At the Microsoft Worldwide Partner Conference in Boston in July 2006, Steve Ballmer told an expectant audience that he was not quite ready to share the company's SaaS strategy yet. All he would say was that SaaS was important to Microsoft and "We're working on it. Give us some time". Partners walked away knowing the company would definitely be involved in SaaS, but they weren't sure how. In Denver a year later, Ballmer introduced Software-plus-Services, Microsoft's strategy on SaaS. It essentially means the company will offer customers the best of all worlds: on-premise software, partner-hosted software and Microsoft-hosted software. Its partners walked away understanding more, but had fresh questions on what their future roles would be.
Which brings us to Houston, July 2008. In an effort to further clarify its sometimes misunderstood Software-plus-Services strategy, Microsoft announced the partner incentives on its directly hosted Business Productivity Online Suite, which includes online versions of Exchange Server, SharePoint Server and Office Communications Server. Microsoft plans to offer partners fees equal to 12 per cent of the first-year subscription value and 6 per cent of all subsequent subscription charges, provided that the originating partner remains involved with their client.
But, despite new Microsoft business division president Stephen Elop's excitement, the announcement was met with mixed reviews.
It appears that the main problem is not exactly in the new program itself, or in the specific numbers that the Company provided. Rather, many partners are slow to accept SaaS (or Software-plus-Services) as a dominant trend within the industry and the large changes it may bring. Partners are hesitant to accept this because of several perceived negative effects.
For one, many value-added resellers are fixated on top-line revenue and this program goes squarely against that. But over time, partners will probably come to realise that this type of model isn't so foreign. Insurance agents have relied on a percentage of customer premiums as their main source of revenue for many years, and have been able to survive and thrive.
Likewise, mobile phone dealers operating under a similar model sell wireless plans from mobile carriers; that is, they sell a service and receive a residual monthly fee, as opposed to selling a physical product with one-time revenue. Not only have these models stood the test of time, but also they have provided companies with consistent and predictable cash flow. But yes, it is a different model than what partners are used to today. And change is never easy.
Another key argument partners are making is that this will ultimately give Microsoft more control over their relationships with customers, possibly even eliminating them from the equation in some cases.
Although IDC has seen this situation occur with smaller vendors, Microsoft has a history of maintaining a strong partner network, and its new strategy should not change that.
Also, and not least, Microsoft has neither the people nor the resources to support and service the broad small- and medium-sized business market sufficiently, and this is a key target for its online services. Essentially, Microsoft's partner is still necessary, even if it doesn't resell.
Microsoft is not the only company implementing a fee structure in this mould, but it has received the most attention from doing so, due to the sheer number of partners its decisions will undoubtedly affect. Symantec, NetSuite, and Salesforce.com are just a few examples of companies with partner fees associated with their software-on-demand offerings.
Adoption of SaaS is and will continue to be a rapidly increasing trend for years to come. By 2011, software-on-demand revenue will have surpassed the $US14 billion ($15.4 billion) threshold. Although that figure will amount to only about 5 per cent of the software industry as a whole, revenue is growing rapidly, at a compound annual rate of about 32 per cent. And the impact of SaaS in terms of units - or seats - sold is even greater.
Rather than resisting the change, it would be beneficial for partners to buy into the SaaS trend sooner, rather than later, and reap the rewards when it starts to grow at an exponential rate. At an absolute minimum, now is the time for partners to be investigating what it can mean to their businesses.
But the big question for vendors remains, "How do we accelerate customers' acceptance of SaaS and the changes it brings?"
Chris Morris is director of services, IDC Asia/Pacific. Email comments to firstname.lastname@example.org
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