In-Depth

Office 365: Microsoft Partners Reset Their Plans Around Direct Billing

With the introduction of a mainstream partner billing option for Office 365, Microsoft overcame the biggest partner objection to its cloud productivity suite. Now happier partners are looking for ways to restart their efforts with new business-model options.

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Partner reaction to Microsoft's changes over the summer to its channel model for Office 365 was swift and positive.

"I'm very excited about the possibilities of being able to bill clients directly," said Matt Scherocman, president at Cincinnati, Ohio-based Interlink Cloud Advisors Inc., immediately after Microsoft announced the changes.

Scherocman articulated what thousands of partners seemed to be communicating with uproarious applause in a Microsoft Worldwide Partner Conference (WPC) arena in Toronto in July. It was then that Microsoft announced sweeping changes to partner compensation around the Office 365 cloud productivity suite.

Those changes (also detailed briefly in the August 2012 RCP cover package piece, "Microsoft Product Shakeup"), included the ability for any Microsoft partner to bill customers themselves for Office 365. By contrast, before the changes, the only way for breadth partners to engage in Office 365 sales occurred when the customer involved in the Office 365 transaction with Microsoft would designate a Partner of Record, who would then be eligible for Advisor Fees.

Now that the surprise has worn off, partners tell RCP that they remain enthusiastic about the new billing option. They're beginning to make plans for incorporating the changes into their business models and to figure out which of Microsoft's myriad routes to market for Office 365 they will emphasize for different customer types.

"Typically when we engage with a smaller client, we're wrapping a number of services together to provide a solution. This change allows us to put it all in one package."

Matt Scherocman, President, Interlink Cloud Advisors Inc.

Microsoft's New Deal
After years of arguing to partners in the Business Productivity Online Suite (BPOS) era -- and after the launch of Office 365 -- that partners didn't have the sophisticated systems to handle billing on Microsoft's behalf, or that they should be happy that Microsoft handles billing hassles for them, Microsoft in July finally provided the roadmap to partners being able to bill their customers.

Microsoft's main selling point now for allowing partner billing (as if it were needed), is that partners can bundle together different services, including their own and others, such as backup and recovery or an entire managed services package, and abstract the pricing of Microsoft's portion beneath a top-line revenue that allows partners to have better control over their margins.

Microsoft calls the approach Office 365 Open License. Asked when the Office 365 Open License option would be available, a Microsoft spokesperson would only say "before 2013." Some partners say they've been told to expect the offering in Microsoft's third quarter.

Although Microsoft channel chief Jon Roskill acknowledged that partners have been pushing hard for something like the Office 365 Open License option for years, Microsoft's Kirk Gregersen provided the Microsoft-centric view of why Redmond changed the licensing now.

"What we wanted to optimize for first is from a customer perspective, we wanted to ensure that they had a simple experience out of the box. Let's go simple, a little more direct, and the advisor model made sense," said Gregersen, a general manager in the Microsoft Office Division. "Now the market is maturing and we wanted to spend the time to get this model right. These guys' business is delivering our software and now our services. We wanted to take the time to get it right. That's basically why we're doing this now."

Top executives clearly are looking for more momentum around Office 365 from partners, too. One of the first things CEO Steve Ballmer told partners at WPC was, "We're growing the number of partners selling Microsoft cloud solutions 10 percent per month. We're adding almost 1,000 new partners in the cloud every month."

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Later in the week, Chief Operating Officer Kevin Turner followed that up, saying that Office 365 revenues increased more than 100 percent in the last fiscal year, and the revenue increase target was higher for Microsoft's FY 2013. "We need every single one of you with us all the time in the cloud. Office 365 is our collective future," Turner said. Then he upped Ballmer's ante on partners joining Microsoft in the cloud per month: "I don't want a thousand a month. I want 10,000. I want 30,000. I want 50,000 partners a month coming to the cloud."

Partner Plans for Office 365 Open
Some partners who had been sitting on the Office 365 fence are committing already. Joe Moore, director of system integration for Detroit-based Center for Computer Resources (CCR), attended WPC and liked what he heard.

"We previously avoided [Office 365] because the client was forced to work with yet another vendor, Microsoft, when they had hired us as their IT department," Moore said. "I think that Office 365 Open gives us another powerful option we can offer to our clients who are migrating to the cloud. This gives CCR another tool in our arsenal."

Microsoft partners that are already selling Office 365 aggressively are also looking for ways to expand the business through the new licensing model. CDW, the huge direct market reseller based in Vernon Hills, Ill., has been one of the largest volume sellers of Office 365 since the BPOS days.

Jay Ritchie, solutions manager for Cloud SaaS at CDW, said Office 365 Open License gives CDW another way to play the trusted advisor role. "The benefits of moving to the cloud with Office 365 have been great. This allows us to start that conversation," Ritchie said. In addition to meeting the needs of different kinds of customers, the new licensing model will have internal benefits for partners. "The ability to purchase Office 365 Open, I think that opens a lot of potential in the partner channel in terms of aligning with existing sales motions," Ritchie said.

Internally at CDW, having the top-line revenue through Office 365 Open License will be important, too. "Given how we're structured, the top-line revenue is going to be a tremendous benefit to our organization," Ritchie added. "One of the pain points with the Advisor [Fee] model is the lack of top-line revenue." By providing better visibility into top-line revenue, it should help managers at CDW quantify the value of the business CDW is doing on the Office 365 side and help justify investments that can accelerate growth in the future, he said.

Scherocman, who was most recently a Microsoft Partner Account Manager for large account resellers before leaving to start born-in-the-cloud Interlink, expects to branch out with Office 365 Open License.

"Typically, when we engage with a smaller client, we're wrapping a number of services together to provide a solution. This change allows us to put it all in one package and give the customer the support levels that they require in a custom fashion," Scherocman said. While Scherocman wasn't expecting the change, and built Interlink's business model on services surrounding Office 365 rather than any Microsoft margins, he's moving to take advantage of the opportunity.

"With the Office 365 Open program, we're able to preinstall within our Metanga product catalog all the Office 365 SKUs -- products and prices. It becomes very easy for our [Microsoft partner] customers to do mash-ups as a service. They can include things such as Office 365 and bundle that together with their own services," said Curt Raffi, director of marketing for MetraTech. "It becomes very easy for them to handle billing and monetization because the tool comes preinstalled."

Scoring a Bigger Advisor Fee
The Open License option wasn't the only change to Office 365 partner sales models unveiled at the WPC. There were also major changes in Partner of Record fees for partners interested in continuing with the Advisor Fee model.

Effective already, partners who sell Office 365 seats see a change from the old 18 percent advisor fee (12 percent for the sale and 6 percent renewal fee each year for 18 percent in the first year). Now the percentage is slightly lower (16 percent total) for partners who sell fewer than 150 seats across all customers. But for partners who sell 150 seats or more the combined percentage is 20 percent, for 500 seats or more the combined percentage is 22 percent, and for 2,500 seats or more the combined percentage is 23 percent. The total seat count across customers and the incentives apply retroactively to all seats.

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Both Scherocman and Ritchie anticipated continuing to sell under the Advisor Fee model as well, even after the Open License option becomes available.

"I have every expectation that they will still leave the Partner of Record option on the portal open. So, I still see using that business model occasionally when I am only facilitating the migration to the cloud. It seems like the best of both worlds to me," Scherocman said.

CDW's Ritchie sees broad appeal for the Advisor Fee changes, too. "Anything that increases the profitability of selling the solution is going to be well received by partners. Rewarding the partners that have placed bets is a smart move. Certainly, when you see payouts getting as rich as 23 percent when you hit the top tier, that sets a very clear goal for some partners," Ritchie said.

In fact, the Office 365 Open License and the Advisor Fee are only two of many licensing models Microsoft offers to sell its cloud bundle. Others include the Service Provider License Agreement, syndication partner licensing, Enterprise Agreements, a government option and an education option. "We now have the broadest array of cloud business models of anyone in the business," Roskill said beneath a WPC slide showing all those options. "However you set your business up, we have a cloud business model that will align perfectly with what you're trying to do."

Those other options, especially the syndication model that has allowed strategic vendors with value-added, broad-market services to resell Office 365 for about a year, continue.

The period between now and the launch of the Open License will give some of those partners -- such as Intermedia, a cloud services partner headquartered in Mountain View, Calif., which has increased its reseller network partly by positioning itself against Microsoft's direct billing of customers -- some time to calibrate their offerings and messaging.

Meanwhile, Microsoft notched another major telco partner under its strategic alliance approach last month when Verizon Wireless began offering Microsoft Office 365 to its small business customers.

All the activity around Office 365 is occurring for one reason: Interest in cloud among customers is getting more and more intense.

According to Interlink's Scherocman, the demand is coming from the executive suite -- and not necessarily from Microsoft Office 365 advertising, but from higher up. "I wouldn't say it's 365 excitement. I would say it's my boss. The CEO or CFO said, 'Hey I got this Fortune Inc., Businessweek article about the cloud. Why aren't we considering this?' I've got to look at this cloud stuff. It's a question of what does Microsoft have to offer, rather than people asking about Office 365," he said.

Ritchie also said the majority of business coming in is from customers raising their hands. There's been a change in the content of conversations CDW is having.

"Twelve to 24 months ago, they were trying to understand the cloud in general. We just spent a lot of time on education. A lot of it was put in the bucket of information-gathering -- the customer wasn't willing to commit to a timeline or indicate if they had a budget for a period of time," Ritchie said. "Now, they want to move to the cloud, they have a timeline and a budget. It's due diligence. They've definitely been coalescing into concrete plans."

With that kind of customer demand, having an Office 365 practice is important for nearly every Microsoft partner. Fortunately, Microsoft is in the process of making it a whole lot easier to do business with it for almost any kind of partner.

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