News

Microsoft To Change Compensation for Dynamics Partners

• By Scott Bekker
• October 27, 2010

With just days to go before Microsoft Dynamics partners absorb the large set of changes coming to the Microsoft Partner Network, Microsoft on Wednesday said it is revamping its compensation for ERP and CRM partners.

"From a compensation perspective, this is the biggest change we've driven in 10 years since we acquired these products," Jeff Edwards, director of Microsoft Dynamics Partner Strategy, said in an interview.

A new Dynamics Incentives Program, which will go into effect in January 2012, will add growth into Microsoft's calculations of partner margins, in addition to total revenues. Partner margins will go up by up to 20 percentage points if license revenue growth hits one-year and two-year targets, and if customer additions hit certain targets. Conversely, if growth isn't hitting Microsoft's targets, margins can go down by as much as 15 percentage points, Edwards said.

Additionally, Microsoft will be separating license revenue targets from maintenance targets. "Larger portions of contracts renewed will get paid more, smaller portions of contracts renewed will get paid less," he said.

"The high-level message is pay for performance. A partner can make more than they do today selling Dynamics software. A partner can make less than they do today selling Dynamics software," Edwards said.

The change comes as Microsoft gets ready to take the Microsoft Partner Network fully live on Monday, with changes to the Microsoft Dynamics channel that include new competency classifications for partners and much more stringent requirements for top-level designations.

Edwards said Microsoft initially planned to include the new compensation structure in other MPN announcements in February. "We decided to hold off because the economy was so tough," Edwards said. "[Partners] see a light at the end of the tunnel."

While the new margin scales won't take effect until 2012, partner revenues from this year and next will factor into the margin calculations once the new compensation model gets rolling, he said.

Andy Vabulas, CEO of I.B.I.S. Inc., an award-winning Microsoft Dynamics partner based in Norcross, Ga., said in an e-mail interview that he was optimistic that his firm will benefit from the changes. "It really comes down to performance," Vabulas said. "If we grow, we can do well and gain more profitability under the new program. If we do not grow, we will be much less profitable." .

It should be welcome news to those looking to invest in and grow their businesses, he added. " "If you do not have the scale, cannot grow or maintain your client base, you will see your margins shrink," he said. "It should be pointed out that Microsoft is giving the Dynamics partner channel plenty of notice of these changes and has been incredibly transparent throughout this process over the past couple of years. I do not know of another company that would be so open in the same way."

Analyst Ray Wang with the Altimeter Group said Microsoft has good reasons to be transparent and to make its margins attractive for proven resellers. "Microsoft has one of the most generalist programs. They don't have a direct sales team; they really treat their partners as their direct sales team. For them, there is a war for partners right now at all levels," Wang said, pointing to SAP, Intuit, Sage, Oracle and IBM as companies battling with Microsoft for midmarket business application partners. "If you're a 20-person shop that has capabilities ... there's a war for [your] talent."

At the same time, Wang said that partners can be more profitable if they specialize, and they're more valuable to Microsoft if they specialize in microverticals. "The verticalization strategy, the process of creating more specialized partners, that's actually going to drive margins more than the modified margin program," he said. "There's something like 350 different microverticals out there that have high profit potential, but people naturally gravitate to the same set of [broad] verticals."

The transition could take awhile to catch on, even with the 18-month lead-time Microsoft is offering, said Robert Helm, an analyst with Directions on Microsoft. "As partners adapt to the new incentives, it will help the Dynamics top line, but it could take some time for partners to shift from farming to hunting."

Helm anticipates the margin changes will play out differently for Microsoft's various product lines. "The program will put more pressure on Dynamics GP and SL partners than on AX and NAV partners," he said in an e-mail interview. "GP and SL have seen little customer growth over the last three years, and they are concentrated in slow-growing economies like the United States. Smaller partners focused on a single product might need to merge to build up the necessary critical mass, while larger partners who represent multiple products might have to refocus."

While Nigel Montgomery, a research director with Gartner Inc., expects the changes to improve Microsoft's Dynamics revenues, he points out that Microsoft must be disciplined as it puts the program into effect.

"Microsoft has to maintain resolve against growing gripes from partners that like the status-quo. That is not easy and will test the management team and particularly the regional teams," Montgomery said in an e-mail interview.

Some of that pushback will come from customers, as well, and Microsoft must be ready for that, Montgomery noted. "Microsoft  must also be mindful that many of its smaller customers like dealing with a partner of comparable size; a partner to whom the customer is seen as an important client and with whom the customer has some influence. Many don't like dealing with big corporate companies," he said.

In any event, Microsoft's Edwards said Microsoft's intent is to maintain or increase it's investment in the channel in the form of Dynamics margin payments. "There is no model here in which we're taking money out of the channel," he said. "If we end up paying more out to the channel, it's basically an indication that we're exceeding our growth."