Channel Watch

Microsoft's Communication Failure on Office 365 Payment Cuts

A little more warning would've been nice.

• By Scott Bekker
• February 12, 2014

The irony of the recent flap about Office 365 enterprise deployment payments is that Microsoft could have come out of it all looking somewhat heroic to its partners. Instead, awful to-partner communication made a difficult situation much, much worse for the channel.

Kevin McLaughlin, an investigative reporter at CRN, broke the story in early January that Microsoft would reduce the amount of money paid to partners who deployed Office 365 seats for enterprise customers by substantial amounts, and the cuts would arrive in less than a month. For some affected partners, the CRN reporting was the first they'd heard about the changes.

Technically, Microsoft could point to a document dated Dec. 16 that laid out the new base rates from which partner payouts would be calculated. Realistically, the document was slipped out just ahead of the U.S. holidays, and little evidence exists that Microsoft made a serious effort to alert affected partners.

The changes involve only partners who deploy Office 365 seats that are usually sold by other partners such as Licensing Solution Providers through Enterprise Agreements. For those partners, though, the change is substantial. Comparing the Dec. 16 document to the previous one from July shows payments for the two most common enterprise SKUs dropped precipitously: 54 percent for E3 and 40 percent for E1.

Partners who are deeply committed to re-sales of Office 365 seats have been saying for years that partner payouts from Microsoft eventually have to fall. And no one argues Microsoft shouldn't cut prices of its products to deal with changing market conditions. In explaining the base rate cuts, Microsoft pointed to two pricing moves from August. There was a 15 percent price cut for Enteprise Agreement customers for Office 365 seats and a very low-cost Office 365 Add-on SKU. The new payment structure represents a blended price between the two types of Enterprise 365 seats -- regular and add-on. One partner tells RCP the deployment payments for add-on seats are actually an increase for him.

But here's where Microsoft could have played the hero. The company could've made a case that it held the line on payments to partners for five months after cutting the revenues they were getting from customers.

Microsoft blew any potential goodwill by waiting to communicate a base rate change until partners would be caught out in deals they'd priced to customers well beforehand. Microsoft knows that enterprise deals have long sales cycles. Its stated policy of giving partners a 30-day notice on price changes borders on cynicism. What's more, the net severity of these changes makes it more than a deal-pricing issue. It requires an entire shift in business models for some partners, especially the born-in-the-cloud firms Microsoft so frequently trumpets as its champions of a cloud future.

Three-months notice, well communicated, would've been pushing things. Five weeks, and only for those paying close attention? A needless disaster.

How is this change affecting your organization? Tell me at [email protected] or leave a comment below.

Related:

• Do the Office 365 Payment Cuts Mark a Sea Change?