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Post-Master VAR, Microsoft Cracks Down on Alternative Approach

UPDATED with new interview with Katalys Group Co-CEO Gabe Parajos.

With its first two Master VARs named, Microsoft is cracking down on a so-called buying group that sprung up in response to the recent changes for Microsoft partners focused on the business application/Dynamics side of Microsoft's product portfolio.

In announcing on Oct. 24 that SBS Group and Socius1 LLC would be the first two of three eventual Master VARs in a blog post on the PartnerSource portal for Microsoft Dynamics partners, Microsoft warned it would take action against unsanctioned buying groups. "The Master VAR program is the only Microsoft authorized channel collaboration model in the U.S. Any group of SPA [Solution Provider Agreement] providers who are not Affiliates (including buying clubs and similar structures) who are operating together in violation of the SPA run the risk of losing the right to provide Microsoft Dynamics ERP software and services to end-customers."

The next day, the best known of those other structures, the Katalys Group, received a notice from Microsoft that it was being audited.

"As of 10/25/2011 we have received an email titled Notice of Audit of Solution Provider, and as such have been asked to remove any references that Katalys is authorized and sanctioned by Microsoft," wrote Katalys Group Co-CEO Gabe Parajos in a comment at the bottom of this Redmond Channel Partner magazine article from the Nov. 1 issue about Katalys Group and its approach.

"Over the years, we have been very transparent with Microsoft and made sure that they are aware of our company and business model. Prior to this article the words 'bulletproof' were verbally used to describe our Compliance by the ERP Director at Microsoft," Parajos wrote. "We strongly believe that we will pass the audit and will work very closely with Microsoft to make any changes, if necessary, in order to remain in compliance with the SPA."

While Microsoft's audit against Katalys Group reverses Parajos' and Co-CEO Mark Fineman's understanding of Microsoft's legal position, it was clear in mid-October as the Katalys Group article went to the printer that the group's approach faced challenges from other powers within Microsoft.

Contacted by RCP for that article, Jeff Edwards, director of Microsoft Dynamics Partner Strategy and the main architect of the Master VAR program, declined to endorse the Katalys Group approach.

"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 in an e-mail response that ran in the article. "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."

Although Microsoft's notice calls into question Katalys Group's ability to serve the scores of partners that have signed on to its cooperative, Parajos is optimistic that the group will pass the audit.

"We believe that we're in full compliance. We don't anticipate the audit to show anything. But if they find something in an interpretation that we interpreted differently than they did, all I want is the opportunity to correct what we're doing. Let me get it back into compliance," Parajos said in an interview Wednesday.

"We're out to prove we're not a buying club. We have all the services in place to basically enhance and augment all of our partners," he said.

Katalys Group was created as a limited partnership on July 1, 2011, with independent Dynamics practice members owning a share in the organization. As of mid-October, the group had 45 partners/owners, and was expecting an uptick in numbers as some MPN grandfathering clauses expired.

Parajos and Fineman said they had considered applying for Master VAR status but had attempted instead to create a bottom-up approach, rather than the top-down model of the Master VAR program.

Microsoft defines the Master VAR program as an opportunity for smaller Dynamics partners to align with a well-capitalized, growth-oriented Microsoft Dynamics partner that has been selected by Microsoft as a Master VAR. The effort coincides with controversial changes on the Dynamics side of the Microsoft Partner Network to focus more attention on large, fast-growing partners, both by making program requirements more stringent and by steering Microsoft resources toward the larger partners.

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About the Author

Scott Bekker is editor in chief of Redmond Channel Partner magazine.