Microsoft solution providers question SaaS margins

Microsoft business application providers are demanding more information on pricing and margins for the upcoming "software plus services" Software as a Service (SaaS) plan.

The plan Microsoft Corp. has been slowly developing to offer Software as a Service that can be resold by its solutions providers will likely come into sharper focus at the company's annual Microsoft Worldwide Partner Conference in Denver, Colo. this week.

Microsoft has been developing its SaaS plan under the Live tag since at least 2005, gradually adding customer resource management (CRM), enterprise resource planning (ERP) and other functions to the free mail, instant messaging and other services it offers through the Microsoft Live online set of services.

Microsoft describes its take on SaaS as "software plus service," an approach that relies on Microsoft business applications that are available across the Internet, mated with Microsoft desktop applications from the Office suite, which become the user interface to the services.

So far a handful of Microsoft partners host or manage its CRM, as well as its ERP applications, for customers. With the imminent debut of the next-release of Microsoft's CRM product, code-named "Titan." Microsoft will also host CRM itself.

What is Microsoft Software as a Service (SaaS)?
Microsoft describes its take on SaaS as "software plus service," an approach that relies on Microsoft business applications that are available across the Internet, mated with Microsoft desktop applications from the Office suite, which become the user interface to the services.

The company's business solutions group has promised customers could start trying bits of its hosted CRM in the third quarter, with general availability slated by year's end.

So, the time is ripe for disclosure around pricing, packaging and other details that will cause Microsoft solution providers to dip their toes into the hosting market, partner with existing hosting partners or forego the whole SaaS craze.

One New York-based Microsoft Business Solutions (MBS) partner en route to the Denver show said his company gets some questions from customers about hosted CRM but that Microsoft CRM is so easy for customers to host internally he wasn't sure of the benefit. In fact, he added, hosted CRM adds complexity for many accounts because of Outlook mail synchronization issues it poses.

At Titan's public debut at Convergence 2007 in March, general manager Brad Wilson said the first early-adopter customers would go live on hosted CRM in the third quarter, and the software and service would be available by year's end. Select partners have been checking out the code since early this year.

Thus, the Microsoft Worldwide Partner Conference this week is the perfect venue to announce execution of those plans -- or a delay -- although MBS partners said the product is on schedule.

CRM, more than any other product on the company's docket, illustrates its "software plus services" plan. The core code for Microsoft-hosted, partner-hosted and hosted-on-premises software is the same and is a test case for chief software architect Ray Ozzie's game plan.

Ozzie -- and Microsoft -- is betting business that not all customers want critical business applications to run in the cloud. But for those who do, it will offer that option either itself or via hosting partners.

Microsoft partner or competitor?

The fact that Microsoft itself plans to offer services from the cloud -- both applications such as CRM and services such as storage -- is a huge concern to several smaller hosting partners who pioneered this business model and now worry that Microsoft will bigfoot them out of it.

Navisite, SMBLive and other Microsoft partners on the infrastructure side already offer hosted Exchange Server and SharePoint. These partners, quite understandably, are watching every move Microsoft makes very closely.

Microsoft execs up to and including Ozzie have said there will be room in this mix for partners, but so far there has been no detail on partner pricing or margins on the new Microsoft-hosted CRM option.

Several MBS partners said that details on pricing and margins are the one piece of news they most want to get out of the show this week.

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On the plus side, several MBS partners including Infinity Info Systems, a New York City-based CRM specialist, said since CRM 3.0 debuted in late 2005, interest in the Microsoft offering has boomed.

Still the CRM offering exemplifies both Microsoft's doggedness in pursuit of new markets and missteps made along the way.

Partners last month said that the vendor underpaid them on margins of CRM sales. Such margins on license sales are now deferred till after the implementation so cash-strapped value-added resellers (VARs) already irked by that plan are now angry at the underpayment and also the lack of detail provided about it.

One partner, who got a "five-figure" check from Microsoft last month to cover the underpayment, said he still has not gotten a straight answer about how Microsoft calculated the margin at all. "There is no transparency," he griped.

"It's hard enough to compete as it is, but then to have to chase the money? And they still can't explain how they came up with the figure. Did they pay me interest on that money?"

This partner said that Microsoft's claim that boosted sales volumes would make up for margin cuts MBS partners took when it shook up its distribution strategy may or may not be true. It's just too hard to tell based on what the company is paying out in margin.

With Microsoft now promising to host CRM another margin threat looms. Salesforce.com and NetSuite, the established SaaS leaders in the field, typically list their services at over $100 per user per month, although discounts apply.

Microsoft built a margin into its partner-hosted CRM model with CRM 3.0, but partners expect Microsoft's pricing to be aggressive to spark volume buys as it takes the service to market.

The good news is that the launch and discounts will spark business -- at least for Microsoft.

The bad news is that even if Microsoft cuts partners in on the sale of its own hosted CRM implementations, chances are per-user monthly price will be significantly lower than $100 and even a 30% or 40% margin on that doesn't amount to much.

Recently a Sage Software partner said ERP, accounting and CRM partners had better get used to shrinking margins, because there's not much to be done about them.

"Look. Microsoft will drive margins down with its volume message, but they're going to go that way anyway, so you've got to come up with additional value to sell," he said.

The whole notion of value gets to another big thread of this year's show. Many Microsoft partners and some insiders think that the highest-level Gold Certified designation has taken a hit and want to beef it up.

According to Microsoft's latest tally, 3,000 of the 140,000 enrolled U.S. partners have Gold designations. The worldwide figure is 10,000 Golds out of 400,000 total enrolled partners.

Many partners still see the Gold "cert" as a checklist item that reassures customers but said it doesn't really bring in business other than that.

"We rarely see an advantage to it, we don't get a lot of leads from it and the managed partner program doesn't significantly change what we do or how we do it," said Howard Diamond, CEO of ePartners, a large Dallas, Tex.-based Microsoft Gold and MBS partner.

Does that mean he'd forgo the designation? "It doesn't matter. It's not a big deal to stay in it, not a big deal to leave it."

About the author: Barbara Darrow, one of the leading reporters covering Microsoft and the channel, is a regular blogger for SearchITChannel.com.

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