In-Depth

Microsoft's Dynamics Partners Finding Strength in Numbers with Katalys (UPDATED)

Katalys Group formed to help small Dynamics partners find a creative way to meet the Microsoft Partner Network requirements by banding together.

Katalys
UPDATE: Katalys Group is being audited by Microsoft, threatening the viability of this innovative but controversial P2P response to the Microsoft Partner Network changes on the Dynamics side. See Katalys Group CEO Gabe Parajos' comment at the bottom of this article, and the related news story: "Post-Master VAR, Microsoft Cracks Down on Alternative Approach."

When Gabe Parajos and Mark Fineman started Katalys Group in 2008, they probably didn't expect to be caught up in a revolution two years out. What started out as a loose affiliation of independent Dynamics consultants to share resources and protect resale margins became a test of will and dedication to find a workable resolution to the pivotal change in the Microsoft Partner Network (MPN) requirements.

"Mark and I used to be the traditional reseller, but [we] sold our business to a large partner organization," Parajos says. "That turned out not to be a good fit for us, so we started over. This time, we set up a little differently, as a virtual partner to provide friends in the industry with an alternative."

As originally envisioned, Katalys Group would allow certified Dynamics ERP consultants to retain ownership of their clients and share resources, but remain independent.

Dynamics ERP (including AX, GP, NAV and SL) partners have a unique customer-engagement relationship with Microsoft, which adds some complexity for the independent Dynamics consultant. When customers purchase their Dynamics ERP license from an authorized partner, the customer account is assigned to the partner of record. The partner of record can view the details of the customer's licenses, support calls and enhancement plan through a section of the Dynamics PartnerSource portal. Orders for add-on modules and enhancement plans are placed through the Microsoft Virtual Office Information Center (VOICE), with margins paid to the partner of record. This assigned relationship with customers means that Dynamics ERP consultants need to be associated with an ERP partner with an active Solution Provider Agreement (SPA) in order to have access to their customer's VOICE information.

Through Katalys Group, Parajos and Fineman provided a way for independent Dynamics consultants to combine their individual competency elements together to meet the competency requirements and to house their customers in a "safe" environment. While some partners will house independents' customers, they often take a slice of the margin on add-on and enhancement sales in exchange.

Parajos and Fineman found plenty of interest from the Dynamics partner community, and continued to build the organization with Microsoft's knowledge and blessing. "We were good for about two and a half years, keeping in constant contact with Microsoft. We were vetted through the legal department, ensuring that we were compliant with all partner requirements," Parajos says. "When the MPN requirements started to change, we were attracting smaller partners, not just independents. They could safely keep their clients under the Katalys Group umbrella and continue to do business as they were."

In March of this year, Microsoft contacted Parajos and Fineman, warning them the new SPA requires that 70 percent of services must be delivered to the customer by the partner of record. Because Katalys Group does not provide any services itself -- all are delivered by the independent members -- the company had a problem. Unless it could find a way to meet the 70 percent service requirement, Katalys Group was doomed.

Microsoft suggested two paths to Katalys Group. The first was the now-discarded franchise model (see the April 2011 cover story, "Golden Arches for the Dynamics Channel?") and the second was the Master VAR program (see "Master VARs," September 2011).

A Changing Relationship
In addition to testing requirements, Dynamics ERP and Dynamics CRM partners must meet a minimum Dynamics license sales number to meet SPA requirements. If a Dynamics partner does not meet SPA requirements, they will lose their authorization to resell Dynamics. For those partners who have focused on service delivery to an existing customer base or other partners, the MPN transition signals a fundamental change in their relationship with Microsoft.

New York-based Smith & Allen Consulting Inc., a Great Plains and now Dynamics GP partner for 20 years, employs eight, including one of the 12 worldwide Dynamics GP MVPs. In addition to its traditional practice, Smith & Allen employees maintain three active blogs with free training and support resources for the Dynamics GP community. Describing its focus, owner Belinda Allen says, "In the last five years we've been more of a consulting partner than a sales partner. We've been supporting other partners."

During this year's Convergence -- the annual Microsoft Dynamics partner and user conference, Allen faced a turning point in her relationship with Microsoft. At a pre-conference town hall meeting with Microsoft Dynamics execs, she was shocked by harsh responses to partner questions.

"It was a big moment for me that changed the game. I, and all the partners around me, felt like the Microsoft leadership team was blaming the partners, and particularly the small partners, for all that was wrong with the Microsoft Dynamics GP channel. It was more about finding someone to blame than 'how do we fix this.'" Allen continues, "It was heartbreaking. I was dumbfounded. That town hall meeting was the straw that broke the camel's back. From that moment, I knew I had to change my relationship with Microsoft. Even though we had only supported Dynamics GP in the past, we needed to pick up another product to protect ourselves."

Allen did not have an issue with the MPN requirements being increased. "We have the people that we need to meet the certification requirements -- that wasn't a problem for us," says Allen. "But a lot of small customers like working with small partners. Our customers call it white-glove treatment. Not that larger partners aren't good, but smaller companies often want to build that personal relationship."

Later at Convergence, Allen met Parajos and Fineman at a Katalys Group-sponsored dinner for partners and customers. Allen felt the same camaraderie as she remembers from the Great Plains Stampede partner events. "People were passionate about the product and passionate about how they could make the customer's business better," she says.

"It gave me hope that we could continue to prosper with Dynamics through Katalys Group," Allen adds. "I want Microsoft to make a lot of money on Dynamics GP. The more profitable Dynamics GP is, the better the product will be. The better the product is, the better off my customer is. And the better off my customer is, the better off I am. I want Microsoft to prosper, and I want to do what I can to help that."

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Why Not Master VAR?
As Parajos and Fineman evaluated their options, they wanted to ensure that the fundamental goal to provide a voice and platform for independent consultants and small partners remained at the core. The Master VAR program requirements of centralized customer ownership, singular corporate name and centralized operations didn't fit.

"We took the Master VAR program PowerPoint that Microsoft gave to us and spent the weekend talking about it," Parajos recalls. "As we looked at it, we thought, 'what if we flip the model so instead of the arrows pointing down from the top, the arrows point up from the bottom?' Instead of us purchasing the members, let the members purchase a piece of us."

On July 1, 2011, Katalys Group LLC was created as a limited partnership with each of the independent Dynamics practice members owning a share in the organization. While it's not an outright endorsement, Fineman says the Microsoft legal department has given its blessing to Katalys Group compliance with SPA requirements.

"We have been fully transparent with Microsoft. We've shared everything with them without reservation," Fineman says. "We want them to know that we're doing everything we can to meet their requirements and expectations."

That said, any understandings Katalys Group has with Microsoft might be tenuous. Asked for comment about the Katalys Group model, Jeff Edwards, director of Microsoft Dynamics Partner Strategy and the main architect of the Master VAR program, replied in an e-mail that didn't make it sound like he was a fan.

"The new Master VAR program is an official Microsoft program designed to provide a unique opportunity for Microsoft Dynamics partners to collaborate and grow. Microsoft intends to partner with Master VARs that are well-capitalized and have a proven track record of success and business growth," Edwards said. "Other, unofficial partner-created buying clubs that merely promise to aggregate license orders for the purpose of meeting minimum requirements are unlikely to provide the same opportunity or level of support and may well be in violation of the current partner agreement."

The Katalys Group Model
Currently, 45 partners have become owners under Katalys Group, paying a flat monthly fee to access the full range of services provided by Katalys Group. Based on conversations and verbal commitments, Fineman expects a significant uptick in numbers in response to the recent October MPN deadline.

Warren Pease, owner of Colorado Springs, Colo.-based Pease Consulting Group Inc., is another 20-year Great Plains/Dynamics GP veteran who is now a partner in Katalys Group LLC. "Katalys represents a way for me to continue on with the clients that I've been working with over the years without having to hire people to meet the new MPN requirements," Pease says. "And, there are the additional benefits of higher margins and a resource base to call on as needed."

With the current membership, Katalys Group is authorized to sell all of the Dynamics products, including AX, GP, NAV, SL, RMS and CRM. Achieving sales volume that garnered a spot on the 2011 President's Club list means that margins partners receive on product sales are comparable to the top VARs in the world. Katalys Group partners retain 100 percent of margin on all product sales, including add-on sales and the Microsoft and ISV enhancements.

While customers are assigned to the central Katalys Group PartnerSource VOICE account, Parajos and Fineman are the only ones who can view the full customer list. Partner members access their own customers' accounts through the Katalys Group partner portal.

Another significant benefit to partners is the centralized billing of customer's enhancement plans for both Microsoft and ISV applications. Most Dynamics customers use at least one, if not many ISV solutions on top of Dynamics ERP. An administrative thorn in every Dynamics partner's side is the cumbersome process of managing ISV enhancements, which are usually low dollar value but require just as much time to invoice the customer and pay the vendor. With Katalys Group centralizing that process, consultants can focus on service delivery instead of administration.

"It's a real benefit for Katalys Group to take the burden of handling the enhancement plans," Allen says. "They also help channel the information from Microsoft, so it's not so overwhelming. For us it's all about keeping our revenue center around Microsoft Dynamics GP, but we do appreciate the higher margins. While our relationship with Katalys Group is purely about being able to keep our business, the benefits are icing on the cake."

Katalys Group is adding members around the globe as well, as small partners abroad face the same challenges as United States-based partners. Robert Hyndman, owner of Wavesoft Business Solutions Ltd. in Auckland, New Zealand, was facing the financial and support issues of a one-person shop.

"I found Katalys Group and liked their model," he says. "I had a conversation with Mark and Gabe from a reassurance and Microsoft approval point and was extremely comfortable. Katalys Group supports the smaller partner by providing affordable access to critical Microsoft and business resources while keeping my company's brand intact."

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Amplifying the Voice of Small Partners
As a combined entity, Katalys Group members enjoy higher Microsoft support levels than they could likely afford on their own. Parajos and Fineman work hard to build mutually beneficial relationships with Microsoft field reps, ISVs and other partners.

"One of the benefits of working with Katalys Group is greater leverage with Microsoft," Pease says. "I can pick up the phone and talk to Mark or Gabe and explain a situation and Katalys Group as an entity is a larger player than I am on my own. I recently had an issue trying to place an order and with Katalys Group's leverage we were able to cut through some of the red tape."

As ISVs are finding, Katalys Group provides an avenue to reach independent consultants one to many instead of one to one. Parajos and Fineman vet the ISVs to determine which bring the most functionality, value and stability to share with the collective. Through webinar demos, Katalys Group partners can evaluate the ISV applications, saving them research time while insulating them from direct sales pressure.

Customer Communications and Reactions
When partners join Katalys Group, their customers must have full visibility into the arrangement. While the partner may keep their own name and brand, Katalys Group co-branding is included on service invoices and in marketing content. Customers must change the partner of record with Microsoft, requiring members to usher them through the process.

"Customers have responded well," Allen says. "I reached out to each of them individually and explained the change. It doesn't really affect them directly but may benefit them as Katalys Group expands services. We didn't lose any clients."

As a next step, Fineman plans to add client satisfaction and upselling services on behalf of the partners. Customers under the Katalys Group umbrella will receive phone calls to ensure they're receiving the care they expect and inform them about promotions on modules that will help their business. Discussions are in final stages with a preferred cloud vendor, giving their partners cloud deployment options and driving business to the cloud provider.

In terms of new client acquisition, partners believe that the Katalys Group size and partner status is a differentiator over other small partners, and a field leveler when competing with larger VARs. There's limited co-branded marketing support now, but Fineman has plans for significant expansion of resources available to partners.

Cliff Hay, owner of Pyramid Practice Services LLC, has been involved with Katalys Group from early in its evolution. Hay, previously the vice president of consulting for Microsoft Business Solutions and Great Plains, provides strategic advice to Katalys Group members. "Competing with the larger national VARs is difficult for smaller partners. Larger practices have the marketing strength to be able to say they have a depth of resources, thousands of customers and structured methodologies," Hay says. "So the primary issues for the small partner are with volume and with branding. The co-op branding approach, like Katalys Group, gives them a more impressive presence, especially for those clients that are concerned about the size of the VAR that they bring in."

Hay continues: "Right or wrong, some first-time customers associate size with longevity and ability. While I don't believe that has ever been the case, it's often the perception of the first-time customer. In this economy the cards are stacked against the small guys. Small independent partners offer individualized attention to customers. In my experience, smaller VARs handle their clients in a much more comprehensive fashion. They provide individualized services, customize their methodology to fit the customer needs and follow up more consistently."

Adding Value, Not Just Status Quo
The ultimate goal of Katalys Group is to provide its partners with more and better resources for customers than the individual consultant can provide on his own. Centralized job and project assistance postings provide a two-way street for consultants to share work and find the best resource for project needs.

"We're not here to just keep them going as they used to, but to elevate their services," Fineman says.

The connection to resources gives Katalys Group members a bench of experts that can support specific customer project requirements. As an affiliate service provider, S2 Technology -- with 17 consultants in 14 states -- helps partners meet staffing requirements for new and existing projects. "Katalys Group brings together a very collaborative relationship where all the partners understand the value other partners can provide," says Craig Maurer, S2 Technology's president. "It's not a competitive situation. Mark and Gabe have built an organization where everyone understands they're working together."

Maurer adds: "They have a great model; they have a great opportunity. Microsoft seems to be very supportive. Katalys Group gives a significant number of partners that were going to be in a very difficult situation an opportunity to do something that won't affect their brand or their company, and their life that they've been working on for the last 10 or 15 years."

Evolving The Partner Model
Parajos and Fineman didn't start out to serve partners wanting to survive Microsoft changes, but rather those who wanted to thrive and grow the business as they wanted it to be. "Selling the Microsoft software is a byproduct of the service focus of many small partners," Parajos says. "Mark and I have walked in their shoes, where we sold our practice to a larger partner. We didn't want others to be forced into the same situation. We wanted to give them an option."

The name Katalys Group has deep meaning, Fineman says. "In Greek, the term 'kata' means 'to overcome' and 'lysis' means 'finding a solution together.' Our strength in numbers helps our members enhance the way they operate with access to resources shared by the group."

Fineman sees a potential role as incubator for individuals and partners who can get started and grow their business under the Katalys Group umbrella, leaving when they're large enough to stand on their own.

"Don't mistake that we're here to keep everyone as they used to be," Fineman adds. "We are forward-thinking and want to elevate the professionalism of client services in the Dynamics channel."

Microsoft often refers to the partner channel as an ecosystem. Katalys Group is just one example of the creative adaptations the entrepreneurial channel is making to a changing Microsoft Dynamics partner environment.

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