Microsoft's partner problem: Too many partners chasing too few deals

Many partners, the highest-tier Gold partners in particular, say there are too many Microsoft partners chasing too little business. That oversupply causes channel conflict.

Microsoft's annual partner conference is still months away, but Microsoft partners are already queuing up questions and concerns they want to raise at the July event.

First and foremost is the notion of oversupply: Many partners, the highest-tier Gold Certified partners in particular, feel there are simply too many Microsoft partners chasing too little business. That oversupply causes channel conflict as partners compete with each other for deals, cutting prices to win and thus accelerating margin erosion.

"There is no value in Gold anymore," said one New England Microsoft Gold partner who may not re-up for the program next time around.

An East Coast Gold partner agreed: "There's a Gold on every corner and customers don't know what Gold means," he noted. "Microsoft has to do a better job marketing the value of Gold to customers and to partners themselves."

Partner complaints about Microsoft's volume-oriented, low-margin software sales approach and reports of channel conflict among Microsoft partners are not new. But the current economic slowdown has exacerbated both trends, partners say.

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Most of the partners who talked to gave Microsoft an "A" for effort, but maintained that the company's volume approach undercuts their own livelihoods. Several Microsoft Business Solutions (MBS) partners said they are looking at alternative vendors for the first time. MBS is the Microsoft financial software unit that concentrates on accounting, enterprise resource planning (ERP) and customer relationship management (CRM) software.

"Wouldn't it be interesting if SAP is outmarketing and outsmarting Microsoft in channel know-how?" said one MBS partner, who referenced SAP's new referral fee for influencers.

"Microsoft is trying to figure this out. Their markets are flat, some of this is economy-driven," said a Midwestern partner. "There's more competition and a lot of choices in the midmarket [for business applications], but overdistributing your stuff and having too many VARs becoming price-competitive on your own platform is stupid. A true VAR should differentiate on the depth and breadth of their own solution."

The problem is, Microsoft tries to keep a level playing field for partners and "treat them all the same when that is not the case," he added.

"For past three years, there has been growing sentiment among partners of 'What's in it for us, we're tripping over each other,'" said another East Coast partner. "There's something like 300,000 Microsoft partners. That's a big number,"

In fact, worldwide Microsoft had 394,000 Gold Certified, Certified and Registered partners last year, down slightly from 396,000 in 2006. In the U.S. the total was 129,000 partners in all three tiers, down slightly from 130,000 in 2006, according to a spokeswoman.

There were 3,000 top-tier Gold partners in the U.S. last year, basically flat from 2006. Worldwide, the Gold population grew from 11,000 to 13,000.

Is channel conflict inevitable for Microsoft partners?

The perception among longtime partners is that Microsoft thinks adding more partners is the way to sell more software, even at a time when existing partners can barely get by.

Most of the partners who talked to requested anonymity. Many credited Microsoft's channel leadership for making a good-faith effort for partners, but said CEO Steve Ballmer's volume sales focus typically trumps channel-friendly forces. And they worry that the Software as a Service (SaaS) push -- which is at the center of Microsoft's anti-Google strategy -- will make things worse. For many in the channel, SaaS equals disintermediation, because the vendor, not the partner, controls the account.

Michael McCarthy, CEO of Dallas-based ePartners Inc., said Microsoft is navigating this maze but that the onus is on partners to prove their value, with help from Microsoft. "We focus on a couple of key verticals with core Dynamics and the Information Worker overlay that lets us drive SharePoint services," he noted. ePartners sells quite a bit of its own application software expertise atop the Microsoft stack.

"Microsoft is trying very hard to understand, but it's hard to move a supertanker in the middle of Boston harbor," McCarthy said.

More partners are scrapping for fewer and smaller deals as customers watch their IT spending. "Customers say they want value add but end up beating up partners on price till they get the best deal," the East Coast partner said.

Microsoft's relatively recent push into business and financial applications -- which take longer to sell and have demanded higher margins than volume-oriented products like Office and Windows -- has spread the angst to those partners. They continue to worry that Microsoft will open up distribution of its ERP software just as it did with CRM a few years ago. Microsoft has said it will not do so.

MBS partners in particular say business has been slow. Microsoft said that for its second quarter, MBS business grew 26% year over year and that it's now a $1 billion business. Microsoft has not reported on its profitability or lack thereof.

Microsoft partners across the spectrum -- with MBS, infrastructure, information worker or other competencies -- said the company needs to better differentiate its top-tier Gold partners. Many said the company should revisit the notion of a higher-level "Platinum" tier -- something Microsoft has resisted in the past. Partners said Microsoft has discussed this issue with them and is working on ways to better showcase its highest-level and most committed solution provider partners.

"Microsoft will try to revamp the partner program to make it more elitist so that if you, as a partner, are really betting your business on Microsoft, it'll pay off," said a New York-area solution provider. "Microsoft knows that 80% of its stuff goes through 20% of its partners."

"Microsoft has to do a better job marketing the value of Gold to customers and to partners themselves," said one longtime East Coast Gold partner. "Right now there's a Gold on every corner, and people outside the business -- customers -- don't know what that means."

What worsened the problem was Microsoft's decision, when it launched its latest partner program nearly five years ago, to make it easy for legacy Gold partners to retain their status. Many were "grandfathered" into the new program.

"What's happened is, for a number of reasons, it became more obvious how to get in [and stay in] the program. There was a checklist, the process had less subjectivity and was more systematic. Now it's not special to be Gold anymore," said Darren Bibby, program manager of software channels research for Framingham, Mass.-based researcher IDC.

Bibby added that the "too many partners" complaint dogs all channel programs and that Microsoft serves partners pretty well overall. "IBM does some good stuff for its software partners, but no other company has the partner resources and spirit that Microsoft does," he said. His big caveat: "That may change with SaaS."

Partners hope to hear more about how Microsoft will ease partner concerns at the July Worldwide Partner Conference in Houston. Many said the company will revive its "One Microsoft" message, whereby it will feed all partner interaction through the partner portal and present one face to the channel across competencies. Partners who deal with both enterprise and SMB accounts complained about having to deal with two different organizations within Microsoft.

"If Microsoft can improve communication and collaboration with its partner community, it'll go a long way to shore up relationships," said Ken Winell, president of ExpertCollab, a Florham Park, N.J., partner.

But partners said they have to keep their eyes open and continually evaluate new offerings and new vendors.

Winell said he sees Google apps as a "nice easy way to set up collaboration that doesn't require Office," but it is a direct move. "If Microsoft comes up with a Live Workspace ecosystem for partners, that could be a breakthrough," he added.

Microsoft's unified communications (UC) push is another foray that partners eye nervously. The type of partners with data and voice plumbing expertise are used to certain margins and they view Microsoft's incursion warily.

Microsoft's argument has been that partners can survive its thin product margins by selling more lucrative services. That may be the case in some instances, but most reseller partners, even in the classic Microsoft world of Office and Windows, still rely on product sales to fuel growth.

Gia McNutt, CEO of SOS, a longtime Cisco partner, is aware of Microsoft's UC intentions but said the vendor will have a hard time winning over partners used to making higher margins. She said Microsoft VARs "can't even make a 2% margin and beat online pricing."

"Microsoft seems to think it's all about the services -- that is false. Product is a big part of the pie," McNutt said. She added that many Cisco partners dabble in Microsoft but make 20% to 30% margins on Cisco product sales. senior news writer Rivka Gewirtz Little contributed to this report.

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