Microsoft softens direct sales blow

MICROSOFT IS to appease partners over its direct sales to small businesses by giving them referral fees for any business they put its way.

The offer is the realisation of the software giant's "co-opetition" partner strategy, which became clearer last week when it announced that it would begin selling software and services direct to businesses of all sizes, not just the corporates it had already been courting directly.

Claire Barclay, director of partner strategy at Microsoft, confirmed that its resellers would be given a referral fee for business they put its way, insisting that Microsoft Online Services, its direct sales
business, would be "a good opportunity for our partners".

Whether the consequences are good or bad for partners is relative, but it will mean widespread and radical change. The implications might also be severe enough to undermine Microsoft's position in the market and open up further opportunities for opensource and other competitors.

To recount the recent news briefly, the meat of the matter involves Microsoft selling its software direct as a hosted, rental service to SMB customers previously serviced solely by its 32,000 UK SMB reselling partners.

You're stuffed
Brian Pearce, channel guru at IDC Research, said the strategy would make that vast SMB channel feel the pinch.

"It could dent the software business of a lot of Microsoft partners quite quickly," he said. "Eventually, half or three quarters would be hit by this. It will have a negative impact on their business."

"That business has gone and probably future business as well because there's no reason why Microsoft can't extend the offering," he added.

The chosen lines give an indication of where the pain will be felt at first. By the present strategy, Microsoft will sell its Exchange, Dynamics CRM and Sharepoint products direct by the software as a service model. Its Vista operating system and Dynamics range of ERP systems for small business are excluded, for now.

The most vulnerable partners are those who sell basic software, of which the Exchange email system is a key source of revenue, along with the accompanying hardware, installation and maintenance services, and licensing revenue.

Those resellers that see products like CRM and Sharepoint are a good opportunity to break into higher-value business among SMBs also look vulnerable.

Be afraid
Such partners are uncertain what it might mean for them. Simon Aaron, joint managing director of Eurodata, a Microsoft Gold Partner that has made Exchange a key component of its offering, believed his corporate customer base will keep Microsoft revenue coming in, at least for a while.

"If I was solely Gold on small and medium, I would be scared," he said, " Ultimately, it will effect people like myself, but I don't believe large companies are going to jump online immediately".

"Larger customers tend to do things themselves. That's where I come in," he said.

Robert May, managing director of Ramsac, another of Microsoft's Gold partners, said he took comfort from a prediction by Gartner Research that by 2012 only a fifth of businesses would be buying their software as a service. And anyway, he said, his business operates as an
outsourced IT department for companies too small to afford one. They will still need someone to call on when something doesn't work.

Yet the software as a service model eats into the basic services revenue of the partner channel, said Pearce. And there are further implications.

"The most important aspect is the way it will weaken ties between resellers and their customers," said Pearce.

"Software licenses have become so complicated that this has reinforced the role of the reseller as a trusted advisor. If that's going to be siphoned off, it will weaken that bond," he said.

"That's bad news, especially for the small reseller that doesn't have the resources to invest in new skills and market themselves," he added.

It's not like that at all
Microsoft has a wholly different view of the situation.

"We think the investments we are making here are building a good foundation for partners to build new opportunities for themselves," said Barclay.

"We are working through the details, [but] in the same way they can make margin today, they can resell [our] services and continue to build that relationship with the customer".

Darren Strange, the Microsoft product manager rolled out to explain the direct sales announcement last week, said the vendor had commissioned a survey of 700 partners around the world who reported that they did indeed see it as an opportunity.

Microsoft was unable to supply us with a copy of the survey, so we can't tell how well it was designed to justify Microsoft's world view, as such surveys tend to do.

Yet, said Strange, partners thought that Microsoft selling software and services direct to their customers would give them an opportunity to break into new vertical markets.

The idea appears to be that as its easy to phone someone up and say, 'would you like to buy your software as a service from Microsoft', a reseller can just as easily do it in the retail sector as the building sector.

"Microsoft, in handling the complexity, enables the partner to apply that to different industries," said Strange. "It's easier because they don't have to sell the whole solution. They don't have to set it up - a lot of the complexity is done".

Microsoft is billing this as something to make partners' lives easier and their sales pitches stronger. Resellers will no longer have to send people out to do services work on site around products like Exchange. As a result, said Barclay, the services bill they send to their customers will be cut by 40 per cent. The only problem is, that's how resellers make their money.

Vertically challenged
This, said Pearce, is a sign of how services margins are being commoditised by the likes of Microsoft Online Services and the moves of many other large firms into supplying hosted and managed services - Dell's managed services being a prime example.

It also suggests that it is misleading to say that partners can use its services to break into new vertical markets. The transition of generalist IT resellers into (usually vertical) specialists, has long
been a response to the commoditisation of the IT industry.

That transition is amply demonstrated by Anglia Business Solutions, which managing director David Hurley turned the late 90s from box-shifting, break-fixing reseller, into a consulting house for SMBs.

Anglia became a Microsoft ERP partner in the early noughties, but Hurley said he found the competition became so tough that it had to transition again from a "generalist" into a vertical specialist, providing Dynamics NAV business systems to the food distribution market, and mobile solutions across industries.

The verticalisation strategy was designed to protect Anglia also from the " inevitable" commoditisation of ERP software for SMBs, which would allow companies like Microsoft to sell that direct as well.

"To a large degree, we saw that coming in 2004, so the planning we have done in verticalisation has been investing to protect that business by investing in services specifically for that market," said Hurley. "And that protects us because a commoditised product can be sold to everybody."

That is what Microsoft was saying about how its commoditisation of its serious software would allow partners to break into new markets. But commoditised markets tend to be dominated by a few large firms.

Get drunk, get therapy, or get cable TV
Microsoft has recognised this indirectly in its advice to partners worried about how to respond to its direct venture.

"Partners need to think think about how to transform their business," said Barclay."There'll be lots of opportunities for them to resell [Microsoft Online Services], add their own packaged services, or develop their own applications on top".

This distinction is the culmination of developments in the IT business that began in the mid-90s with the ominous mantra, 'get big, get niche or get out".

Steve Wood, joint-managing director of Parity Medical, said this is the advice he followed when in the last couple of years he responded to increased competition and falling margins by jettisoning his Microsoft reselling business and selling computer housings to hospitals.

Microsoft's move has been forced by online competition from the likes of Google and Salesforce.com. In doing so, it is undermining its channel relationships by undermining their customer relationships.

It's all very well for a customer to sign up to Microsoft Online Services, said Aaron, but then all they'll get is Microsoft's flavour. They get something altogether different with MessageLabs.

The channel patterns Microsoft untethers will inevitably have to broaden their alliegences to compete. Pearce said their fate will depend ultimately on Microsoft's pricing strategy, and that will depend partly on Microsoft's competitors.

But the way resellers should adapt to the changes is clear, he said: "Be less dependent on Microsoft," work night and day nurturing customer relationships to slow Microsoft's incursion into the customer base, and turn to specialist vertical applications and opensource.

There is on the other hand the view that this development is inevitable, and car boot resellers who used to do nothing but sell Microsoft software, will now do nothing but sell time on a Microsoft server. Plus ça change. µ