I was at the Microsoft World Wide Partner Conference when Microsoft announced their S+S (Software plus Services) and some partners decided to throw their toys out the pram and start a whole bunch of scare mongering around the partner opportunity.  I’ve decided I will cover both off here, so here are some thoughts – please note, this is not an official communication, but simply my view and response having spoken to partners and Microsoft people alike.

What are the customer options?

A customer can choose from two non-exclusive models for their IT Services – On Premise on Hosted.  The reasons why someone might want to have a solution hosted are many, but can includes:

• Remove IT from premises
• Remove soft off of the books
• Outsource the IT management
• Deliver IT from the best place for their customers (eg where they have low bandwidth)
• Outsource IT upgrade & delivery
• Enable simple price per seat solutions

Should a customer choose to have a solution hosted then their is a choice as to who hosts the solution – Microsoft or a partner.  It should be noted that just because a customer chooses to have some technology hosted does not mean that all their IT will be or can be, nor does it mean that they suddenly become able to do everything that is needed, thus removing the need for an IT partner.  Hosted solutions using Microsoft technology is not new, what is new is the Microsoft hosting and much better licensing opportunities for partners to offer profitable solutions without tying customers into complex licensing schemes.

So why should a partner keep with Microsoft and S+S?

If you are a SBS 2003 aware and was there for the launch you may well remember throwing tomatoes at people like me because we said you needed to move away from relying on making money purely from the install of SBS 2003.  It was the configuring, connecting, customising and enabling that was where the money was going – and the setup process was part of the reason as it got much easier in SBS 2003.  This trend has continued and many partners now make very little money on this part of the operation, but have a number of value add support and enabling solutions that make the technology accessible to the customer and add business value.  The

If a customer wants or needs a hosted solution then in effect the install process reduces, but they still need all the connecting, configuring, enabling services to take advantage of the solution, so the main source of revenue and profit remains.  Add to that the fact that Microsoft returns 12% of the subscription to the partner for the 1st year and then 6% ongoing means that a reasonable profit line is included on top of the services to get this delivered for the customer.  I think this is not only better than ANY other SaaS provider in the market, but also potentially will return a better bottom line due to reduced costs involved in enabling.

Now, lets deal with one of Vlad’s points that Microsoft “will go direct”.  Microsoft takes 96% of it’s revenue via partners and this will continue.  We have been selling volume licenses via partners for years, yet the process of collecting funds on a Microsoft contract without Microsoft taking the deals “direct”, so in short, get real Vlad, we don’t have the engine to “steal” customers.  Microsoft has no desire to kill off the on-premise business, but CUSTOMERS want choice and so we have offered 3 solutions, all partner focused where PARTNERS still get to offer the solutions and the software is still Microsoft.  If Microsoft did not offer anything in the hosted environment, others would continue to grow in this area without offering solutions that existing partners could leverage without much struggle.  Vlad’s business model that has Microsoft products delivered with “more” than the Microsoft hosted solutions is not a mistake – this is ideal – we would like to see many partners hosting solutions.

Vlad see’s that the very fact that Microsoft has a solution in this emerging market as a competitive play to existing partners, but Microsoft is trying to build a way for On Premise customers to use their skills to deliver in this space and still make money on the “install” ala the connection and then continue to add all the other value added services they used to do.

The mis-conception around opportunity with hosted vs on-premise solutions

I think that some of the concern around hosted solutions (hosted by Microsoft or others) is what revenue will be available to partners.  If you do more than an install and run then I think this diagram works for you:

Note that there is a need the customer has to turn “IT” into something that helps their business.  I’ve called this the solution gap and partners would normally collect revenue for this up front and potentially on an ongoing service basis.

Some people feel that if some of the on-premise solution gets hosted the partner gets squeezed as below:

The above picture suggests that somehow a hosted solution closes the solution gap or that the hosting provider will fill the “direct to customer” services.  Most providers will not be able to do this, so as a provider, the red “lost revenue” will not happen and instead you will see something like:

In the final diagram the way people get paid is different, but the up front purchasing costs have disappeared.  Depending on the provider the purple chunk will change, but in the Microsoft solutions, you will get a straight 12% profit in the 1st year and 6% after that for the subscribers.  This may well provide more revenue, especially if there is also on-promise solutions too. I think the above is well articulated by Vijay on his entry here.

One thing I don’t get about Vlad and Vijay’s later response is how partners choosing a hosted solution, based on Microsoft, from someone like Vlad is bad?  The customer has the choice, as does the partner – providing they add value to the customer then the customer will buy a solution – the one they want.  Partners do need to evolve, but the death of the mainframe is still not here, after 2-3 business model changes and the internet revolution is still in it’s infancy.  I would like people to see this for what it is, an offering from Microsoft for those customers that want to go that way, not an announcement of the demise of the on-premise solution!

Also, if you want a counter opinion, have a look at http://blogs.msdn.com/stevecla01/archive/2008/07/08/microsoft-partners-hunger-is-addressed.aspx from Steve.

I hope this makes sense, but if not, please feel free to contact me, or Vlad has a “build a bridge” blog post too.

Thanks

David