and traditional ones that are transitioning to cloud, according to Rodriguez. "Depending on what stage they're in, these incentives might look different and might not be as rich," she told CRN.

However, some Microsoft partners aren't buying this explanation.

"It's time consuming and expensive for partner to train staff and market cloud services. If Microsoft doesn't give the channel time to reap a reward before changing the incentive model, then the channel model is not viable," said one Microsoft partner, who spoke on condition of anonymity.

"This won't be good for Microsoft's reputation or credibility and will encourage people to start taking a closer look at alternatives, or sticking with on-premise software," Daniel Duffy, CEO of Valley Network Solutions, a Fresno, Calif.-based Microsoft partner, said in an email.

Microsoft, in a document sent recently to partners, says it reviews the Advisor EA Deploy program terms every quarter to decide if fees should be increased or decreased and gives partners 30 days' notice of any changes. But at least one partner doesn't think Microsoft is giving partners enough advance notice in this case.

"They're giving 30 days' notice to make changes to payouts on a sales cycle that typically takes 6 months?" the partner said in response to Rodriguez's comments. "I think that actions speak louder than words here."

But the rapid evolution of the cloud market could lead to additional partner program changes down the road, Rodriguez acknowledged. Aware of the stress it might cause, Microsoft waited until January to make the program changes because many partners' fiscal years end on Dec. 31, Rodriguez said.

"We're trying to say that business model and methods of sale will continue to innovate, and incentive changes will come faster than before," she said. "We're mindful of the pain that can accompany that transition, and incentives are just one way Microsoft is responding to this."

NEXT: Microsoft Says It's Increasing Some Partner Incentives

Not all changes to channel incentives are negative ones. Last year, for example, Microsoft tripled its fees for EA renewals, Microsoft's Rodriguez said.

A spokesperson told CRN that Microsoft invests $2 billion annually in channel incentives, and that cloud incentives are set to double year-over-year in terms of dollars and as a percentage of the overall incentives mix from fiscal 2013 to fiscal 2014, which ends June 30.

Ric Opal, vice president at Peters & Associates, a Microsoft partner in Oakbrook Terrace, Ill., told CRN he's optimistic that Microsoft will continue to make it worthwhile for partners to sell Office 365 and other cloud services.

"I'm hopeful Microsoft will help partners continue to grow their businesses with incentives, training and practice guidance as they have historically done," Opal said in an interview.

However, Office 365 fee cuts aren't the only issue here. Microsoft has also cut its fees for large account resellers, which it now calls licensing solution providers or LSPs, and that's causing them to compete with smaller partners for cloud deals.

As lines blur between partner types, and LSPs start looking more like systems integrators, Microsoft wants to create incentive models that recognize partner capabilities and their value proposition for customers, according to Rodriguez. In other words, Microsoft partners are just going to have to deal with the heightened competition.

"Many traditional licensing partners now have services and consulting businesses. That's expertise we value," Rodriguez said. "We don't want to dictate to a partner the scope of business they can provide to customers. Incentives are ways to recognize true differentiation and quality and excellence. Sometimes, that can be blurry."

While Microsoft's Worldwide Partner Group wants to enable partners to be successful, some channel conflict is inevitable, Rodriguez said. "We certainly don't want to be a referee in the market, deciding which spot they sit in and what customers they can talk to," she said.