Shaping a New Identity

How the recession is forcing partners to reinvent themselves and is changing the structure of the Microsoft ecosystem.

The deepest global recession in 60 years is hitting the channel like a sledgehammer. Partners that are finding business under the impact-scattered rocks consider themselves lucky. As Gartner Inc. channel analyst Tiffani Bova puts it succinctly, "Flat is the new up."

With about 640,000 partner companies, according to one of Microsoft's most recent public statements, Microsoft's ecosystem accounts for as many as two-thirds of all the channel companies in the IT industry worldwide. As goes the Microsoft channel, so goes the IT industry as a whole.

The sharp global downturn in spending on everything-including IT-combined with the global credit crunch are radically reshaping the Microsoft partner ecosystem and the way each partner company does business. Companies are going out of business, laying off employees, shifting to services of all kinds, seeking suitors and turning to vendors for help. While these moves are fundamentally altering the channel in the short run, many of the repercussions will stay in place in a fundamentally reformed channel when the economy comes out of recession, be that later this year, in 2010, in 2011 or later still.

Forced to Fold
"There was an interesting theme at the Microsoft Convergence conference in March-this notion that this economy has exposed your warts. Those were some of the best attended sessions," says Reed Overfelt, CEO and founder of Optimize Now Technologies LLC, a venture capital-backed consultancy that advises companies on social media strategies. "Realize that Microsoft partners are not cash-flow rich. A lot of these companies are going to end up folding," says Overfelt, a former general manager at Microsoft.

As founder of the Heartland Tech Group (HTG) partner-to-partner organization, Arlin Sorensen is in a unique position to see deep inside the books of many peers' companies. He's undertaken a few emergency consultations with peers to advise them through the tough times, and Sorensen gets regular calls from partner company executives seeking a sounding board.

"The partner channel is not that healthy. It's sort of scary when you see the financials as I do at HTG," says Sorensen, also CEO of Harlan, Iowa-based Gold Certified Partner Heartland Technology Solutions Inc. Companies on the infrastructure side that are hardest pressed come in two forms, says Sorensen. There are small companies of one to five employees with just a handful of customers and fast-growth companies of all sizes that have never been well capitalized.

"I'm seeing cash flow drive out smaller partners that were marginal in profitability," Sorensen says. Any kind of slow payment or other burp from their limited handful of customers and those partners struggle or close. "They give up the ghost and try to find a job."

The other type is companies with dynamite sales teams that started without financial capital behind them. "They've always just operated on their ability to sell their latest success. That's great as long as payment comes in, but when the economy slows the payment down, you're continually outselling your cash flow and the cards can tumble pretty fast," Sorensen says.

One example of an ugly situation exposed by a down economy is a company doing between $2 million and $3 million in sales that Sorensen wouldn't name. "They were buying a significant amount of their product on eight personal credit cards. They had tapped them all out, paying 18 percent to 20 percent interest and were losing money like crazy. But it was their only way to stay in business. Once you're in that spiral, it's impossible to get out of it," he says.

Problems are especially acute in the Microsoft Dynamics channel, several channel insiders say. Mo Edjlali, CEO of TalentFamily Inc., a Fairfax, Va.-based recruiting company, which places Microsoft professionals with partner companies nationwide and does much of its business in the Dynamics space, notes: "We've seen about 75 percent of clients freeze all hiring. On the permanent placement side, where people are paying premium fees to find individuals-they've just stopped doing that," Edjlali says. "Its' pretty brutal out there."

Some small firms in the four to 15 person range in the Dynamics space have shut down, and larger Dynamics firms have been laying off employees aggressively, Edjlali says.

One of the hardest hit sectors in IT has been hardware. Microsoft OEM Division Corporate Vice President Steve Guggenheimer has seen the economy take a toll on the OEMs and system builders he works with. The dozen multinational OEMs, the Dells, HPs, Lenovos, Acers and the like, can play around with currency fluctuations to survive and even grab some market share. Similarly, small system builders with good niches and low overhead are also doing OK. But the middle tier? "The people that are large enough to compete with the multinationals, but too large to have the agility to be in all the little areas with the smaller folks, I think that's the hardest part of the market to be in," Guggenheimer says.

The numbers bear that out. Microsoft's "named" accounts among system builders, the category right below the 12 multinationals, has fallen from 520 worldwide a year ago to 482 this year, according to a Microsoft spokesperson.

An IDC survey of channel companies released in March tapped into broader signs of trouble. Nearly 20 percent of resellers with annual revenues of less than $5 million reported that they didn't have enough capital to continue "business as usual." A further 37 percent of that group weren't sure if they had enough capital to get through.

In a conference call to discuss the results, IDC analyst Janet Waxman compared that lack of knowledge to flying a plane across the ocean without knowing how to read your fuel gauge. Between nearly 20 percent without the necessary capital and nearly 40 percent who weren't sure if they'd make it, that's a lot of potential planes ditching in the ocean.

'Embracing the change'
Matt Scherocman isn't seeing a lot of other channel companies fold their tents in the Cincinnati area, but he says it's definitely been harder to scare up work.
"Somebody called it a grind the other day," Scherocman says with approval. To illustrate, he mentions a best practices event his company put on for customers recently. "The event was twice the money, twice the work and half as many attendees."

PCMS IT Advisor Group, where Scherocman is vice president of consulting services, is a mix of project work, outsourcing and managed services. "I'm seeing that our project work has slowed down significantly," he says. The company's balance has let them fairly seamlessly shift to more services work. "A midsize company got rid of their Cisco resource. They said, 'you guys handle it,'" Scherocman explains of a typical recent deal.

Shifting the balance toward services is one of several methods that Microsoft partner executives say they're seeing among partners who are managing best in the current environment. "The partners that are thriving right now are those who are embracing the change in the industry and talking to customers about the business value technology can create/unlock. They are evolving to deliver Software plus Services [S+S] solutions. They're moving from project-oriented businesses to services-oriented businesses. It's a more stable business model for partners," explained Cindy Bates and Robert Deshaies, vice presidents in the U.S. Partner Group, in a joint e-mailed response to questions for this article.

For some partners, meeting those realities requires a simple shift in priorities. For others, adjusting is harder and some are looking for an exit strategy. One possibility is to get acquired. As Gartner's Bova notes, valuation in this environment can be tricky. "For VARs, no matter what size they are, if 90 percent of their revenue is project-based, 2009 is going to be very stormy. I think the valuations of VARs are also becoming much more tied to health and predictability in the business versus top-line revenue."

That said, deals are happening, according to Mike Harvath, CEO of Revenue Rocket, which specializes in business and management advice for solution providers with less than $50 million in revenues. "If you look at overall merger and acquisition activity, almost all major indicators show that M&A activity has fallen off dramatically and completely stalled," Harvath says. Not so, for the solution provider segment. "It feels like the demand for these types of transactions in 2009 will be 20 percent to 30 percent over what it was in 2008, and in 2008 it was pretty good."

"I think it's really two things that are driving [M&A among smaller solution providers]," Harvath says. "It's access to capital, but it's also the desire to grow quicker than they can fund through just cash flow."

Sorensen has seen M&A activity, too. "I'm getting lots of calls from brokers that are trying to put together deals. They're looking for larger partners, primarily managed services organizations, that they want to roll up right now."

No Magic Bullets
At the same time, many vendors are working overtime to help their channel partners by advising them on how to thrive, or at least survive until the recession ends. IDC analyst Darren Bibby, who advises vendors on relations with their channels, says, "Every vendor expected that every other vendor is going to launch some magic bullet program." Nobody has that magic bullet, he says.

Instead, each vendor's materials tend to be repackaged, greatest hits-style tips and programs that are still extremely relevant. Microsoft is a good example, Bibby says, with pragmatic advice about using Microsoft Financing; pushing cloud computing-style services; capturing customers' spending out of operational expenditures, which are still flowing, rather than capital expenditures, which are not; and good sales practices. "After all," Bibby notes, "getting sales has never not been an issue."

To that point, Microsoft's Deshaies and Bates said in their response, "You have to really focus on the basics of salesmanship. That means being prepared when you go on customer calls, adjusting plans in a timely way, and really checking in with [buyers] a lot more often than you did before."

Financing is tricky. Dave Sobel, CEO of Evolve Technologies, a Gold Certified Partner in Fairfax, Va., has had good luck with the Microsoft Financing program. His customers have been able to get approved, and he notes that Microsoft Financing continues to reach out to him for new deals. But in the channel survey, IDC noted that nearly half of the respondents reported having more difficulty getting their customers financed across all financing and leasing programs (not just Microsoft's). And Heartland's Sorensen says word is getting back to him that partners are having more trouble getting credit-card limits increased and that distributors aren't as quick anymore to approve deals bigger than ones they've OK'd in the past.

"A year ago, if you had a large deal, you could go to a distributor and they'd upgrade you to get over a hump. Everybody is just more cautious. The distributor is being fiscally responsible, which is what they should do. But a lot of partners have operated based on the fact that the distributor [didn't used to be] as responsible as they should be," Sorensen says.

Which Changes Will Last?
Sobel, like many people interviewed for this article, saw business fall off a cliff in January. Also like others we interviewed, Sobel saw orders pick up slightly in March. "My sense of this, from talking to my customers, was they were holding off to see what happens. Now they are actively engaging in the projects that they need to do. They're definitely not doing any fluff projects. They've decided that this is the way things are going to be for a little while, and they've got to get back to business."

Even if things start to turn around quickly, several trends have begun or accelerated that will leave the Microsoft channel a different place than it was before the recession began in late 2007.

Structurally, there are the partner companies that have gone, or will go, out of business. That includes everything from massive Gold Certified Partner and systems integrator BearingPoint Inc., which is being liquidated in bankruptcy court, down to the sole proprietor who puts herself on the job market.

Employees caught up in the layoffs in the Dynamics channel and elsewhere may have a hard time finding new jobs in the field amid the glut of candidates and could be forced to move to fields other than IT. That could mean even some highly skilled, well-known channel veterans won't be back.

Partners report their attitudes toward business are becoming more conservative, now that they've experienced how bad things can get. Says Sobel, "We're doing a lot tighter financial projections. What's our non-growth plan look like? We have a version of the plan that says, 'What happens if we shrink, and what are the trigger points?' I wasn't talking like that two years ago. Part of me has to say maybe I should have been doing this before."

The recession is highlighting for many partners how important it is to develop and promote business-process expertise. The next major meeting of HTG will feature sessions about business-process standards. "That's where I see our next step needing to be in the channel in 2011 or 2012. We're working on helping our members with service delivery that's consistent and follows process," Sorensen says.

Throughout the recession, partners have been trying to tap into customers' operational budgets through cloud computing, managed services and outsourcing. Will partners revert to project-based revenues again when things turn around?

"That's the million-dollar question isn't it?" notes Gartner's Bova. Views on the question vary widely.

Bova contends that solution providers have been nodding their heads for years about the need to move from project-based business models to business process-based models or trusted-advisor models, and toward recurring revenues.

Stimulus Bill: What's in It for Partners?

By Keith Ward

President Obama's economic stimulus bill, designed to help pull the U.S. economy out of its worst funk since the Great Depression, has billions of dollars earmarked for IT spending. It's a cash cow the size of Texas, and savvy IT vendors need to start planning now to milk some of that funding.

Officially called the American Recovery and Reinvestment Act (ARRA), the law was signed into effect Feb. 17. Analyst firm IDC dissected the bill and found that the impact on IT spending could be significant. "$788.7 billion spending in the ARRA will stimulate approximately $101.2 billion of technology spending in the energy, health care and government sectors," IDC predicted in a paper.

Some of the chief areas of opportunity for IT firms include:

  • Health care
  • Broadband access
  • IT security
  • Upgrades for outdated computer systems
  • Increased energy efficiency

The lion's share of the IT-focused money will go toward health care. The Administration's goal is to develop an "electronic health record" (EHR) for every American by 2014, according to the bill. Another goal is to be able to efficiently exchange health records between various facets of the health-care industry like doctors and hospitals, while at the same time safeguarding the privacy of those records.

About $20 billion has been earmarked to help reach these goals. IDC predicts that "this will be incremental spending that will take place between 2009 and 2014, with the heaviest spending taking place in the later years."

In addition, incentives will be built into the push to move toward EHRs. For instance, physicians who have them in place by 2011 could receive payments from $44,000 to more than $60,000. Hospitals similarly could receive Medicare incentive payments starting at $2 million annually by having an EHR system. On the disincentive side, Medicare payment cuts loom for hospitals without such a system in place by 2015. It's worth your while to point out these provisions to doctors and hospitals, suggesting, of course, that you have the expertise to help meet those deadlines.

Protecting those EHRs moves into the realm of IT security, which will be welcome news for security vendors. In addition to the need to protect EHRs, security funding will get a boost from the $2.8 billion allocation to the Homeland Security Department. According to Federal Computer Week magazine, about half of that money will go toward information technology-related programs.

While there's a huge amount-about $77 billion-set aside for energy initiatives, a small slice of that is devoted specifically to IT-related projects. That includes $4.3 billion for "Intelligent Grid" computing and $3 billion for energy-efficiency initiatives.

Intelligent Grid computing involves metering and monitoring of power usage for consumers and businesses, allowing smarter use of resources. It involves technology on both the hardware side, for things like meters, and the software side, for the software needed to manage and analyze the data.

The energy efficiency spending is also consumer-based, for things like making homes more efficient. The bulk of the money is for developing renewable energy sources-not directly IT-related initiatives, although of course it will still require lots of computing power and software development to produce those green technologies.

Broadband will become available to a larger portion of Americans as well, as the bill calls for $7.2 billion in investment in bringing bigger Internet pipes to rural and underserved areas. In addition, the law calls for the Federal Communications Commission to create a "National Broadband Plan" that will guarantee everyone broadband access within a set amount of time.

Interestingly, two different agencies will be holding the pursestrings for broadband development: $4.7 billion will be distributed through a Commerce Department program, while $2.5 billion is under the auspices of the Agriculture Department.

In its advice to vendors, IDC stresses speed. Many of the provisions in the ARRA are time-sensitive, and the first ones in line are primed to get the bulk of the funds. "It is imperative that the vendor community be both aggressive and agile in their strategy to capture this newly addressable market. This once-in-a-lifetime flood of new technology money requires a new way of finding and following opportunities," states IDC.

A Web site to track the progress of the ARRA, including a breakdown of the money spent, has been established at

"You don't have the masses that have moved to cloud opportunities or managing based on service-level agreements. Although you've had partners say they need to move from products to solutions and from transactions to predictability, I would say the bulk fits in the value-added reseller [category]," Bova says. At the end of the recession, she adds, "There's still going to be a majority of technology purchased exactly the way it's purchased today. If partners want to continue focusing on doing business the same way they have for the last 10 years, they absolutely can. What will start to get challenging is pricing."

Scherocman sees the recession-based shift toward S+S, SaaS and managed services as part of an old cycle.

"Do I think it's a shift? Yes. I don't think the economy is changing that shift but it's accelerating it. It's similar to the centralization and decentralization of IT. We go through cycles where everybody says centralization makes sense. Then it shifts back," Scherocman says.

Optimize Now's Overfelt is emphatic that the change toward the cloud is more permanent, and the channel needs to adjust. "This economy is going to hasten SaaS and the cloud as primary providers." Moreover, Overfelt says those changes don't bode well for the current size of the Microsoft channel. "Because of that, the Microsoft channel is going to have to shrink. That business is coming from some place. Some Microsoft partner or channel partner is losing that business."

More Information

Q&A: Microsoft U.S. Partner Group Vice Presidents Robert
Deshaies and Cindy Bates

Microsoft has perhaps the largest partner channel in the industry with about 400,000 MSPP members. When this recession is over, be it in 2010 or later, where do you see those numbers ending up roughly? Is it, say, half as many MSPP members due to consolidation, bankruptcies and refocusing? Or is it more MSPP members because of factors like unemployed IT workers starting up one-man shops and all channel companies expanding their portfolios?
It's really hard to say where the industry will be when the recession is over, as we aren't even sure when these challenging economic times will start to turn around.

Because of Microsoft's focus and because of our partner channel around the world, a higher percentage of those people will be Microsoft-based skilled employees than anything else. At the same time, our business portfolio and technology investments continue to evolve and the breadth of our customer needs continues to expand. And so, it's a great opportunity to take advantage, take share, and grab skills at this important time.

To help partners navigate through what the future may hold, we're evolving the Microsoft Partner Program to meet their needs. At the Worldwide Partner Conference this July, we'll be introducing the next generation of our Partner Program. We'll be talking at that time about how we have heard partners, about how partners want to be recognized in the marketplace. And partners will hear about how there's an opportunity to demonstrate deeper investment and capability in the particular skills that customers find important.

There's never been a better time to be a Microsoft partner. The next 12 to 18 months will be one of the biggest launch periods in Microsoft's history. That launch wave will produce value that's additive to the core platforms that you already know. From Windows 7 to Office 14 to Windows Azure, there's more innovation and opportunity to deliver customer value in more ways than ever before. There's never been a better time to be a Microsoft partner.

What kinds of partner business models are thriving?
The partners that are thriving right now are those who are embracing the change in the industry and talking to customers about the business value technology can create/unlock. They are evolving to deliver software plus services solutions. They are moving from project-oriented businesses to services-oriented businesses. It's a more stable business model for partners.

The partners that are thriving are also those [that are] laser-focused on salesmanship. And in our studies of recent recessions and depressions of the last 100 years, people who focus on salesmanship, including customer relationship management and retention, are the ones that win. But you have to really focus on the basics of salesmanship. That means being prepared when you go on customer calls, adjusting plans in a timely way, and really checking in with sellers a lot more often than you did before. Microsoft has completely re-pivoted its selling force around saving customer's money and driving innovation -- these things are on the top of customers' minds.

We are finding that partners are very motivated to build new skills during the downturn to both provide more relevant offerings and be well-positioned to accelerate out of the downturn when the recovery begins.

What kinds of partner business models are struggling?
This is not business as usual. Partners who aren't focused on driving incremental business value with current and new customers or those who haven't prioritized salesmanship to drive customer relationships will struggle in this environment. This is the time to be visionary and make big bets. Partners need to focus on low-cost, high-value solutions, delivering the right cost savings and innovation to help customers get the most out of their investment.

Are partners serving one size of customer (small business, midsize, enterprise) doing better than those serving other sizes of customers?
There is opportunity in each customer segment. For example, we recently surveyed 600 Small Business Specialists to understand how they and their customers are experiencing the current economic conditions. Based on the survey results, 55 percent of the partners are forecasting the same or higher spending among small to midsize businesses (SMBs). We believe that IT will play a significant role in shaping how soon and how aggressively the SMB community reclaims financial stability and becomes a catalyst to help lead us out of a global recession. The soft economy is impacting almost every market and demographic, but smaller businesses are expected to maintain a stronger-than-average commitment to IT as a strategic investment during the recession.

There's also incredible opportunity in the enterprise as well. With technologies like virtualization, unified communications, and cloud-hosted offerings, many enterprises are turning to IT to help them save money. GlaxoSmithKlein is expecting a cost savings of 30 percent by putting 100,000 employees on Microsoft Online Services, and Saxobank in Denmark leveraged the virtualization features in Microsoft Windows Server 2008 to reduce servers by 36 percent, resulting in an estimated cost savings of 1 million dollars.

Is the recession accelerating adoption of managed services or cloud computing?
We are seeing more businesses adopt cloud-based solutions as the economic climate drives demand for solutions that are affordable and flexible and offer financially backed service-level agreements. For example, our customers are saving between 10 percent and 50 percent with Microsoft Online Services, which is a significant savings during this economic downturn. The move to Microsoft Online Services is helping customers refocus IT on the most strategic business priorities and realize immediate savings on staffing and equipment by eliminating their underutilized servers.

Microsoft Software plus Services, rather than SaaS, is the opportunity for choice, for someone to have the right mix of on-premises software and cloud-hosted software, so they can deliver and have the best opportunity to get value out of IT, save money and drive innovation.

However, on-premises solutions continue to offer familiarity and a predictable return on investment and will therefore increasingly be complemented with hosted and online services offerings to create hybrid solutions that bring together the best of both delivery models.

What's the effect on Microsoft Large Account Resellers?
Like many of our partners, Microsoft Large Account Resellers (LARs) are focusing more than ever on reaching out to new customers and driving more incremental value for existing customers. Microsoft is working closely with the LAR community to invest in driving customer demand and help partners to invest for short- and long-term success.

What are you seeing among ISV partners?
We see ISVs evaluating on-demand offerings of their current solutions, as well as augmenting their on-premises solutions with hosted services, which provide new revenue streams and increased relevance (vertical & horizontal) to further differentiate their offerings. ISVs are continuing to sell directly to customer -- as well as partners -- and continuing to leverage the VAR and SI channel to extend their delivery capacity and explore new means of accessing new customers. The specificity and relevance of ISV offerings provide a mutually beneficial customer discussion topic for SIs and other solution delivery partners.

What other interesting trends within the Microsoft partner ecosystem are emerging due to the recession?
Like Pam Salzer shared with you last week related to WPC, it's all about connections and the network effect. In this challenging economy, partners are looking to connect with other partners and customers more than ever. Partners can do more together -- drive more value, more demand and more cost savings for customers.
-- S.B.

Forbes: Microsoft Billionaires Hit Hard by Recession

When you have a lot, you can lose a lot -- and that's exactly what this recession has meant for the current and former Microsoft employees that make up the company's billionaire club.

According to Forbes' 2009 World's Billionaires list, released in March, former Microsoft CEO (and current non-executive chairman) Bill Gates lost 31 percent of his estimated personal wealth -- $18 billion -- in the past year, dropping from $58 billion to $40 billion.

Microsoft's Top 4 Earners 2009 2008 2007
Bill Gates $40B $58B $56B
Steve Ballmer $11B $15B $15B
Paul Allen $10.5B $16B $18B
Charles Simonyi >$1B $1.1B $1B
SOURCE: Forbes' World's Billionares List, 2009, 2008, 2007 (

Even so, Gates' managed to regain his No. 1 spot on the list, up from third in 2008 (behind U.S. investment guru Warren Buffett and Mexican telecommunications mogul Carlos Helu).

Current Microsoft CEO Steve Ballmer also jumped up the list, from No. 43 to No. 29, even though his fortune dropped from $15 billion to $11 billion. He didn't lose as much as Microsoft co-founder and current chairman of Charter Communications Paul Allen, who went from $16 billion in 2008 to $10.5 billion on the 2009 list, losing $5.5 billion but still making him the 32nd richest person in the world (up from 41st in 2008).

If there's a "Sorry You're Not a Billionaire Anymore" card available at your local drugstore, you may want to pick one up for the former Microsoft executive who supervised the launch of Office (and then spent a reported $60 million on two Russian space flights), Charles Simonyi. After grabbing a lower-level spot on the list for several years -- in 2008, his estimated worth was $1.1 billion -- this year Forbes signaled that Simonyi is no longer a billionaire by leaving him off the list entirely.
-- Becky Nagel, Exec. Editor


  • Image of a futuristic maze

    The 2024 Microsoft Product Roadmap

    Everything Microsoft partners and IT pros need to know about major Microsoft product milestones this year.

  • SharePoint Embedded Becomes Generally Available

    After a six-month preview, SharePoint Embedded, an API-based version of SharePoint that developers and ISVs can use to embed Microsoft 365 capabilities into their apps, is now generally available.

  • Copilot in Microsoft 365 Getting Agents, Extensions and Team (Not Teams) Support

    Microsoft is adding more functionality to its Copilot AI assistant aimed at improving business collaboration, processes and workflows for Microsoft 365 users.

  • Microsoft Giving Startups Templates To Build AI Apps

    A new perk for businesses enrolled in the Microsoft for Startups Founders Hub program aims to fast-track their ability to build AI-powered applications.