Partnering for Profitability

What Microsoft's Partner Team is doing to boost your bottom line.

Over the last year, you'd be hard-pressed not to have noticed the word "profitability" if you've read any e-mails, brochures or PDFs written by Microsoft for partners. It's been almost an obsession.

Overt efforts around profitability include closer work with the product groups, a half-dozen commissioned reports and a new online tool focusing on ways to make partner businesses more profitable. The word surfaces as a major theme of many campaigns Microsoft undertakes on partners' behalf.

On the surface, this emphasis shows the strength of the Microsoft Partner Program. Rated as one of the healthiest and largest channel programs in the IT industry by analysts and others who perform cross-industry measures, the program is able to reach down and help pull partners up to better profitability levels. In fact, that's a perk of being in the Microsoft Partner Program.

For Microsoft, it shows an ability to move beyond traditional concerns of channel programs by the size, strength and depth of partner offerings. But Microsoft is known for being busy and smart. Is there a deeper explanation? View Microsoft as a bellwether for the IT industry in general, and the quest to make partners more profitable looks like something else for Microsoft: more like a critical move for survival.

The go-go years of IT spending and hockey-stick revenue growth are temporarily, and possibly permanently, in the past. "Slower revenue growth across the IT industry since the blazing pace of the '90s has focused attention on bottom-line performance and the many factors, both large and small, that contribute to partners' performance," Matthew Lawton and Stephen Graham, analysts for Framingham, Mass.-based research firm IDC, wrote in a recent report. "IT vendors increasingly recognize that the business health of their partner community is critical to their success."

View the profitability lifeline however you want. What matters is not why it's there but that it's there. Over the last few years, and especially in the last 12 to 18 months, Microsoft has been tying strands together to help partners become more profitable. What follows are details on what Microsoft offers to help partners improve profitability and a look at just how practical those offerings are.

Building a Platform
Allison Watson, corporate vice president for the Worldwide Partner Group at Microsoft, frames all of Microsoft's recent partner profitability efforts as consistent with a larger fact about Microsoft.

"Microsoft is a platform company in our product view. I view partnering as a platform for this company. We build a platform on which individual partners can be profitable, and we focus on how as individual partners they can be profitable," Watson says. "We can't promise profitability. We can promise that we're creating a partnering framework that looks at those elements so that partners can be profitable."

Helping Watson build that profitability platform for partners is her team of partner executives. Sherle Webb-Robins, previously channel chief for Sun Microsystems Inc., is general manager of the Worldwide Partner Program. Todd Weatherby, an 11-year Microsoft veteran who also spent time at Oracle Corp., is general manager of partner systems-the online resources that make Microsoft's program scale to hundreds of thousands of partner organizations. Don Nelson, who came to Microsoft with the acquisition of Great Plains, runs partner sales and readiness. Naseem Tuffaha, whose experience includes a dot-com stint, is senior director of ISV sales and marketing in the Worldwide Partner Group. Marie Huwe, a longtime Microsoft vet, handles partner marketing. Not directly on Watson's team, but working closely with partners in the United States, is Robert Deshaies, vice president of the U.S. Partner Group.

Working with the Product Groups
Billions of dollars in product development investments will come to fruition for Microsoft this year with the release of Windows Vista, the Microsoft Office System and several servers. For a product-focused company like Microsoft and for its partner community, perhaps nothing is as important as the degree to which Microsoft pushes partner profitability as a focus within the product groups.

The big job of coordinating with the product teams falls to Webb-Robins and her team. One of the early deliverables of this effort is the Executive Partner Guide for the Information Worker Business, a glossy-paged guidebook distributed at the Worldwide Partner Conference and other Microsoft events.

Part of the goal for that guide is to provide broad guidance on the potential size of certain markets. For example, the Executive Partner Guide identifies Information Worker as a $148 billion business opportunity, with $30 billion in partner services revenues expected by 2007 in the area of smart client solutions. Microsoft has been compiling similar numbers across the Microsoft Partner Program competencies related to the new wave of products to point its partners to new, profitable opportunities.

9 Ways to Improve Your Profitability

These five Microsoft tools, campaigns and programs provide opportunities and advice designed to help partners raise their profitability:

  • Check out the IDC studies on the Microsoft Partner Portal for broad relevance if your business involves networking, information worker solutions, mobility, Windows Small Business Server or software development.
  • Try Microsoft's online self-analysis tool, also on the Partner Portal, to obtain a more customized look at your profitability.
  • See whether your organization can take advantage of the Partner Skills Plus certification programs for financial assistance in training your employees.
  • Double-check the list of Microsoft Partner Program benefits to make sure that you're getting everything possible from the program. For instance, can you save time and money by using the event-planning resources or sales and marketing collateral that Microsoft's already developed?
  • If you have a partner account manager (PAM), take conversations with your PAM seriously. A big part of the PAMs' focus this year is better understanding your business and helping you become more profitable. Your PAM may also be able to point you to Microsoft co-marketing funds or other programs that can cut your expenses.

Following are four more strategies for increasing profitability:

  1. Focus your conversations with customers on solutions for their business problems rather than on product features.
  2. If you're horizontally focused, think about moving more aggressively into vertical markets where you're especially strong.
  3. If you're already vertically focused, look at Microsoft's online resources such as maps and spreadsheets highlighting new opportunities by geography and industry sector. You may find that you can move into an adjacent vertical market, increasing your revenues without significantly raising your operating expenses.
  4. Investigate opportunities around new products that build on your existing strengths while potentially generating new revenues.

Direct Profitability Guidance
Microsoft has taken upon itself to conduct or sponsor original research into the factors behind partner profitability and educate its channel on the results.

"We're committed to building a profitability model and then benchmarks for partners by competency, and at the same time we're going to think richly about the needs of the partners in those competency areas," Watson explains.

The most direct and high-profile part of that effort is a series of IDC studies that were commissioned by Microsoft. Since November 2005, IDC has published four research papers analyzing the factors that determine business success among partners. The studies have focused so far on four Microsoft Partner Program competencies: Advanced Infrastructure; Information Worker; Mobility; ISV/Software Solutions. (A related group of IDC reports in January 2005 looked at business opportunities around Windows Small Business Server.)

While the mobility study examined a business area with explosive revenue growth, the other three competency-based studies all use the business-analysis concept of key performance indicators (KPIs) to identify factors that correlate with success or failure. In interviews with more than 1,000 VARs, systems integrators and consultants in several countries, Microsoft identified KPIs for several competencies.

In the ISV/Software Solutions-based report, for example, IDC identified as KPIs revenue growth, net profit margin, gross profit margin, cash flow from operations, customer growth, deal growth, change in market share, average deal size, sales cycle, implementation time and revenue per employee. IDC surveyed Microsoft Partner Program competency holders, other Microsoft partners and partners of other technology companies.

The reports have all shown strong performance for Microsoft competency participants, so Microsoft has partly touted the reports as strong public relations for its program. But the company hopes that partners, many of whom have limited resources for analyzing their own business processes, will take the KPIs to heart and use them to improve their businesses.

In that vein, Weatherby's team has been turning the research into a customized online tool. "We're taking the IDC profitability study and putting it online so that partners can do their own self-assessments. [It's] self-service, in the spirit of driving profitability," Weatherby says.

"We sometimes underestimate what [partners] can do, and we sometimes overestimate what they can do, and how sophisticated they are. A big number of partners who have used this thing have said, 'We're going to start using these kinds of KPIs to drive our business strategy.' Well, I didn't think that was the feedback we'd get," Weatherby says. "It's exciting to see how useful this has been to them, and it's exciting to see the usage."

Weatherby says that more than 700 partners have done the self-assessments online.

"Today, they get a pretty good graphical and interesting assessment of how they stand in the industry. As we mature this thing, we're going to be able to continue to feed the entries back," Weatherby says. "With IDC coaching us on the design, they do all the smart analytical part of it and we do the scale and access to our channel part of it. We think [that's] a pretty useful instrument for our partners." Weatherby adds that some sophisticated database work remains to be done on Microsoft's side in maintaining privacy and confidentiality before the online self-assessment tool is more dynamic and scalable.

Indirect Profitability Guidance
There are many other Microsoft initiatives that don't directly address profitability, but where a profitability improvement for a partner is a major potential side benefit. By providing tools that give partners a head start on business-generating functions like marketing and sales or event planning and promotion, Microsoft removes costs that would otherwise detract from the partner's bottom line.

One of these areas is in the myriad program resources Microsoft offers to its Registered Members, Certified Partners and Gold Certified Partners. Many of these resources have a profitability angle that comes from the partner costs that Microsoft eliminates or reduces by investing in the resource. One example is the Partner Marketing Center, with its campaign-support resources from customer-ready business letters to presentations to supporting documents. Others include the Partner Channel Builder, the Microsoft Action Pack, software licenses, the Partner Sales and Marketing Planner and the Competitive Selling Resources.

The marketing muscle behind Microsoft's "People-Ready" campaign brings another opportunity for partner profitability. By turning the focus from product features to solutions to business problems or else enablement of business scenarios in national TV and magazine advertisements, Microsoft hopes to help create an environment for partners to have higher profit conversations with customers-talking about solutions for business scenarios rather than product features. Huwe, with her work on Customer Campaigns (see "On the Campaign Trail," October 2006), is building on that trend of higher-order conversations.

The profitability efforts go hand in hand with Microsoft's efforts of the last few years to encourage partners to take on a vertical approach, where margins can be higher and the amount of overlap between partners in a region tends to decline. If everyone does networking infrastructure, every Microsoft partner competes with every other and prices are driven down. If one partner focuses on health-care solutions, another on law firms, distinctions between them become clearer and margins are preserved.

As Microsoft works to get partners to pursue vertical strategies, the company's partner organization has been adjusting to tailor itself better to working with partners in many niches. "We use it as a platform concept, so that we ask the questions every time, and then ideally we specialize it," says Watson. "So if you're a partner in the Microsoft Business Solutions area focused on the food and beverage industry in mid-market in Denmark, we can have this whole well-rounded conversation with you."

Meanwhile, the company is pushing skill development through programs, such as Partner Skills Plus, a $30 million investment to help partners defray the costs of certification and training. Getting up to speed on the new Microsoft products at the cost of time rather than time and fees means more profits, Nelson says.

The U.S. Partner Group has already put some of the training in place. "We've had close to 7,300 individuals from partner organizations go through different types of training around marketing, business management [and] solution selling. They're taking a look at how to run a profitable sales organization," says Deshaies.

For Certified Partners and Gold Certified Partners, a partner account manager (PAM) might point partners to profitability-enhancing resources. For the rest of the Microsoft Partner community, it falls to the online resources, such as the Partner Portal, to get the word out. "In addition to being able to have the one-on-one conversation with a partner, we say, 'How do we make it scale? How do we make it self-service?' so that for between let's say 5,000 [and] 6,000 partners around the world, which is as big as anyone else's partner channel in the world, we do have one-on-one conversations with partners about this and their business," Watson says. "Our opportunity, because of what we've described around our growth, is how the 7,002nd partner and the 100,000th partner ... can get in and participate and take advantage of assets to grow their business in a self-serve and scalable way.

"So we're building out, if you will, a technology platform that's an IT investment," says Watson. She adds that she views her job in part "as being a CIO of a pretty big technology platform that we build and innovate on, and [I] think about it that way in terms of, 'How does it serve this asset of partners in a very rich way?'"

Which is all well and good, but can all these profitability-enhancing efforts reach most partners?

Microsoft is already addressing some challenges. For example, the high production-value Executive Guide turned out to be too broad to be useful for many partners, Webb-Robins acknowledges. Future efforts will be less glossy and more targeted, she says.

The Myths of Profitability

In mid-2005, IDC researchers surveyed 1,000 VARs, systems integrators and consultants in the United States, United Kingdom and Germany for three studies on Microsoft Partner Program competencies. Following are IDC's broad conclusions about how participants' perceptions differed from reality in several key areas:

Gross Margins
Perception: High gross margins mean that a business is healthy and profitable.
Reality: A company's gross profit margin bears no relationship to its net profit margin or its cash flow from operations.

Small Deals
Perception: Small deals are less attractive than larger deals.
Reality: Although companies having larger average-deal sizes tend to perform well, organizations with smaller average-deal sizes can perform well if they maximize their business velocity.

Linux-Based Organizations
Perception: Linux is more profitable than Windows.
Reality: A company's operating system platform has little to do with its financial performance. Business execution is more important.

Business Focus
Perception: Having a narrow focus in your business helps performance.
Reality: The best approach is diversification in complementary practice areas- what IDC calls a "portfolio approach" to the key aspects of operating a business.

Capacity to Fund New Opportunities
Perception: Access to capital is a major driver of business performance.
Reality: What's more important is a company's overall capacity to fund new business opportunities, drawing from all sources, including its own ability to generate cash from operations.

Business Growth
Perception: Since the dot-com bust, growth has taken a back seat to cost reduction.
Reality: Although cost management is important, the top-performing companies are also the top growth companies.

Source: "Microsoft Competencies: Partner Pathway to Business Performance," IDC, February 2006.

Another issue is the sheer size of the partner community: 380,000 Registered Members, Certified and Gold Certified Partners worldwide, with estimates of more than 600,000 when you include partners not enrolled in the program. No matter how granular Microsoft makes its profitability efforts, it's simply not possible to account for every conceivable partner.

Some partners will slip through the categorization cracks, while others might be consciously overlooked if their business models or niches don't mesh with Microsoft's strategic goals. In a program of hundreds of thousands of partners, the profitability tools won't mean much to a fairly broad swath. Meanwhile, for those who don't register, access to many of the profitability-enhancing program resources is off-limits. Even for those who are registered, some of the tools-such as spreadsheets showing vertical sector opportunities by sector and geography-require a business to be fairly agile.

In all, Microsoft's efforts to improve partner profitability have a little something for most partners. Big or aggressive partners looking for new opportunities can find them with Microsoft's tools. Small partners looking to shave off some expenses might reach that goal by cutting their own marketing costs and using some Microsoft templates. If you're lucky enough to fit squarely into an IDC study or find that the profitability assessment tool is fairly robust around your circumstances, the payoff could be huge in terms of improved business processes and a new way of looking at your business.