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Direct, Indirect or Referral: What Microsoft CSP Flavor Works for You?

Microsoft partners must answer some hard questions to determine which of Microsoft's CSP offerings fits their model best.

Microsoft has been driving hard on its relatively new Cloud Solution Provider (CSP) program. From Redmond's point of view, it solves several weakness areas for the company. The biggest is that end-user customers want to have a relationship with their providers, and Microsoft knows that it cannot reach down to have relationships with every single customer. Microsoft also knows that technical issues can come from any link in the chain. Frequently, problems that are blamed on Office 365 might actually be on the network, on the PC or on the end user's lack of knowledge.

For years, Microsoft has claimed that more than 90 percent of its revenue comes through partners. Selling direct with Office 365 bucked that tradition and meant that Microsoft has had to try hard to scale its customer support and billing organizations. However, the experience for customers has been terrible -- my team spent more than two hours to get a $50 bill paid for a customer recently. The customer was finally forced to wire a payment even though they pay Microsoft hundreds of dollars monthly on their credit card. Even if Microsoft invested in this support, it still couldn't build the relationships that partners can.

Now, Microsoft claims CSP fixes all these issues. The partner will own the front-line support and billing for the client. Many partners have been requesting this exact scenario for their clients. They want to own the client data, and they're fearful of Microsoft disintermediating them from their clients. However, the question still needs to be asked at the partner level: Is this good for our business? Will this be a profitable business for us? Would we still deem it profitable after adding in all the additional labor hours?

The CSP program comes in three flavors -- Direct, Indirect and Referral.

Direct: This program is where Microsoft will resell the CSP SKUs directly to the partner. The expectation is that the partner is already large enough to effectively handle these additional workloads for the client. Expectations for margin here are about 20 percent, plus back-end rebates and incentives that Microsoft is offering to jump-start this program. Partners need to be serious about being in the CSP business to play here -- support has to be 24x7 and billing processes need to be mature enough to deal with Microsoft. Because the program is changing rapidly, partners will also need to be blessed with plenty of patience because the back end of Microsoft has never been labeled as "easy to do business with."

Indirect: This is the distribution-sponsored program where the distributor takes on the first-line support responsibility, the partner will be invoiced by the distributor and then is responsible for invoicing the client. Expectations for margin here are around 9 percent plus back-end rebates and incentives that Microsoft is kicking in for this program. A 50-person company, purchasing the Business Premium SKU at $15 per month, would yield about $67.50 for the partner. Partners need to look at their own cost models to determine if there's enough profit here to cover their time working with the client, taking care of billing issues, doing the actual invoicing, buying from the distributor and chasing accounts receivable. Microsoft tells partners that they should bundle their own managed services around these offerings and, therefore, could spread the operations cost of billing across the additional revenue that CSP is generating.

Referral: This is a relatively new offering in the distributor community. I've only seen Ingram Micro offer a program like this so far. Basically, the distributor will take the first-line call and handle the billing direct to the client. The margin is smaller at about 7 percent, but the headache of invoicing the client and chasing the AR is pushed out to the distributor. That margin is also more than twice the 3 percent margin of Microsoft's classic Advisor model for partners selling Office 365. I think this could be an attractive model for many partners.

Partners will have some hard choices to make -- should they exit the resale game and focus on services? Can they bundle their managed services offerings and the Microsoft CSP SKUs and truly create a bundle that's attractive to the client -- so much so that the client will pay more for Office 365 sourced from them? Or will the referral or advisor models be the best fit to focus on services and take a little cash back from the sale? What's the best fit for your model?

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About the Author

M.S. Partner is a pseudonym for a former Microsoft U.S. field rep who returned to the channel and writes this column to help other partners succeed with Microsoft. Let M.S. Partner know your thoughts and questions about how Microsoft works at mspartner@rcpmag.com.