Microsoft SaaS leaves partners feeling deskless

I've made it a point to write a lot about my excitement over the intersection of SaaS and the channel on this blog. At Intacct our channel business is currently growing at around 400% per year, partly because there is a huge amount of demand for our on-demand financial applications and partly because we spend a lot of time thinking about how we can help our partners run successful businesses that make money while keeping their clients delighted.

As I've written before, I think the three key things that need to be in place for the SaaS channel to really take off are:

1. compelling SaaS offerings with high customer demand
2. clear ways for the partner community to be able to make money, and
3. the ability for the partner to manage /own the client relationship

Today Microsoft announced that it plans to let VARs resell its new SaaS offerings - called hosted business productivity services, which includes Exchange, SharePoint, Office Communications Server at $15 per month. They also announced the unfortunately named "deskless worker" suite. (say it 10 times fast) that Josh Greenbaum panned today in Deskless Workers, Useless Services.

Microsoft announced they would pay channel partners a royalty of 12% of first year bookings and 6% of renewal bookings on these SaaS offerings. According the news coverage, Microsoft plans to own and control the customer relationship and experience as well.

Predictably, the channel isn't happy. In one of the stories above, a partner is quoted as saying:

"Twelve percent is not enough," said one partner, who asked to remain anonymous. "To give partners a real incentive to resell these services, the margins on services has to be huge. Why? Because we're spending all this money to locate and qualify leads, and with no support or other middleman revenue. Basically, we're just handing the customer to Microsoft.

Why do I say "predictably?" Look at the three criteria I've defined above.

Clearly my first criteria is met - there is a ton of demand for these offerings via SaaS, as evidenced by the large number of Microsoft partners hosting these services.

But criteria two and three appear to be in trouble.

It's unclear to me how a partner can build a profitable business around a model that only shares 12% of first year bookings and 6% of renewal bookings to the partner. The partner has to spend a tremendous amount of time, money and energy up-front to find, market, educate and sell to their clients. It's hard to see how 12% and 6% royalty rates will allow partners to build a profitable model that allows them to recoup these costs and build an ongoing revenue stream.

My experience says that in the subscription model the channel starts to get excited at around 30% and above of first year and ongoing bookings. At these levels, partners can run a financial model and can see how they can build an ongoing, profitable annuity business that is better for them and for their customers than the traditional license model. As long as they keep their clients happy this model works out a lot better for the partner in just a couple of years, and it works out far better for the partner in the long run. Plus the partner is enormously incented to keep their clients satisfied, which is good for everyone.

Also according to the news coverage, in the Microsoft SaaS model partners apparently have to give up their client relationships to Microsoft. I've seen several times now that the tendency of large enterprise vendors is to assume that ownership of customer relationships is a de-facto entitlement - from their perspective channel partners are a lead generation and referral function. Since they as the SaaS vendor operate the software thus they are entitled to own the customer relationship as well.

Partners consistently hate this. My experience shows that channel partners really want to manage their client relationships and that they do a great job of it - relationships are their key assets that they have worked so hard to build, and the clients usually value their local relationship with the partner as as much as the partners do with the client.

So with two strikes out of three it's not too big of a surprise the channel is reacting negatively to Microsoft's SaaS plans.

The low rates in particular make me wonder whether Microsoft is having challenges around cost of service or operating margins for their SaaS offerings. In a properly architected multi-tenancy SaaS model the marginal cost of operations should be quite low, so the vendor can afford to carve off a significant percentage of ongoing bookings for the channel. Do these low rates mean that the Microsoft Software + Services model doesn't scale economically, or is something else going on? Is Microsoft trying to protect another channel or another revenue stream by making SaaS margins and terms unattractive to partners? I don't know but I'm sure much will be written on this.