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In-Depth

Get Comfortable with the Cloud

Relax, there's a future with Microsoft in the cloud, channel chief Allison Watson plans to tell partners at this month's WPC. That's not to say it won't take hard work to get there. Watson and pioneering partners share their flight path to profits.

When Microsoft CEO Steve Ballmer told the world that Microsoft was "all in," throwing all its weight into cloud computing in March, it represented a pivotal turning point for Redmond. Microsoft overnight would transform every facet of its business from one focused purely on selling software to one devoted to delivering services with its software as the backbone. But Ballmer's call to arms left Corporate Vice President of the Microsoft Worldwide Partner Group Allison Watson with some explaining to do.

While Watson followed up days later with a partner webcast expanding on the theme, she and other Microsoft executives know that partners still have a lot of questions about what being "all in" on the cloud means to them, questions they hope Microsoft will answer at the Microsoft Worldwide Partner Conference (WPC) in Washington, D.C., this month.

"Microsoft is 'all in,' but we haven't really been telling everyone what 'all-in' is yet in a comprehensive way. That's obviously a major goal for WPC," Watson says. Watson, speaking in a 50-minute interview with Redmond Channel Partner just weeks prior to the WPC, promises her team will deliver hard evidence and best practices for partners to succeed in the cloud, be it with the Business Productivity Online Suite (BPOS) and other Microsoft Online Services, Dynamics CRM Online or the Windows Azure platform. "Our goal is to get to the WPC with tools and guidance about how partners take the next steps based on where they're coming from."

The partner team is developing those resources from the growing base of Microsoft partners selling the software giant's cloud offerings. "We have 3,000 partners that have migrated their business to BPOS this year," Watson says. "We're adding about 100 [partners] a week. We've got quite a bit of evidence that we will have packaged up for partners to reuse based on 500 to 700 partners who have actively gone out and [sold online services] this year."

In interviews with six companies that Watson calls some of the "top cloud pioneers" in the Microsoft Partner Network, partner executives tell RCP that they've seen a huge surge in interest in cloud solutions in the last few months, especially since the company slashed the cost of Microsoft Online Services, including BPOS, late last year. Those partners are not hesitant to acknowledge the wrenching transition issues, but they are finding profits in selling Microsoft's cloud offerings or building solutions around them.

From Microsoft to the Cloud
If you're not sure your Microsoft partner account manager (PAM) is being completely truthful when he tells you there's a great opportunity in the cloud, consider former PAM Pete Zarras. He and another former Microsoft employee, Doug Fraser, started CloudStrategies LLC in Morris Plains, N.J., about a year ago specifically to go after BPOS deals.

"We were recognizing the opportunity and the shift that Microsoft was having toward the cloud," Zarras says. "Likewise, we were recognizing that not all partners would be so quick to jump on the bandwagon. We really believe that for many kinds of infrastructure and services, there are overwhelming benefits to being in the cloud. We see that over the next several years, more and more things will move to the cloud."

 "We saw close to $5 million in revenue this year [from Microsoft cloud services]. We are profitable."

Dave Cutler, GM, Online Services Practice, Slalom Consulting

To customers, CloudStrategies is positioned, as its name suggests, as a strategic advisor to help them weigh the question of whether to move to the cloud or not, and if the answer is yes, then how? As a business, the Gold Certified Partner's model is built almost exclusively around the Microsoft fees partners get as the Partner of Record for a BPOS deal.

"Our model is that we're trying to build a business that monetizes off of recurring revenue streams from Microsoft and other cloud solutions providers," Zarras says. "We want Partner of Record fees. Our consulting services are there in support of our other long-term desire for recurring revenue. We do have enough professional services to play the role of business advisor and to facilitate a decision process, and to deploy and leverage those cloud solutions. Consulting services are more of a recovery of cost of sales for us. For all the other ancillary services on building solutions, at least for now, we're partnering with other partners."

So far, Zarras reports, it's going well. "We've closed opportunities in a little more than 30 accounts, and we're working on more than 200 additional opportunities, representing many tens of thousands of seats," he says. "The opportunities have been accelerating over the last four months. We closed five deals in the [first week of June]."

The best news for CloudStrategies is that the deals keep growing. "One of our first clients purchased 40 or 50 seats," Zarras explains. "We talk to them on occasion to check in. Now they're approaching 150 seats on their deployment, and I don't think they've bought more than two or three seats at a time. I got one this morning, it's the perfect residual sale."

A Partner Starts Over
Around the same time Pete Zarras was starting CloudStrategies, Don MacNeil was sitting at a table listening to a pitch by a guy much like Zarras from Microsoft about why the partner firm MacNeil then worked for ought to sell BPOS. "My opinion was, this is a game-changing opportunity," MacNeil says. He resigned and started Strategic SaaS LLC, a cloud services broker based in Houston.

"My company today is selling BPOS almost exclusively. In the long run, I'll be selling the entire stack of Microsoft solutions as they move them to the cloud," says MacNeil, the firm's managing partner. The business model for Strategic SaaS involves handling the sale, which MacNeil says is trickier than expected, and partnering with other partners on the implementation.

"If I'm a partner and I'm looking at adding BPOS as a service line, it's not a hobby, it's a very serious thing. I would say it would be very difficult to do without dedicating people," MacNeil says.

Technical questions have overwhelmed the sales process at times. Questions Strategic SaaS has faced include: How do fax services on an existing Exchange box connect to BPOS? What happens to public folders? What's performance like if some employees are in Texas and others are in India? What's the coexistence model with on-premises servers? Can passwords be managed through Active Directory?

And those are the easy questions, MacNeil says: "There's a threshold for becoming competent at dealing with the technical questions." A good way to be ready is to follow Microsoft's advice for partners and use BPOS internally, he says.

After 10 months in business, MacNeil has also seen business pick up in the last two or three months. "We're just seeing the pipeline fill up," he says. "As we look at fiscal year 2011, I'm really excited."

Sitting in the Cloud Waiting for Microsoft
Tony Safoian, president and CEO of North Hollywood, Calif.-based Gold Certified Partner SADA Systems Inc., actually had been steering toward the cloud in 2004 and 2005, trying to build some utility computing solutions around Microsoft Terminal Services.

When Google hit the market with Google Apps, SADA Systems signed on early, and later added Microsoft BPOS when it came online.

For Safoian, offering the two major, competing offerings is critical to be seen by customers as an honest broker. "We know that the market will have various cloud players. The more we remain as vendor-neutral trusted advisors, the better we're able to service our customers," he says.

Safoian likes the way the cloud allows him to change conversations to focus on productivity. "The fallacy of IT is that it's been reduced to most IT people reporting to the controller or the CFO, because it's looked on as a tremendous cost center," Safoian says. "Our agnostic stance has helped get us a lot of consulting work."

For now, the bulk of consulting and services revenues comes from migrations, especially from Lotus applications or Microsoft Access projects, Safoian says. "I think once people are migrated in three to five years, that's when the high-value work will start. Customers will ask, 'Now that I have this platform, how do I maximize this? I'm already paying the flat fee. I get all these tools, and I'm using 5 percent of the capability.'"

Turning a Bigger Craft
Not every partner company making a go of it with Microsoft BPOS has a business architected from the beginning for the cloud. Many have more-traditional business models and revenue streams that can be disrupted by a shift to cloud computing. Case in point: Slalom Consulting, an 800-employee Gold Certified Partner based in Seattle. Deciding to add a cloud practice despite the potential to cannibalize existing business, Slalom started engaging with Microsoft on cloud services two years ago.

Like Strategic SaaS, Slalom Consulting is also a customer of BPOS, although at 800 seats, it's a fairly large customer. "We eat our own dogfood, or I guess we eat Microsoft's dogfood," says Dave Cutler, general manager of the online services practice at Slalom Consulting, which is one of only 40 Microsoft National Systems Integrators in the United States.

Nevertheless, that implementation is dwarfed by some of Slalom's BPOS customers. "We've done 10-person implementations and 75,000-person implementations, and we've seen value in both of those," Cutler says.

Cutler's team -- about 20 employees plus another five or 10 who bounce back and forth between traditional practice work and online work -- handles BPOS deals along with Dynamics CRM Online and Windows Azure projects. BPOS brings in the most money, CRM Online has a lot of promise in the next year and Windows Azure, because it's a development platform -- at least initially -- is harder to pigeonhole, Cutler says.

Revenues are growing fast and starting to represent a significant portion of Slalom Consulting's balance sheet. "This fiscal year is our first full fiscal year doing it. We saw close to $5 million in revenue. We still see it as a bit of an incubator, but that's a nice chunk of business for us," Cutler says.

Cutler also has high hopes for Microsoft's fiscal year 2011, beginning this month. "We've got a very, very strong pipeline -- 50 clients approaching $10 million in pipeline already going into 2011," he says.

Coming from a background in professional services, the Partner of Record (POR) annuities make up very little of that revenue. "We're looking at less than 10 percent coming from the POR fees. We see that as a nice benefit," Cutler says. Instead, the company is making money from business consulting and from custom-built tools like a migration utility for moving from Google Apps to BPOS and for a BPOS user portal that helps customers manage the system more easily.

Perhaps the most important outcome of its move is that cloud services aren't a loss leader for Slalom Consulting. "We are profitable," Cutler confirms. "We made profitability partway through the second quarter being involved in [Microsoft cloud services]. Part of that was through some nice client wins that we had. We've also been seeing some good profits in the projects we're doing."

Adding a Revenue Stream
LiveOffice LLC is another firm that was already in the cloud when Microsoft arrived, but saw a big new opportunity in participating. The Torrance, Calif.-based company has offered outsourced e-mail archiving since 1998.

"We saw this as a huge opportunity," Nick Mehta, CEO of LiveOffice, says of BPOS. The company almost immediately began supporting BPOS. Technically, LiveOffice competes with a direct Microsoft hosted archiving offering. Practically, however, Microsoft bills for archiving separately, making it an entirely different selling motion for partners. While customers can add BPOS a few seats at time on a month-to-month basis, Microsoft's archiving solution must be purchased through traditional Microsoft Licensing channels.

Mehta also says customers have been receptive to having a different cloud firm archiving their e-mail from the one that's hosting it. "A lot of people like that -- reducing the risk of moving to the cloud."

In any case, even for a company with 10,000 customers, BPOS has been a big boost. "Probably about 20 percent of our new sales are related to customers archiving to us from BPOS," Mehta says.

Backing into Windows Azure
The other side of Microsoft's partner cloud story centers on development in the cloud via the Windows Azure platform. Although this may be where some of the most dynamic businesses opportunities lie and Watson says there's partner momentum on Windows Azure, right now it's a greenfield from a partner perspective.

"We've actually found it surprisingly easy to deal with Microsoft on the Azure side. Is it because it's new and their resources aren't taxed as much as they should be? I don't know," says Jeff Fildey, president of Broad Reach Mobility (BRM), a Registered Member and startup focused on delivering enterprise mobility solutions.

The San Diego-based company formed two years ago to bring mobile applications to the enterprise market. "At the time, we couldn't find the applications we really wanted to deliver. We went back to the drawing board and developed ServiceReach," Fildey says. "It's designed to take all of the complex mobile technologies used by companies like UPS, FedEx and Sears, boil it down, simplify it and make it affordable to the mass set of businesses."

Because the market for corporate mobility is based on rugged devices that run Microsoft .NET Framework-based applications, a Microsoft-based approach was required. When BRM began developing ServiceReach, Windows Azure wasn't well-defined. But BRM's application and Windows Azure were coming together at the same time, and pairing them made a lot of sense. As a cloud delivery model became attractive, Windows Azure was the natural choice. "There were so many more tools that we could leverage since most of our application was built on .NET," Fildey says.

The company has been billing customers for five months, and so far, the Windows Azure fees from Microsoft to BRM have contained no surprises. "We have a good handle on how we're utilizing the services," Fildey says.

Customers are responding to the immediate ROI in mobile fleet cost savings that ServiceReach's monthly billing allows, and potential investors seem to find the model appealing as well. "The investors that we talk to love the concept that basically our cost structure grows as our business grows," Fildey says. "We don't have to forecast the next six [or] 12 months and have this cost infrastructure and this availability of bandwidth and processing power that's really tied to a forecast."

The Power of Pretend
A common theme across partners, customers and even vendors, when it comes to the cloud, is existing investments. "The biggest barrier for so many of these people is sunk costs," Strategic SaaS' MacNeil says. Microsoft's Watson acknowledges the point, and notes that many of the most successful partner transitions so far are either in the pure-play cloud arena or in the really large partner companies that can afford to set up incubation units. "It may be the 10- to 25-[employee partner firms] that may have the hardest time to go to the cloud because of their costs," she warns. "I think all three [groups of partners] will have challenges in getting to be truly profitable."

Watson recommends that all partners try an exercise that the Microsoft executive team used during the company's recent mid-year review. "We just shut the door and did a what-if exercise," Watson recalls. "What if all we were going to be was the cloud -- and when I say the cloud at Microsoft, I mean the full Software plus Services implementation? What if that was the only thing we had, and we didn't get there incrementally, we got there transformationally? What would we do differently? We actually changed how we price, package, how we compensate our sales force and how we set goals for going into fiscal year '11 as a result of that exercise." Ballmer's "all in" speech was one outcome of that meeting, she reveals.

"It's going to feel very incremental in execution, but we had to go through the mental exercise of putting the transformation in place," she says. "I encourage partners to take an off-site and do a ceremonial closing and reopening so they can build the new P&L approach."

Meanwhile, resellers will have the same gear shifting issues as Microsoft -- they will have to keep working the clutch and the pedals in order not to leave money on the table from the current product wave, Watson argues. "Core systems integrators in the Microsoft Partner Network who started to go into early adopter mode are starting to realize, 'OK, I've got to keep my core business accelerating while I incubate.' The acceleration is going to come from Windows 7 and Office 2010 deployments using management, and then they will allow them to bring a profitable business online with the migrations to Microsoft Online."

MacNeil says he's been surprised at how negative partners are about the cloud in meetings with other partners and Microsoft executives. Says Watson: "When I get a group of [partners] in a room together, I will have a set of them not understanding that the customers have moved. What I find works really well is when I start describing both the analyst results and the customer results, then one partner will tell the other partners, 'Hey, if you weren't seeing it move then you're just not talking to your customers about the right stuff." One of those outspoken advocates is Zarras' partner at CloudStrategies, Doug Fraser, who recalls saying in a meeting, "If you're not educating your clients about the cloud now, they won't be your clients for much longer because someone else will."

Several of the partners we spoke with were excited how much they can change customers' cost structures around IT and improve customers' businesses' bottom lines. But make no mistake, it's as significant a shift as the rise of Wal-Mart was to main street retailers. Listen to MacNeil: "My business model is completely counter to most of the partner community. I want to drive cost out of services."

Slalom Consulting's Cutler works at a firm that did well when services were more expensive, and he intends to do well when they're less expensive. "We realize that we can't not do this," Cutler says. "This is where the market's going. We can either sit back and try to grab the last dollars of infrastructure buildouts that we can, or we can try to grab the next wave."

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