Turner: Microsoft Partners Must Adapt To Software As A Service

The Wild West is a recurring motif at Microsoft's Worldwide Partner Conference (WPC) in Denver, where buffalo images, cowboy hats and mechanical horses dot the show floor and Microsoft channel chief Allison Watson rode on horseback across the plains (in a pretaped video) to arrive at her opening keynote. It's an apt metaphor for the new frontier Microsoft hopes to lead its partners across: the changing landscape of the business software market.

With on-demand, hosted applications vendors aggressively building market share in the consumer, small and midsize business markets, Microsoft shifted course several years ago and began developing a hybrid "software plus services" strategy to respond to the SaaS (software as a service) threat. But partners have grumbled that the strategy is murky -- before WPC, a number said they felt Microsoft hadn't been clear about its respoonse to the software as a service movement.

That fog was intentional, Microsoft COO Kevin Turner told WPC attendees in his closing keynote.

"A year ago we launched and started talking about software plus services. We didn't give a lot of details to you. I got people that wondered if we just held our cards close to the vest and didn't share it. I'm standing up here today to tell you, the reason we didn't share that much with you is we didn't have it figured out," Turner said. "We're still figuring it out. Next year we'll be smarter about it than we are this year, and this year we're smarter about it than we were last year."

The message is still evolving, but several partners said WPC has finally helped clarify Microsoft's strategy and tactics. In numerous presentations at the show and in a white paper published this week on "Microsoft Software + Services Partner Opportunity," Microsoft has begun laying down a blueprint for its strategy, which involves eventually adapting all of its software to work in three different delivery models: traditional on-premise deployment, partner hosted, and hosted directly by Microsoft, as its forthcoming CRM Live service will be.

"I still need to see more of the steps, but at least they've solidified it -- and I give them credit, because I think it's the most realistic approach I've seen in a long time," said Dave Sobel, CEO of Evolve Technologies, a Fairfax, Va.-based Gold partner. "To actually come out and say 'this is a hybrid approach: it's not all one thing, or another, but it'll be somewhere in the middle.' I found this to be surprisingly realistic in a very good way."

"I would say that everything I've seen thus far is far more articulate and far less confusing than what we saw six months ago," said Tom Williams, director of strategic alliances for Web analytics technology developer WebTrends, in Portland, Ore.

Williams has had a front-row view of Microsoft's efforts to shape and clarify its software plus services approach: He serves on the Live Partner Advisory Council, an in-the-trenches group that gives Microsoft feedback about its hits and misses.

"We spent the entire first day beating them up about the fact that their branding strategy was so disjointed," Williams recalls.

NEXT: How Partners Fit Into Microsoft's Live Strategy

That branding still isn't crystal clear. Microsoft's "Live" means different things in different contexts: While CRM Live will have full feature parity with its offline Microsoft CRM counterpart, Office Live and Windows Live aren't on-demand parallels to their traditional desktop namesakes -- Office Live is a bundle of Web presence tools for small businesses, and Windows Live is a collection of consumer search and data services.

"What we found in that is that Live is more of a brand modifier than a brand in and of itself. Live is not a platform in the same way that .Net is a platform, at least in this stage of development," WebTrends' Williams said. "That helped clarify some of this to me."

Microsoft also devoted time at WPC to explaining exactly what it means by "software plus services," which refers not to professional services but to Web services and on-demand data access. Microsoft's twist on SaaS is that pure on-demand "in the cloud" data services aren't the IT Holy Grail. In its view, customers will always need a blend of traditional software and on-demand applications -- a need it hopes to fulfill with its three-pronged delivery approach blending directly hosted applications, partner hosted applications and on-premise software.

Microsoft's software plus services plan calls for it to build out its portfolio of software delivered directly to customers, a move that will shake up its traditional model. CRM Live marks the first time customers will be able to buy Microsoft Dynamics business applications directly from the company, with no partner involvement. While Microsoft executives stress that they don't want to cut partners out of the equation, they're also blunt in saying that that the new software landscape requires partners to adapt or die.

"This is a hard transition. It was a hard transition for us to accept a couple of years ago, and it is one that's in full steam ahead at Microsoft. It's a new business model," Turner said in a WPC presentation. "But you know what, we have to change faster internally than the world is changing externally or we will become obsolete. ... I encourage all the Microsoft partners -- we'll help you, we'll work with you, but this change is going to happen. I encourage all of you to make that change with us and make sure that you're looking at your business model that way."

Partners making the transition say the key is to work with and around Microsoft, rather than fighting off turf encroachments by the industry giant.

Gold partner TriVenture in Seattle currently supports 225 customers on its Microsoft CRM hosting services, a space Microsoft will soon cannonball into with CRM Live. But TriVenture CEO Randal Southam said he doesn't expect Microsoft to cut into his business. He said he feels TriVenture will always be able to offer essential customization and integration services that Microsoft's more basic, standardized hosted CRM service won't rival. At most, he expects Microsoft CRM to erode the low end of the market, the very small customers deploying only a few licenses. Those customers are almost more trouble to support than they're worth, said Southam, who is happy to turn them over to Microsoft and collect his 10 percent referral fee.

That's also the approach taken by Workopia, a San Francisco Microsoft CRM specialist. Workopia President Frank Lee anticipates CRM Live helping him win prospects that would otherwise have opted for a SaaS vendor like Salesforce.com. Once those prospects are in the door, Lee is confident he can make money on customization and business process consulting services, even around an on-demand system maintained by Microsoft.

"Live software requires live services," Lee said. "This is still software, and businesses still need value-added professional services."

Of course, not all partners are so sanguine. One partner who requested anonymity thinks CRM Live will erode some of the integration business partners rely on.

"CRM is a beast. It requires current levels of Exchange, current levels of Windows Server, and SQL Server. It requires a lot of work, and that all goes away when they say, 'here it is for $45 a month,'" the partner said.

The partners most optimistic about Microsoft's software plus services push seem to be those most confident of their own ability to stay a few steps ahead of Goliath.

"The competition aspect is always present with Microsoft," said WebTrends' Williams. "But if you step back for a moment, you realise that for them to grow, they have to move into the ISV space. They have to move up the stack. As an ISV, gone are the days when you could have an application and leverage it for five years. Our industry is changing at the speed of light."

Microsoft is developing Web analytics tools for its adCenter that will compete with the low end of what WebTrends offers. That's okay, Williams says. WebTrends will compensate by focusing on other areas with better growth prospects.

"I do not want to compete with Microsoft. I have no interest in that game. We follow the Citrix example -- align with Microsoft and innovate around it," Williams said. "We stay very close to Microsoft, and we know where they're going well in advance. We can decide where we're going to align and where we're going to evade."

CH2M Hill, an Englewood, Colo., firm that provides IT services to construction and engineering companies, is also confident it can find opportunities to build atop what Microsoft offers, no matter how much "what Microsoft offers" expands. Managed services has been a hot field for CH2M. Its managed services group's revenue rose 60 percent last year and is on track to grow at a similar rate this year, according to company executives. But if Microsoft's Live stack eventually expands to include, say, SharePoint and Exchange, two products CH2M does strong business hosting, CH2M will still win customers that need more advanced services, CH2M Collaboration Solutions Director Scott Prather believes.

"Even if those customers can consume a product like CRM Live, they might not have the skills to set it up and configure it," Prather said. "We do a lot of consulting on how companies should be using those technologies. We don't see Microsoft as a threat at all."

Instead, CH2M is focused on the big benefit it sees from Microsoft pushing deeper into on-demand services: "It drives their products to be more friendly in those environments," Prather said.

Like their partners, Microsoft executives are still studying SaaS adoption and experimenting with the product road maps and business models they'll need to support changing customer demands.

A few are hazarding forecasts about what they see coming down the road. Dynamics CRM General Manager Brad Wilson, responsible for the product line that's furthest along on a dual on-premise or on-demand delivery strategy, estimates that "over the long run" between a quarter and a third of Microsoft's CRM business will move to on-demand deployment.

"There will be people who do it tactically but aren't necessarily committed to SaaS," he said. "We want to encourage both models."

By next year's WPC, Microsoft will have at least a few months of CRM Live experience under its belt -- and will presumably, as Turner pledged, be wiser about the marriage of on-premise and on-demand software than it is now. But for the foreseeable future, the strategy remains a work in progress.

"We aren't completely at the end of the job on our vision for where we're going with software plus services," Turner said. "The call to action this week was that hopefully you'll join us in figuring it out. But we don't have it completely figured out yet."

Additional reporting by KEVIN McLAUGHLIN.