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In-Depth

Microsoft Gets Serious in the Cloud with Office 365 Open

With its Open Licensing move, Microsoft finally enlists all partners in the Office 365 effort.

Christopher Pyle looks over the dashboard of his 365 Command tool in wonder at how quickly customers are coming onto his management platform for Microsoft Office 365.

"We're at 550,000 mailboxes on the platform, 1,100 companies, 35 partners," Pyle says of his company's tool, with which customers and partners manage their Microsoft Office 365 subscriptions and replace common Windows PowerShell and command-line tasks with a Web interface.

It's part of a general increase in business surrounding Office 365 for Pyle, the president and CEO of Champion Solutions Group, based in Boca Raton, Fla. "I'd say over the past three months, we've seen a pretty dramatic increase in the amount of services work that we're doing for different organizations. It's not just 10 or 20 or 30 mailboxes, it's getting up to the thousands," says Pyle.

He's expecting that pace of sales to get dramatically faster, for Champion and for other partners, since Microsoft officially began allowing partners to bill customers directly for Office 365 with the availability at the beginning of last month of Office 365 Open and Full Packaged Product (FPP) sales.

"We had three calls [the day of the announcement] from existing customers saying, 'Tell me more about this subscription service,'" Pyle says.

In the fight for cloud share, Microsoft is finally unlimbering one of its best weapons: a uniquely huge channel with unrivaled small to midsize business (SMB) reach.

A Long March to Direct Billing
Since Microsoft first joined the cloud productivity suite market with the Business Productivity Online Suite (BPOS) in mid-2008, the overall deal with partners has been that Microsoft would bill the customers, while partners would get advisor fees and the opportunity to sell add-on services around the edges.

And since the beginning, partners have been saying, in effect, "We're interested, but with the nature of the cloud, we'd be far more interested if we controlled the billing."

BPOS has been on the market for five years, and its successor, Office 365, launched in June 2011. To take the last 12 months as an example, Microsoft says 22,000 partners have sold Microsoft public cloud services, and the ecosystem for Office 365 -- when you add in training and supplemental services partners -- is about 50,000 partners. Impressive numbers, sure, but nowhere near leveraging Microsoft's frequently cited partner base of 600,000 companies worldwide.

Jon Roskill stepped into the role of global channel chief for Microsoft in late June 2010 at the height of Microsoft's "all in" cloud mania. He immediately faced insistent questions about when Microsoft would let partners handle customer billing, and if not, why?

After getting his bearings in the job, Roskill let out a hint in a town hall meeting in November 2010 that Microsoft was thinking seriously about making direct billing possible. Now, two-and-a-quarter years later, partners can bill customers directly. Microsoft told partners at its Worldwide Partner Conference (WPC) in July that Office 365 Open was coming, but it took seven months to arrive.

In general, Microsoft is now enabling partners to own the billing process; capture top-line revenue and margin on the resale; sell and service customers in ways that make sense for cloud business models; and earn rebates and co-op funding. The Open Licensing option is in addition to the existing advisor model, which will continue, along with a syndication option for about 100 partners worldwide and specialty programs for government and education partners.

Roskill acknowledges the wait. "It's something that has been a bit of time coming, but something that we're really excited about because we think it's really going to open up the whole next wave of Microsoft partners to get in and start selling our cloud offering," Roskill says.

Between mid-2010 and July 2012, Roskill contends that Microsoft recognized two main things as an organization.

"We've noticed since early on that deals that have a partner involved wind up with a larger deal size. They wind up getting deployed more quickly and we wind up with higher customer satisfaction. So everyone is very aligned that having partners involved in these deals is a good thing for everybody," Roskill says.

The other realization involves the importance of SMBs for cloud suites. "If you look now at the data on Office 365 customers, what we see is that more than 90 percent of them are from businesses with 50 or fewer employees. Small business is at the core of this product customer base, and the fact that we're talking 50 or smaller, it really does show the partner opportunity is huge," Roskill said.

The more specific delay between the WPC announcement and partner billing's delivery involved internal engineering and process changes. "The licensing keys, the commerce platform and the product itself all need to basically come together," Roskill says. "The old world of channel and product being able to be separate is no more. Core changes had to be made in the product by the development team to be able to accommodate this, and we had to make some changes in our commerce platform."

Looking Ahead
As for critics who say Microsoft was too late last July, let alone now, in delivering direct billing to meet demand for cloud suites, Roskill strongly disagrees: "Although we're selling a lot of [Office 365], the penetration is still in the low single digits. So there's a great opportunity for us and partners to make a lot of money here."

Roskill is setting an aggressive goal for partner participation in the next five months. From the baseline of 20,000 partners selling Office 365 in the last year, Roskill says, "My expectation is that we'll double that reach by the time we get to WPC."

That projection is based on a very specific and strategic set of partners -- partners who handle Open License transactions for other products such as Office, Windows Server and Exchange. Microsoft has about 4,000 of those partners in managed relationships, mostly through telePAMs, and 100,000 Open partners who work exclusively through distributors.

"I think the big deal here is getting that 100,000-plus Open transaction partners into the cloud game. They're sitting there on the sidelines right now. We want them in the cloud game on our side," Roskill says.

Partners Gear Up
After the delay, the first rev of direct billing may not be perfect. There's muted grumbling in the channel about various things from paying for licenses up front all year to the complexity of the SKUs involved. But, overall, the reaction has been extremely positive.

One prominent Microsoft partner breathed a sigh of relief that direct billing had arrived.

"Office 365 Open proves to us that Microsoft is listening to its partners and sees value in partners delivering total solutions to their customers," Andy Vabulas, CEO of I.B.I.S. Inc., said in a statement timed to Microsoft's announcement.

"Office 365 Open proves to us that Microsoft is listening to its partners and sees value in partners delivering total solutions to their customers."

Andy Vabulas, CEO, I.B.I.S. Inc.

On the SMB side, an Ingram Micro executive in the Netherlands related Office 365 Open to the hole left in the Microsoft portfolio by the sunsetting of Windows Small Business Server (SBS). "In the Netherlands, Windows Small Business Server is [and] was very popular," Storm Rohnstrom said in a statement. "Given that SBS will no longer be available in Open License, we see a huge possibility for end users who formerly would buy SBS. Now Office 365 not only 'ties' them to their reseller, but partners can also give service."

Harry Brelsford, CEO of SMB Nation, is also seeing Office 365 as an avenue of opportunity for partners who once relied heavily on SBS to support their customers and their own businesses. He sees another parallel with Office 365 -- a parallel reinforced by the maturing of Microsoft's billing model.

"[This] release of the latest Office 365 wave is comparable to the [Windows SBS] 2000 release. Translation: You're still early riding the wave up and [there are] good times ahead," Brelsford wrote in a blog entry on the Office 365 release and billing developments. "It will be the next wave of Office 365 that puts it in the enviable position of what SBS 2003, God bless it, was to the SMB Nation community."

For Pyle, the move represents Microsoft putting its money where its mouth is. Microsoft repeatedly talks about the choice it offers for customers and partners as a selling point. Now that choice is available for partners on Office 365.

"The biggest thing for our company -- and the channel overall -- is that Office 365 Open gives us the power of choice," Pyle says. "We can choose how we want to work with Microsoft and how we want to work with our customers. If we want to provide value-added services on top of Office 365 all on one bill, we can do that. On the other hand, if you don't want everything on one bill, you can stick with the Partner of Record model."

Matt Scherocman, president of Interlink Cloud Advisors Inc., has been making a go of Office 365 under the advisor fee model in the Cincinnati area. While he's encouraged that Microsoft is making billing options available for other partners and expects a rising tide to lift all boats, he'll stick with his existing business model of offering high-value services around Office 365.

"We keep wondering when they're going to drop the Partner of Record fees. They just upped them."

Matt Scherocman, President, Interlink Cloud Advisors Inc.

Scherocman notes that in addition to the direct billing investments, Microsoft is still investing aggressively in the Partner of Record fee model. "We keep wondering when they're going to drop the Partner of Record fees. They just upped them," he says.

His team has also been winning business with some promotions Microsoft is running involving subsidies that customers can use to pay partners to handle migrations to the cloud.

"Here's Microsoft making massive investments in their partner channel for those that are driving cloud, and massive investments in their customers to get them to cloud. They're driving them really, really hard. They're very serious about this," Scherocman says.

Even before any potential bump in the number of Microsoft partners reselling Office 365 because of the direct billing option, Microsoft argues it has the biggest cloud partner ecosystem by far.

"We believe [the Office 365] ecosystem is more than 10 times the next-biggest competitor. More than 10 times Google, more than 10 times Salesforce, more than 10 times Amazon," Roskill says. "If we can double this in the next five months, obviously that makes us more than 20 times. I think this is a really important milestone in our establishing the channel cloud leadership that we're going after. The way that we're going to get to [cloud leadership] is through the way we always have from a Microsoft perspective, which is driving partner scale."

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