Directions

Putting the Squeeze on LARs

LARs may become a rarity, as Microsoft proposes changes to limit the earning power of those LARs focused on license-only sales.

• By Paul DeGroot
• December 01, 2008

That's good advice, but it could become harder to follow. The reason: Microsoft is discouraging LARs from focusing only on license sales.

LARs typically deal with midmarket and enterprise customers and sell licenses to customers with Select and Enterprise volume agreements, two agreements oriented to larger customers.

Other Microsoft partners that need to get licenses for customers as part of a larger IT project, such as updating a corporate network and messaging system, often need to work with a LAR. However, if the LAR provides a broad set of services -- updating corporate networks and messaging systems, for example -- the partner may find that its license reseller has become a competitor. That's why the advice to buy from a LAR that only sells licenses makes sense.

But Microsoft's perception, as of late 2008, is that LARs that only resell licenses aren't earning their keep. The company has proposed a long list of other services that it wants LARs to perform, and it has not proposed paying LARs more for these services.

Many LARs are concerned that Microsoft's management has no idea how much time they need to spend explaining Microsoft's byzantine licensing rules. LARs that don't offer additional services could find that their revenue dries up if Microsoft pays less to LARs that only sell licenses.

LARs want to continue to sell Microsoft software, because it often accounts for the bulk of their sales. But the margins they get from Microsoft are slimmer than those of many other vendors. Although breaking with Microsoft would be painful, and possibly fatal, so is a business in which most sales result in a loss.

As of this writing, the list of additional services and qualifications that Microsoft is proposing for LARs is not final, and Microsoft could still back off. But the company has proposed a much broader set of pre-sales services than many LARs provide today, especially for free, and these services stray into territory that many partners might regard as the kind of early-stage prospecting, planning and deployment that they use to win lucrative post-sales services deals. When it comes to the licensing part of the deal, these partners simply want their LAR to take an order, although they may need advice from their LAR on the fine points of licensing and volume-purchase plans.

Even if Microsoft does not follow through with its squeeze play on LARs, the threat that it could has set some LARs on a path of expanding their services. They're already acquiring systems integrators or developing their own technical services arms in an effort to get ahead of the curve.

In the long run, that sets up a collision with not only partners that must go through a LAR for certain kinds of licensing sales, but possibly with Microsoft's own interest. If Redmond manages to shift a big chunk of LAR revenue from licensing sales to non-licensing services, LARs will be less reliant on the company, and may be tempted to explore competitive products if other vendors offer better margins of if their licenses take a smaller cut of overall IT project costs (leaving more opportunity to bill for services).

In addition, Microsoft has watched idly as LARs have consolidated, on the theory that it needs fewer of them. However, with scarcity comes power. Microsoft could find that a few powerful LARs are in a position to demand concessions from the company that it would not face from a more scattered, diverse group of partners.