In-Depth

Dynamics Franchising: Microsoft Pushes the McDonald's Model (UPDATED)

Many small partners won't qualify for a gold competency under the new Microsoft Partner Network. Merging with larger partners is one option, but many partners are reluctant to give up their independence. Now Microsoft is considering franchising as an alternative, noting the success of big chains like McDonald's.

• By Jeffrey Schwartz
• March 31, 2011

• Read our related Q&A with Kristi Hofer, U.S. Partner Channel manager for Microsoft Dynamics, here.

In a bid to migrate its Dynamics channel to larger and more vertically focused selling organizations, Microsoft is considering a controversial plan that would encourage partners to become franchisees of larger partners.

After quietly floating the idea to select partners over the past several months, the Microsoft Dynamics channel management team has started outlining the proposed plan to a larger set of partners. The proposal would create a framework sanctioned by Microsoft that would allow smaller solution providers to join franchises of larger partners with similar business models or vertical specialties.

Two Microsoft Dynamics channel execs outlined the proposal at an International Association of Microsoft Channel Partners (IAMCP) meeting in New York in mid-February and have since begun reaching out to partners throughout the country.

Franchising would be an alternative to merging, another option Microsoft has suggested smaller partners consider to enable them to meet the requirements of the new Microsoft Partner Network (MPN). The MPN has higher barriers to entry than the Microsoft Partner Program, which it replaced. The MPN requires partners to have six people certified in either of the Dynamics competencies (ERP and CRM), making it difficult for many smaller partners to achieve gold certification under the new program.

Many partners -- who have spent years or decades building successful businesses selling, deploying and managing Dynamics software -- have resisted the suggestion of merging with others to obtain the scale necessary to qualify for the valuable branding of a gold competency in the MPN. Recognizing that partners don't want to be acquired, Microsoft officials say franchising is an avenue that would allow them to retain their independence.

One thing is clear: Microsoft would like to see smaller Dynamics partners migrate toward larger ones.

"There are a lot of organizations that don't come across as the ideal partner," Terrence Abrahams, director of channel strategy for the Dynamics product suite, told partners at the IAMCP meeting.

The ideal partner has to have the scale to sell more aggressively against rivals such as Salesforce.com Inc. and NetSuite Inc., Abrahams said. Franchising would be a viable alternative to achieving scale without having to give up ownership, he emphasized.

Using the metaphor of McDonald's or an insurance brokerage, the individual business relies on a franchisor to provide overhead for common services such as marketing, accounting and order fulfillment while the franchisee has a streamlined organization focused on the selling and implementation of products and services.

"Franchise as a concept is a very well-proven concept that allows organizations that are small to be able to thrive in an economy. Franchises create 11 million jobs directly attributable to the franchisee. It's a viable option and it's actually growing," Abrahams said. "What we wanted to do is try to find a way to take this and apply it to the Dynamics world in a way that's both palatable to those partners that may feel challenged and at the same time allows us to be bold in this channel so that things like the cloud, things like vertical, things like direct sales competitors that we have to go up against -- the Salesforces, Epicors, SAPs -- how do we compete effectively against them."

Some partners hearing Microsoft's proposal are skeptical. "Typically a franchise is like a McDonald's. The company offers everything for you, it's a turnkey. You follow the instructions and you've got a business," says Jim McCann, president and senior partner of Micro Force Inc., a New York-based Dynamics GP partner.

Like many Dynamics partners, McCann is an original partner of Great Plains Software, the company Microsoft acquired 10 years ago to forge its way into the ERP market. "You have businesses like us that have been around 20 years. We're not looking for [someone] to run our business -- we're pretty comfortable how we run our business," said McCann, who also leads the New York chapter of Dynamics partners for the IAMCP. Many partners have confided similar concerns with him. "We're trying to see what the final result is to see if there might be some value there," he added.

Others, notably larger partners, are open to the idea. "It's very interesting," says Jeffrey Goldstein, managing director of New York-based Queue Associates, a Microsoft Dynamics partner that has already met its gold competency requirements in the new MPN program. "It may be a benefit to help some of the smaller partners in the area who can't achieve their MPN gold certification status," Goldstein noted.

Kristi Hofer, the Microsoft Dynamics U.S. Channel manager, envisions a small number of very large partners qualifying to become franchisors. "We think it's probably going to be something like two to five franchisors across the entire channel," Hofer said in an interview following the IAMCP presentation.

Who Owns the Customer Relationships?
Hofer emphasized to partners at the February meeting that the franchising model that Microsoft is considering would allow companies to retain ownership of their businesses. And depending on the contract agreements outlined by franchisors, the smaller VAR would be able to maintain their client relationships should they decide to later sever the franchise relationship.

"You're an independent company, it's just that you get guidance from the person on top," Hofer told partners. "You also adopt the person on top, their brand, you get the processes; they help you with a lot of different things such as centralized marketing, centralized ordering and things like that. But you're still an independent company, which is very, very key."

Howard Cohen, president of the New York chapter of the IAMCP and a consultant to channel partners, said that might sound good in theory, but in practice, it could backfire on partners. "Until the day that a small player decides they want to switch franchisors, then we get to see just how strongly that contract is upheld," Cohen said.

Hofer disagreed. "I would be very surprised if a franchisor came up with a model that did not allow the franchisee to keep their customers," she said. "I don't think anyone would sign up for that model. My own opinion is the franchisee will absolutely be able to keep their customers when they leave."

Cohen said he believes many partners will be reluctant to become franchisees. "I think a lot of players will resist it, a lot of players will still go elsewhere, exit the Microsoft ecosystem. I think that's sad for Microsoft," Cohen said. "But in the end, the ones who will suffer will be the small players who now have to retool and restructure for a whole new set of software. They have to move from Microsoft to Sage or from Microsoft to Quickbooks or to Oracle, or to something else."

While Cohen credits Abrahams and Hofer for trying to come up with an alternative that works within the MPN's new guidelines, he believes Microsoft is falling short of preserving the independence of the smaller Dynamics partners. "These guys have built their careers on innovation, and now Microsoft in a lot of ways is saying, 'We don't believe you can be innovative unless you're bigger.' To me that's patently untrue -- to me it's the small guys who have always been the greatest innovators," he said.

Pete Zarras, president and CEO of Cloud Strategies LLC, a Microsoft Online Services partner that plans to become a Dynamics partner, attended the New York meeting and observed the negative reaction from partners around him. But Zarras says it's difficult for small shops in any industry to prosper on their own these days.

"It sucks that there are no mom-and-pop gas stations out there any more, or very few," Zarras says. "Why is that? Because BP would rather have an organization that runs 200 stations, than serving one Joe's station. It's sad for the local mechanic and the fill-up station, I can empathize, but it doesn't mean it's the wrong decision. People are frustrated because they've poured a lot in, done a lot of great work, and no one is knocking that -- but from Microsoft's view of the world, that doesn't scale, and it's too hard for them to manage. I don't think anyone is telling them they can't have a relationship with Microsoft, they just can't act like they're bigger than they are."

His advice to small businesses? Keep doing what they're doing and forget about trying to achieve a gold competency. "I don't think that the value of [being a] Gold partner was worth nearly what they think it was to their business," he said. "If they're doing good work for 10 or 20 years, the label is not going to change the good work that they do. Microsoft can't stop them from selling consulting services."

Consistent Branding
Abrahams and Hofer outlined the benefits of potentially having a franchise program for Dynamics partners. Having a consistent brand would be a key factor in the franchise relationship, said Hofer, who came to Microsoft through the Great Plains acquisition. Explaining that when someone goes to McDonald's they know they're going to get a consistent experience, Hofer said that Dynamics partners can make a similar comparison to how their businesses might function.

"You want the franchisees to be able to leverage that really powerful brand, and we want the franchisors to build a very powerful brand for the franchisees to leverage," she said. "When you think about it in the channel, the Microsoft brand is the Microsoft brand. The reason we're doing MPN is so that we can help you guys differentiate between Microsoft, which is the big huge thing, and maybe what you do best, which might be Dynamics."

However, Microsoft's plan takes the franchise concept a step further, she said, pointing out that the franchisee would be part of a brand created by a franchisor with strong vertical experience. "With the franchise model we feel we can grow big brands like that, that focus on individual areas, and then franchisees can leverage those brands, to be able to grow their own business, within their particular areas," she said.

Franchisor Requirements
To be a franchisor, under Microsoft's proposal, an operator would have to have $1 million in capital with the rationale that they'll need that level to support their own operations and that of franchisees. Next would be legal agreements between franchisors and franchisees. "We want these guys to be serious -- we want these guys to really be in the game, to be serious from a legal perspective, so if you guys decide to sign on, they're not going to be going anywhere anytime soon," Hofer said.

Franchisors would have to have a gold competency on their own, without relying on franchisees to push them up to that level. Franchisors would also have to undergo training, though Microsoft hasn't determined specifics. They would need to centralize areas where they can achieve economies of scale for franchisees. That would include such processes as branding, marketing and operations support. And they would have to have Solution Provider Agreements (SPAs) with Microsoft.

Franchisee Requirements
Franchisees would have to be registered Microsoft partners, undergo training and operate under a unified brand, Hofer said. "At the end of the day, the franchisor role is all about giving you centralized services, centralizing a whole bunch of stuff, doing all of this sort of strategic stuff, and the franchisee role is all about selling," she explained.

"If you choose to be a franchisee, it's all about selling, selling, selling, selling, selling, and the franchisor is going to provide you with all the things that you need to make sure that you can keep selling -- plus you can service those customers, and those customers get the best care that they need and they're thinking about long-term strategies."

The two Microsoft officials emphasized that the franchise plan is only a draft proposal, and if the partner community rejects it, then Microsoft will walk away from it. "If you guys come and say, 'You know what, this will never work, this is the stupidest thing I've ever heard of and nobody will ever make money,' we may feel like, 'You know what, maybe we shouldn't do this franchise thing,'" Hofer said. "At the end of the day, if you don't think this model is right for your business, no one is going to force you to take it. It's one more option. If the franchisors can add value, it's up to you if you want to leverage it."

Nevertheless, Cohen said he believes Microsoft will go forward with some form of franchising plan. "I can't imagine it not happening," Cohen said. "I believe Dynamics partners will rise up against it; there will be plenty of very vocal partners. [But] this franchise model is going to happen, because it fits Microsoft's requirements -- and, quite frankly, for a large number of the small partners, it fits their needs too."

For some, it may be the lifeline some smaller partners need to stay in the game, Queue's Goldstein says. "I think in theory it's great, because with the new MPN requirements, not every partner is going to be able to become a gold or silver competency partner. A merger or acquisition may not make total sense because you have people who've owned their own companies for 20 or 30 years and they may not be right for an acquisition," he said. "But if they could become a franchisee of a franchisor and benefit from their certifications and from their ability to be able to have a large infrastructure and still maintain the entrepreneurial spirit and still own their own organization, it could be a great win-win."

Microsoft's next step is to assemble feedback from the partner community. Hofer said Microsoft would make a decision by the end of the fiscal year, which is June 30.