Microsoft Partners In Uproar Over Cloud Sales Commission Cuts

Microsoft is preparing to slash the fees partners get from its Online Services Advisor Incentives program, and many partners are furious about the likelihood of making less money selling Office 365, Exchange Online and other cloud services.

"Microsoft is [screwing] its partners," said the CEO for one Microsoft cloud services partner, who did not want to be identified. "It's total [crap]. I am not happy about this."

The fee cuts, which go into effect Jan. 25, are happening in Microsoft's Advisor Enterprise Agreement Deploy program, in which partners steer customers to purchase Office 365 and other cloud service subscriptions as part of EA volume licensing contracts. In return, partners get a one-time payment based on the full-year value of each seat when the customer deploys the services.

Some partners are so angry about having their fees cut that they're prepared to sell competing products, like Google Apps. One partner told CRN he's planning to change his business to be less dependent on Microsoft partner fees.

"Based on this information, I'll push into other services sooner instead of being a cloud-only play," the source told CRN. "That means VMware and managed services, for which Microsoft gets zero revenue."

The fee cuts mean partners will have less incentive to tout Microsoft cloud services over Google's, the source said. "In the small and medium business space, since the payment from Microsoft isn't much, and the payment from Google isn't much, I'll let the customer choose, instead of advocating for Microsoft," he told CRN.

None of the half-dozen or so partners CRN interviewed for this story would speak on the record for fear of damaging their relationships with Microsoft. A spokesperson for Microsoft addressed some, but not all, of the questions CRN asked about the Office 365 fee cuts, and declined to make an executive available to discuss the matter.

All of the partners CRN interviewed are questioning the wisdom of Microsoft cutting back on Office 365 partner fees at a time when competition in the cloud services market is intensifying.

One Microsoft partner told CRN his incentive fees for Office 365 will drop more than 50 percent after the changes go into effect. To put this into context, a 300-seat deal for Microsoft's top-of-the-line Office 365 E3 plan, which used to earn the partner more than $12,000, will now only bring in around half that much.

For an Office 365 E1 deal of similar size, partner incentive fees are set to drop 40 percent, according to the source. "Unfortunately, it looks like the changes are pretty drastic," he said in an interview.

Even partners that don't have a direct financial stake in the Advisor EA Deploy program told CRN the fee cuts are a troubling sign.

"Microsoft has been preaching that the cloud was going to level the playing field [for partners], but nothing is going to stop them from cutting margins," said one disillusioned partner who has been selling Microsoft cloud services since the Business Online Productivity Suite was launched in 2008.

"The channel needs consistency, but Microsoft has changed the payout and commission structure four times in two years," said another disgruntled partner. "How can a partner build a go-to-market model around a payout plan that keeps changing?"

NEXT: Why The Office 365 Fee Cuts Are Happening Now?

At least one Microsoft licensing expert believes the unprecedented fee cuts, which come in the middle of the company's fiscal year, are the first step in what will be a steady erosion of partner sales commissions on Microsoft cloud services.

"Microsoft wants to shift as much of its sales as possible to a direct relationship with the end customer, who will order everything online, and partners are eliminated as a sales channel," Paul DeGroot, principal analyst at Pica Communications, a Camano Island, Wash.-based Microsoft licensing consultancy, told CRN.

"They will still have a role as integrators and enablers of the technology, but no one should expect a business built on licensing sales only to be a clear shot for the next 10 years."

Microsoft's Response

Microsoft has been urging partners to embrace the cloud for the past few years. But at Microsoft's Worldwide Partner Conference in July, then-Microsoft channel chief Jon Roskill told CRN just 25 percent of Microsoft's 600,000-plus partners worldwide had joined its cloud channel programs.

Microsoft COO Kevin Turner, in his annual keynote to partners at WPC, made it clear that he thinks this number is unacceptably low. "I want all 600,000-plus [partners] selling and transacting in the cloud," Turner said at WPC.

If that's the case, cutting the amount of money partners get from selling Microsoft cloud services is an odd way to go about it. Many partners rely on Office 365 incentive fees to train their staff on cloud skills and compensation models.

Without this revenue, moving to the cloud model will become more difficult, sources said.

"If I am moving to the recurring revenue model, and I don't get the advisor incentives, then how am I going to transition my business?" one Microsoft partner told CRN, speaking on condition of anonymity. "Bottom line: It's getting harder to make money with Microsoft."

A Microsoft spokesperson said in an email that Microsoft is cutting Office 365 fees for a couple of reasons.

First, Microsoft cut pricing for Office 365 volume licensing plans by 15 percent in August, and it is now aligning partner fees to match the lower rates. Second, Microsoft in August launched Office 365 Add-Ons, which lets customers add Office 365 subscriptions to an existing Enterprise Agreement and get discounted pricing.

Because the add-ons cost less than the full Office 365 subscriptions, Microsoft "created the blended rate to keep Incentives calculations simple and continue to adequately compensate partners regardless of the deployed product," according to a Microsoft document sent to partners recently, which was viewed by CRN.

Licensing experts, incidentally, have criticized Office 365 Add-Ons as a way for Microsoft to get customers to pay twice for Office: once for the on-premise software in the EA, and again for the cloud subscription.

DeGroot doesn't see Microsoft's Office 365 Add-Ons as a good thing for partners. "They continue to announce changes to their volume licensing programs, which, if you look at the actual contracts, are takeaways pitched as positive and beneficial," he said of Microsoft.

NEXT: Other Factors Coming Into Play

Microsoft, in the document, says the partner fee cuts do not mean it is cutting back on its investment in the channel.

"Microsoft is committed to continuing partner investment on Cloud with a significant growth in Cloud Incentives this fiscal year," Microsoft says in the document. The partner fee cuts "reflect the underlying changes in the product pricing and product mix and do not reduce partner opportunity to build a profitable business on Microsoft Cloud Services."

The spokesperson told CRN that Microsoft reviews the Advisor EA Deploy program terms every quarter to decide if fees should be increased or decreased and gives partners 30 days' notice of any changes.

Microsoft held off on making the changes until now to minimize disruption to partners' business, according to the spokesperson.

"Microsoft delayed implementation of these adjustments until the second half of its fiscal year in order for partners to continue earning Incentives at prior rates during the period between August 2013 and January 2014," the spokesperson said in an email.

Nonetheless, partners remain puzzled as to why Microsoft is changing its Online Services Advisor Incentives in the middle of its fiscal year, which ends June 30, 2014. The spokesperson declined to comment on whether Microsoft has previously made mid-fiscal year cuts to partners' Office 365 fees, but partners told CRN this is the first they've seen it happen.

Other Factors Coming Into Play

Office 365 fee cuts aren't the only issue Microsoft partners are grappling with these days. Microsoft is also cutting fees for large account resellers (LARs) by 1 to 2 percent in fiscal 2014, and that's having a trickle-down effect on other Microsoft partners, sources told CRN.

LARs are responding to their fee cuts by going after other partners' cloud deals, sources said. And since only LARs can sell EAs, smaller Microsoft partners don't have much recourse when this happens.

"When Microsoft squeezes LARs, they come to me and say they're going to take our partner incentives because Microsoft cut their fees," one partner told CRN. "At some point, if you take all the profit out of this, people are going to stop selling your stuff."

Asked to comment on the LAR fee cuts, the Microsoft spokesperson said LARs -- which Microsoft now calls Licensing Solution Providers (LSPs) -- can earn money from EA sales in a variety of ways.

"As Microsoft continues to invest and reward for both cloud-enabled and traditional EAs, LSPs that capture and grow both types of revenue will see the benefits. LSPs that are slower in capturing those opportunities will likely experience a change in their earnings," the Microsoft spokesperson said.

With LARs swooping on deals that have previously been handled by systems integrators and the Office 365 fee cuts going into effect later this month, the competition for dollars in the Microsoft channel is as fierce as it's ever been, sources said.

NEXT: Who Is Driving The Partner Fee Cuts At Microsoft?

Yet another issue partners are dealing with is Microsoft's Dec. 31 shuttering of its Solutions Incentive Program (SIP), in which they could earn up to 30 percent extra margin on registered deals for certain Microsoft products.

Though the shutdown wasn't unexpected, the SIP program was a huge revenue driver for some Microsoft partners. Some that had hired full departments of employees to process SIP rebates are now laying off those staff members, sources told CRN.

"There are no more registrations to get rebates on. With the SIP program gone, we're not getting the payments we used to," said one partner.

While change is constant in the IT business -- and especially in the cloud -- partners said they'd like to see Microsoft doing more to help partners navigate the challenges.

"Microsoft has historically tried to avoid channel conflict, but the shift to cloud and services was always going to create some issues -- smaller pie, thinner margins, different sales and value streams. It could get messy before it's done," one partner told CRN.

Who's Driving The Channel Program Cuts?

The Office 365 partner fee cuts are coming straight from upper management at Microsoft, and not from the Worldwide Partner Group, which typically communicates channel program changes, sources told CRN.

"People that should have heard about this had no idea beforehand," one partner told CRN. "If this is going to turn out badly, why aren't [Microsoft channel chief] Phil Sorgen and Josh Waldo [senior director of cloud partner strategy] getting out in front of this?"

Multiple sources told CRN they suspect Turner, who despite his enthusiastic WPC keynotes is not known for having the channel's best interests at heart, is the driving force behind the partner fee cuts. Which would make sense since the Microsoft channel is part of Turner's large scope of duties at the software giant.

Inside Microsoft, Turner has slashed expenses to such an extent that Microsoft's field reps don't have enough budget to travel with partners to close deals, one partner told CRN. Instead, Microsoft field reps are directed to use Lync to engage with clients remotely.

"When I go to lunch with Microsoft people, I'm the one who pays," said the source, who requested anonymity.

Microsoft's channel cost-cutting could have something to do with revenue declines in other parts of its business, such as Windows desktop, which has been hit hard by the lukewarm market reception to Windows 8, as well as the popularity of iPads and Android tablets.

"Because margins are so high on Windows, it accounts for a large chunk of Microsoft's profitability, and every dollar lost on Windows translates into about 70 cents of profit lost," Pica Communications' DeGroot told CRN. "To keep Wall Street happy, Microsoft has to shave costs elsewhere. Every dollar saved by cost reductions adds a dollar to profits, assuming it has no impact on sales or total revenue."

Sources told CRN the partner fee cuts could also stem from Microsoft's decision to beef up its senior sales staff by putting regional LAR managers into field sales positions. "They're trying to put more feet in the street," one partner said by way of explanation.

Microsoft likes to say it's all-in with the cloud, but it's unclear whether it'll be able to meet its goals without help from a broader portion of its partner base than it has right now.

One thing's for certain: Office 365 fee cuts, and the reduction of incentives for LARs, aren't the kind of moves that inspire confidence in the Microsoft channel.

PUBLISHED JAN. 10, 2013