Microsoft Dynamics VARs hope for best, brace for less

Microsoft Partner Network changes mean fatter margins for Dynamics ERP VARs. Maybe.

Theoretically, Microsoft Dynamics ERP partners should be able to earn higher margins on ERP sales and maintenance under the new Microsoft Partner Network program. Realistically, many fear that won't be the case.

The new Microsoft partner program officially launched Nov. 1 and some Microsoft partners worry that while they possibly could earn higher margins selling and supporting Microsoft Dynamics GP, NAV, AX or SL ERP products, it is more likely that their margins will shrink because of new program requirements.

"The real deal is, if you don't grow fast enough, you will lose margin and you will get killed," said one Northeastern Microsoft Dynamics partner who requested anonymity. Currently, the top margin a Dynamics ERP VAR can get is about 52%. Going forward, 60% is possible if the VAR adds enough "net new" ERP accounts annually, maintains a high percentage of renewals, and, as this VAR said, "the stars are aligned."

To get to 60% -- a margin that "classic" Microsoft VARs can only dream of -- Dynamics VARs will also have to do $1 million in gross ERP business per year, the VAR said. "If you grow customer adds, you get an additional five points atop the 45 points you start at," he said.

An additional five points of margin will flow to VARs that match overall ERP growth -- as measured by third parties like IDC and Gartner -- in the first year, and another five points if they carry that growth into the next year.

Microsoft wants Dynamics partners to specialize, to do larger deals and hit higher volume numbers, said Ray Wang, analyst with the Altimeter Group. To get there, "these partners will need 35 to 50 delivery professionals so Microsoft is rewarding the larger partners and also asking the smaller partners to get specialized," Wang said.

But, fielding that many trained people is expensive and midsized partners are "extremely concerned that they won't be able to make those targets," Wang said.

Jeff Edwards, director of partner strategy for Microsoft Business Solutions (MBS, aka Dynamics), would not confirm specific revenue or margin numbers, but said it is fair to say that VARs can reach higher margin levels than before but will have to do more than in the past. They also have until January 2012 to adapt to the new requirements, he said.

Goal: Stronger but fewer Microsoft ERP partners

Many Gold Microsoft Dynamics VARs, and many Gold Microsoft VARs in general, have long complained that Microsoft let the "Gold" certification lose its luster—that there were too many Gold partners that did not add value. These VARs pressured Microsoft to burnish the brand and make it mean more in the field.

At the same time, Microsoft realized that while Oracle and SAP field a limited number of strong ERP VARs in the field, Microsoft ERP VARs tended to be smaller, serviced smaller companies and lacked clout. The goal of an effort known internally as Project Tabasco was to build a small cadre of stronger, ERP VARs to combat SAP and Oracle in the upper midmarket.

"We'll have to have more certified people to get to Gold -- and that is an investment," said Tommy Madsen, CEO of ArcherPoint, a Microsoft NAV partner in Norcross, Ga. "But, for us growing our business, it helps distinguish ourselves. In the past, there were too many Gold partners that were not unique."

Measuring ERP VARs against the market

For Dynamics ERP VARs, Microsoft will also set a bar based on overall ERP market growth -- partners must surpass that level to earn more margin points. "We'll set the goal at market growth plus, based on IDC and Gartner and add a specific number of points above that line," Microsoft's Edwards said.

Microsoft also decoupled net new license sales from maintenance and will measure those categories separately to determine partner margins, Edwards said.

"In the past, you were able to total all license and maintenance together to derive overall margin. We recognize that new customers and new sales require a different investment level so we're separating that out."

"We're incenting partners both to add customers and to retain customers, but we're measuring that separately," Edwards said.

He also confirmed that Microsoft will measure partners on year-over-year license sales growth with special attention to attaining two sequential years of growth, as well as "revenue recapture" as determined by the percentage of contracts coming up for renewal that the partner actually renews.

The higher the renewal percentage, the higher the margin.

Dynamics partners keep a piece of maintenance

But VAR participation in software renewals and maintenance is not a given. For example, Oracle Corp. cuts its partners out of maintenance and renewal funding after the first year of the contract.

On the flipside, to attain the higher "Gold" advanced level within the program, partners will have to train more people than in the past -- and that costs money and lost billable hours. For Dynamics, they'll need six people trained and certified. And one person cannot do double duty on more than one Gold certification. If the VAR wants a certification in ERP and infrastructure, two people must be trained, whereas in the past one person could have done both. Edwards said the higher number makes sense given the skill set customers expect in ERP.

Dynamics partners understand that their value depends on deep skill sets and customer service. What they don't necessarily love is the higher investment required of them in training to achieve both their Gold status and higher margins.

Edwards said that, generally speaking, Microsoft hopes to promote a smaller number of strong ERP partners. "If we did nothing, the channel is consolidating," he said.

The goal is to promote a cadre of high value-add partners and perhaps filter out those that are less value-oriented.

Compared to the broad population of Microsoft VARs that numbers in the hundreds of thousands worldwide, MBS Dynamics partners are truly a small subset: Edwards estimates there are about 1,000 "active" MBS Dynamics ERP partners in North America.

Another nagging concern that remains unspoken by most MBS VARs is that Microsoft Dynamics ERP is not a priority at a company obsessed with building Azure cloud services, a strong game and phone franchise, and protecting cash cows like Office and Windows.

"From what I see, Microsoft is cutting its marketing budget and investment in Dynamics while also asking us to increase our investment in it," said one long-time partner.

At the same time, Kirill Tatarinov, the corporate vice president of MBS, used to report into Stephen Elop, the vice president of the Microsoft Business Division. When Elop left the company, Tatarinov was made a direct report to Microsoft CEO Steve Ballmer. That puts MBS one step closer to the top of the heap.

Let us know what you think about the story; email Barbara Darrow, Senior News Director at bdarrow@techtarget.com, or follow us on twitter.

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