In-Depth

Microsoft's 'Master VAR' Program: Dynamics Franchising Revisited

Microsoft preps pilot of program for Dynamics partners as an alternative to its aborted franchise plan.

• By Jeffrey Schwartz
• September 26, 2011

UPDATE, 10/3: Microsoft has officially launched the Master VAR program. Read the details here.

Microsoft's efforts to focus its resources on fast-growth Dynamics partners will take a new twist when an aborted plan to support a franchising program reappears in somewhat different form.

This month, Microsoft plans to launch a pilot of a "Master VAR" program for Dynamics partners.

The plan addresses Microsoft's stated goal of giving some of the smaller Dynamics partners who are being crowded out of the market by economic trends, customer preferences and Microsoft channel program changes a way to stay in the Dynamics business without having to engage in mergers and acquisitions.

Jeff Edwards, director of Microsoft Dynamics Partner Strategy, steered Microsoft's evaluations of both the franchising and Master VAR approaches. He explained to RCP at the Microsoft Worldwide Partner Conference in July the thinking behind the decision to go with a Master VAR concept rather than franchising.

Microsoft started floating its franchise proposal late last year and early this year before the company abruptly put the plan on hold (see the April 2011 cover story, "Dynamics Franchising: Microsoft Pushes the McDonald's Model"). Despite sidelining the franchising plan, Microsoft officials indicated they would revisit it in the new fiscal year, which began July 1.

"I think the word franchising has connotations around fast food," Edwards says of an impression Microsoft helped set in previously describing the proposed program to partners using McDonald's as an example of how franchisees would work with franchisors.

Aside from potentially negative associations, there were other factors that proved more problematic in a franchising model. Edwards says the business filing, tax and legal requirements for setting up a formal franchising system were all fairly daunting.

That aside, Edwards says there was one main element to franchising that Microsoft wanted to keep: "What we did like about it is you did have consistency with national brands."

Enter the Master VAR approach. Under the model, a Master VAR would recruit smaller partners, known as affiliates, who would sell Dynamics ERP and Dynamics CRM under the Master VAR's brand.

One of the most difficult aspects of the transition to the Microsoft Partner Network (MPN) structure over the last year for Dynamics partners has been the much higher bar for membership at the gold level, and a similarly high bar for the new silver level, as well. For Dynamics partner companies with fewer than six employees, the requirements are nearly mathematically impossible to meet. Even for slightly larger organizations, the gold and silver hurdles are much more difficult to clear than the Gold Certified Partner status of the past.

Specifically, the MPN requires partners to have six people certified in either of the Dynamics competencies (ERP and CRM), shutting out many smaller partners from achieving gold certification under the new program.

Also under the new Solution Provider Agreement (SPA), partners reselling Dynamics must take on 70 percent of the implementation and support of the software as billed to the customer. "This provision is included to ensure that you are qualified to implement the solution and provide post-sales support," according to a clarification of the SPA posted on the Microsoft partner site. "Failure to comply (such as relying on other partners to implement and support your solution) may result in termination of your SPA."

There are many partners who have spent years or decades building successful businesses selling, deploying and managing Dynamics software. Many of those have balked at Microsoft's suggestion that they merge with others to obtain the scale necessary to qualify for a gold competency in the MPN.

"The problem remains the same," says Howard Cohen, a channel consultant and president of the New York chapter of the International Association of Microsoft Channel Partners (IAMCP). "Small Dynamics partners' most valuable assets are their customers. They will not want to 'assign' them to anyone else. My advice to them has been to revise their business model so they can be profitable from their services and not dependent upon software license margins. I don't see any other alternative for them."

But Edwards positions the Master VAR program as such an alternative. Under the Master VAR setup, Edwards says, "We would hold [only] the Master VAR to the MPN gold requirements, like any large partner."

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While that requirement would allow smaller partners to continue to sell and deliver Dynamics solutions as a gold-branded partner, it would have to be under the Master VAR's brand and on the Master VAR's terms. "The Master VAR would decide the financial relationship," says Edwards, adding that most agreements would probably involve the affiliates being able to take back their customers if the master-affiliate relationship didn't work out.

In addition to the MPN certification requirements, Microsoft would expect its Master VARs to centralize marketing, search engine optimization (SEO), support, billing and other operations.

For small partners considering an alliance with other small partners in other regions, the Master VAR pilot won't support that particular arrangement, Edwards says. "We require a unified brand," he says. "We don't want it to be that lightweight."

To be considered as a Master VAR, a nationally focused Dynamics partner will need to meet several requirements. The company will need to:

• have $1 million in operating capital
• assume legal liability for the work done under its brand by its affiliates
• drive the certification, operations, support, marketing and SEO for its national brand
• require affiliates to operate under a common brand

Edwards declined to identify the national partners that Microsoft is in discussions with about participating in the Master VAR pilot this fall, but he did share some characteristics.

"We're going out [mostly] to existing large partners," he says, adding that four to five companies are interested. "We only want two or three."

The Master VAR pilot starts just a few months before the Jan. 1 launch of a new Dynamics Incentives Program, which will increase product margins for partners that are meeting growth targets and decrease margins for partners that miss the targets.

Edwards says the Master VAR program could give both Master VARs and especially their affiliates an opportunity to realize those growth incentives, which can add up to 20 percentage points to Dynamics margins. Conversely, they can decline by as much as 15 percent if they don't hit certain targets.

What's the Difference?
Many observers see little difference between the Master VAR program and the franchise effort that Microsoft had aborted earlier this year.

"They're giving it a different name and they're saying, 'We don't know what it's going to be yet, it's going to be what the Master VAR wants to include in the program.' But they are determined to go forward with some sort of plan like this," says Jim McCann, president and senior partner of Micro Force Inc., a New York-based Dynamics GP partner.

"I guess they tried to put a different look to it, but from a partner perspective, I don't see a difference. But we have to wait to get the program details from the Master VARs," he says.

Gabe Parajos, co-owner of Plainview, N.Y.-based Katalys Group LLC, says the Master VAR program -- as Microsoft explained it to him -- sounded similar to the earlier franchise program.

"In my mind, it's not much different," Parajos says. "If you have a Master VAR who's putting in a master operating agreement that the subs really have to follow, each individual smaller company is going to be operating as that larger VAR -- that screams out franchise to me."

Smaller partners rejected the concept of franchising, McCann says, because they don't want to take the risk of losing their customer relationships.

"The franchise model scared off a lot of people," he says. "One of the concerns is the ability to hand over your customers."

There are some benefits, McCann acknowledges, such as the assumption of liability. "It sounds like you'd be under the insurance plans of the Master VARs," he says. "That would probably be very attractive to a lot of the smaller partners. The devil will be in the details, we have to see what the offerings will be."

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The Master VAR proposal is the latest effort yet by Microsoft to consolidate its Dynamics partner base. As the thinking goes, Microsoft wants fewer but stronger partners that are looking to grow their businesses.

Some 70 percent of Microsoft's Dynamics partners were gold, and now it's 17 percent, Edwards says. "We're tracking exactly where we want to be," he says. "Regardless of what we're doing, we're seeing channel consolidation both from an economic perspective and a customer-preference perspective."

Directions on Microsoft analyst Rob Helm says Microsoft has made clear that it wants the number of partner companies to decrease and the size of the partner companies to increase.

"Their hope is that they'll end up with net more partners in terms of people on the street and more depth in terms of training and resources," Helm says.

Some partners believe consolidation in the channel is a good thing and question the need to boost smaller partners. Andy Vabulas, CEO of Atlanta-based Dynamics partner I.B.I.S. Inc., believes the Master VAR program dilutes the MPN requirements.

"Many partners work very hard to meet the new [MPN] requirements and it doesn't seem right to me that someone could game the system and claim they would be our equal -- when in fact they're not -- by virtue of tying themselves to another company's certifications," Vabulas says.

"The whole purpose of the MPN was to boost the bar and raise the ante, and it seems unfair to have it both ways. We took significant time and effort to hit the goals of the new MPN, and those that can did, and we had to work to ensure that we were there. If you can't, you can't. You can be in business without the certification. It will allow partners that could not earn the silver or gold competency to display the competency as if they had earned it."

Bob Gleason, president and CEO of RedTail Solutions Inc., an ISV based in Westborough, Mass., welcomes consolidation in the channel, whatever form it takes. "From an ISV perspective, consolidation in the channel is always a good thing from my point of view because it makes our outreach to the channel more efficient," Gleason says.

"The more little VARs there are, the harder our marketing effort is. So from our point of view, whether it's acquisition or franchise or Master VAR, if we've got a good relationship with a major VAR who's promoting our EDI solution, it's very likely if they took a little VAR under the Master VAR umbrella, there's a good chance we can pretty easily get that little VAR to adopt the promotion of our solution, and that's great."

Fewer brands in the channel and stronger brands is a good thing from an ISV point of view, he adds. "Not because we don't like working with small partners -- we work with many small partners, and they're great to work with -- but if we can reach more people, more efficiently, that's a good thing."

Master VARs, he says, are going to be the first to adopt the cloud, and that will force the smaller partners to hone their cloud skills and promote the cloud-based versions of the Dynamics product line as they reach the market.

"They get it. They can adapt their business model," he says.

Keeping the Brand
For many Dynamics partners, it's about keeping their brands and customer relationships, and many question whether that will be achievable with the Master VAR concept. Katalys Group said it looked into the franchise concept even before Microsoft started floating the idea and determined it wouldn't work.

"The legal headaches. Mounds and mounds of paperwork. It just wasn't going to work for us," Parajos says.

Still, the company spotted a need to give small partners the scale they need to survive in the post-MPN world. So it established a cooperative of sorts that allowed small partners to buy into a partnership where they could co-brand their businesses with that of Katalys Group.

"There are a lot of people we know firsthand that have built up very nice reputations for themselves. They may not be very large, but they have a very loyal customer base that's very happy with them. These changes that are coming down from Microsoft can affect their relationships with their customers and threaten them with losing their livelihood and their customer base," says Mark Fineman, a Katalys Group co-owner.

"We struggled with the franchise model where you basically take away somebody's hard-earned brand, their company name. Part of our logic and thinking was we had to come up with a way to legitimately come together, and yet give them a way to back out. With a franchise, it's very hard to pull out again and be your own."

For the Master VAR program to succeed, it appears partners are going to want to have an exit clause as well as assurance that their customer relationships remain intact. But many others will opt to go it alone without the gold and silver certifications, while other partners are aligning with different vendors.

Related:

• Microsoft Preps Pilot of Master VAR Program for Dynamics Partners
• Microsoft Puts Dynamics Franchising Plan on Hold
• Dynamics Franchising: Microsoft Pushes the McDonald's Model