Channel woes persist at Microsoft Business Solutions

Hiccups in Microsoft Corp.'s efforts to work with its channel partners are continuing to hurt the software vendor's sales in the business applications market it is trying to crack.

When the Redmond, Washington-based company announced its quarterly results last week, Chief Financial Officer (CFO) John Connors had some harsh words for Microsoft Business Solutions (MBS), the business software group that includes Great Plains, Navision and Microsoft CRM (customer relationship management) products.

While there were no complaints about sales abroad, MBS in the U.S. is having trouble maintaining its relationship with partners such as the VARs (value-added resellers) on which it depends, according to Connors. "We aren't having very good U.S. execution," he said on a conference call with financial analysts.

MBS CFO Kevin Mueller attributed the problems to "short-term integration issues" merging Microsoft's traditional channel with the Great Plains Software Inc. and Navision A/S channels it inherited when it bought those companies. The addition over the past year of new personnel managing the MBS channel has also contributed to problems, he said in an e-mail response to questions.

Connors did not hold back in his comments about MBS during the conference call, said Matt Rosoff, an analyst at Directions on Microsoft Inc., a research company in Kirkland, Washington. "I thought he was unusually harsh. That indicates to me that they have noticed that it is somewhat of a serious problem," he said.

The problems aren't new, but they're persistent. Microsoft in the U.S. is "being less effective with the traditional MBS partners than the MBS group was a year ago," Connors told analysts. Last October, Connors said first-quarter MBS results showed a slow down, which he attributed to sales force and channel realignment issues. He said at the time that the company hoped the disruption had peaked and would soon fade.

While all other Microsoft segments reported double-digit revenue growth in the most recent quarter, MBS reported revenue up only 4 percent over 2003's third quarter, to US$153 million. That's a long way from the annual sales of $10 billion Steve Ballmer, Microsoft's chief executive officer (CEO), forecast for the division by 2011.

One Microsoft partner who works with Microsoft CRM -- the MBS group's highest-profile product, first released early last year -- said chaos descended in January, when Microsoft shook up the channel by moving Microsoft CRM into its volume licensing program and cutting the margin paid to partners for up-front sales.

For Ben Holtz, CEO of Watertown, Massachusetts, CRM services firm Green Beacon Solutions LLC, the change meant that he could no longer buy his clients' CRM licenses directly from Microsoft. Instead, he now works via a middle reseller, an arrangement that's been fraught with complications and delays.

"We're not a high-volume dealer. We are having a terrible time getting customers situated properly with the software," he said. "We had a very rough time signing up with the distributor. We haven't gotten any of our referral bonus cuts that we're supposed to get. It used to be so easy. I'd get online, order something, they'd ship it, and I got it and got my commissions."

Microsoft's rationale for the change is that volume licensing is easier for end users, who can buy from their preferred reseller. But Microsoft CRM is aimed at small and midmarket companies, organizations that typically don't buy in bulk and don't have a deep relationship with Microsoft, Holtz said. For those customers, and for the small consultancies that support them, the changes have added obstacles and bureaucracy to the buying process.

Microsoft is also hitting some rough patches in the consolidation of its various partner organizations into a single, global Microsoft Partner Program, announced in October. The new program went into effect in January and will be implemented in phases through 2005. MBS partners are scheduled to join in July.

For example, at one point a glitch in combining two systems based on Siebel Systems Inc.'s software caused the flow of sales leads to partners to slow, said one Microsoft partner who asked not to be named. A Microsoft spokesman confirmed there was a glitch in merging leads databases in the second half of last year, but provided no further details.

Microsoft's MBS missteps come as it is trying to gain share in the crowded and highly coveted market for business applications aimed at midsize companies. Microsoft faces stiff competition from large vendors moving down into the small and medium-sized business space, such as SAP AG and PeopleSoft Inc., and from smaller vendors already there, including Salesforce.com Inc., NetSuite Inc. and Intuit Inc.

"We're just not doing a lot better than the competition the way we expected. We're kind of doing what the competition is doing," Connors said about MBS in the U.S. during the conference call. He expects U.S. operations to begin meeting Microsoft's expectations sometime in the company's 2005 fiscal year, which starts July 1.

Not all of Microsoft's problems are of its own making. "It has been a lousy several months for selling accounting and CRM software," said Rafael Zimberoff, president of Z-Firm LLC, a Santa Rosa, California, firm that makes add-ons for MBS products, including Microsoft CRM. "All the players are basically treading water."

Still, Microsoft's channel plan needs some adjusting to accommodate for the differences between the business software market and the platform market with which Microsoft is more familiar, Zimberoff said. Software to handle sales, accounting, marketing and customer service functions is more complex to install, customize and service than the operating system and desktop software that forms Microsoft's core business. A channel strategy built for the platform market doesn't necessarily fit the needs of business software partners and buyers.

"Customers are buying two fundamentally different things," Zimberoff said. "A business software customer has a number of competitive options and often has a long-standing relationship with their reseller. A platform buyer has a different relationship with Microsoft and the reseller, which in many cases is more shallow. What kind of relationship do you need to have to get a PC with Office installed on it?"

Channel issues aren't Microsoft's only hurdle. Its vagueness about MBS product plans may be crimping sales. The vendor has publicly talked about Project Green, an initiative to replace Great Plains, Navision and Microsoft CRM products with applications built on a single code base that depends on Microsoft's Longhorn client, server and tools products, expected to start shipping in 2006.

"The elephant in the house is Project Green," Directions on Microsoft's Rosoff said. "It seems like something that could hurt MBS sales. Customers know there is going to be this big technology transition, and Microsoft has not given them any assurance about backward compatibility."

Microsoft's reluctance to discuss a CRM road map also frustrates some: It took the company nearly a year to put out Microsoft CRM 1.2, an update generally regarded as a bug fix release, and the company has not yet committed to a release date for a 2.0 version. That 2.0 release, now not expected before mid-2005, is likely to incorporate expanded customer service and mobile features that will make Microsoft CRM more competitive with its rivals' products.

"There's a lot customers are waiting for," in the 2.0 update said Green Beacon's Holtz. "It's stuff that should have been in there in 1.0 if it was going to be two years before 2.0."

Microsoft is aware that it is not making life easy for its partners, said Orlando Ayala, senior vice president for Microsoft's Small and Midmarket Solutions & Partner Group in an e-mail response to questions. "We recognize there is a great deal of change for some partners as we make this transition and we are working closely with them to ensure that this is a smooth process," he said.

Despite their gripes, some partners say they're with Microsoft for the long haul.

The disruptions Holtz has faced haven't stopped him from enthusiastically backing Microsoft CRM, he said. Lance Kyle, managing director of Seattle CRM services firm Acetta Corp., said the changes Microsoft made as it moved to volume licensing for CRM cut his firm's margins on the product, but not significantly enough to worry him. He considers Acetta's dealings with Microsoft fairly smooth.

Most integration issues are a thing of the past, said Earl Hunt, an accounts executive at MBS partner Congruent Software Inc. in Bellevue, Washington. "There have been some technical challenges as well as personnel changes. Any company would have experienced some difficulty. I see Microsoft working hard to make things better," he said.

Jim Bowling, business development manager at I.B.I.S. Inc. in Norcross, Georgia, said his company increased its revenue by 25 percent each year throughout the past four years and has reaped nothing but benefits as a member of both Microsoft's traditional and MBS partner programs, which are now being merged.

"There has been an adjustment internally at Microsoft and it has been a massive undertaking. I do think it is something they had to accomplish, and in the near term we'll start to see a more successful channel strategy," he said.

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