Cutting LARs to the Bone

For LARs, recent changes to the way Microsoft treats its reseller channel have really hurt.

The old expression "penny wise, pound foolish" may apply to Microsoft's treatment of its reseller channel: the company has significantly cut back its financial commitments and has pared the rebates that its Large Account Resellers (LARs) get. The results aren't pretty.

This became apparent last fall at a two-day boot camp that my company offers on Microsoft licensing. What do you think of a vendor whose sales process and rules are so complex that people sign up for two days of training on them?

This isn't merely a promo for our boot camps, but an insight into one of the important tasks that LARs do: explain to Microsoft customers what they can and can't do, what licenses they need and the best way to get them. It's mind-numbing, and for the most part LARs don't get paid for it.

The story got worse in January 2009, when Microsoft told LARs with about two-days notice that it planned to cut the rebates that LARs get for helping large customers with their Enterprise Agreements (EAs). For the work for which they were best rewarded -- getting customers to activate Software Assurance benefits, one of the best predictors of whether customers would renew an EA or not -- rebates dropped about 90 percent.

Microsoft argued that it was actually increasing the rebates LARs get for helping small customers. That's true. It's also true that small customers are more costly to reach, know less about Microsoft licensing than large companies (who frequently have a Microsoft licensing specialist on staff), and generate smaller rebates for ongoing services, even if the rebates are a couple of percentage points higher.

For LARs that handle the largest accounts, the changes really hurt. These folks have always lived on thin profit margins, and the profitability of Microsoft products (which generate the most revenue but not the best profit margins for many resellers) dropped substantially. LARs don't want to stop working with Microsoft, but for the hours LARs put into selling its products and helping its customers, they get less than ever.

What's the likely consequence of that? Many LARs have cut staff and have likely encouraged those who remain to focus on vendor relationships that generate more net revenue than Microsoft does.

I think I'm seeing that. At our boot camps, I'm often asked questions about pricing issues, effective discounts and the like, and my usual response is "your reseller can help you with that." Increasingly, that response provokes a frown and an unkind comment about their reseller. In fact, at our fall 2009 boot camp, not a single attendee that I talked to had anything good to say about his reseller. For most, resellers had a reputation for being inaccessible and unhelpful.

That's not good for Microsoft or its customers. I'm sympathetic to resellers because I know from first-hand experience how much time it takes to do a good job of explaining Microsoft licensing and purchasing options to enterprise customers. And I know also from first-hand experience how poorly Microsoft understands it.

So, what will happen when the economy picks up? Resellers who reduced the staff dedicated to Microsoft accounts have lost critical expertise and those that are left are likely less enthusiastic about those accounts. LARs will focus on deals that sell themselves, not on deals that require a lot of unbillable time and persuasion. Microsoft itself is not equipped to do this work.

For every penny Microsoft saves on LAR rebates it could lose several when the economy picks up and LARs decide that they have better ways to spend their time than on barely profitable Microsoft agreements. If LARs can get these agreements signed without a lot of work (that is, without spending too much time helping the customer), great. But ask them to knock themselves out for customers and show a lot of enthusiasm for Microsoft products? Doesn't look like it's happening now and I wonder what will make them start doing it in the future.

About the Author

Paul DeGroot is principle consultant with Pica Communications, which provides consulting services for customers with complex Microsoft licensing issues.