UK MICROSOFT partners have demanded a percentage of profits the vendor makes from its direct sales venture to compensate for the loss of as much as a quarter of their sales.

Microsoft said last month that Online Services, which sells software directly to customers as a service, would start selling to businesses of all sizes, including those serviced by its SMB sales partners.

It said at the time that its direct strategy would be a good opportunity for its partners. In evidence it produced a snippet from a survey it commissioned of 700 partners, which said they thought the direct sales strategy would be a good opportunity for them.

Further details of the survey, however, reveal that it may have been designed with the sole intention of supporting the strategy. And partners do not think its coming up roses.

Tim Wallis, chief executive of Content And Code, told the INQUIRER that he had told the vendor he wanted a percentage of the profits Microsoft makes by selling direct to any of his customers.

He said a fixed referral fee, which Microsoft said it was considering giving partners to compensate them for loss of sales, would not be enough.

"We have asked Microsoft for a percentage of the ongoing amount. We want Microsoft to give us money back every month," Wallis said. "It should be a shared risk model. If they Microsoft paid a monthly fee, I would be more inclined to keep the customer."

"At the moment i think they've got no plans to say they'll give us any money. But we think they should do. 25 per cent of our revenue could be lost," he said.

"We are worth 10 per cent a month. but we'll be lucky to get three or four per cent. The percentage they pay for licensing is three or four per cent," he said.

Oh yeah?
Nevertheless, said Wallis, Online Services was still a good opportunity for some partners. And as a firm that already sold software as a service, he was one of them. Microsoft's traditional reselling partners, which number about 30,000 in the UK, reacted "negatively" to the strategy, he said.

As expected, it turns out that the marketing survey Microsoft used to justify its direct strategy to partners only surveyed those likely to be less affected by it: hosting firms like Content And Code (or those reselling hosted services already, or planning to in the next twelve months).

It refused to release the survey at the time, only saying that it found that partners thought Online Services would give them "the opportunity to expand their current customer base by over 200 per cent".

Microsoft still refuses to release the survey, but has admitted that
less than half (48 per cent) all of opinions presented to the survey
about online services were positive. 78 per cent of these partners
already selling hosted software services showed some interest in doing the same for Microsoft; although, like Content And Code, they wanted to see recurring revenue.

Despite it being a threat to his business, Wallis still said it was an
opportunity.

"I see this as a real opportunity," he said, "because, for example, if you buy a new computer the setup is not really the value add. The value is more the training in how to use it."

Come again?
For many Microsoft partners, the setup and other hands on gubbins is exactly where the money is. Still, it's not all roses for Wallis on paper.

Content And Code made just 40 per cent of its revenue from hosting software as a service, he said. All the rest came from installing and maintaining Microsoft's Sharepoint product in-house at its customers, with all the equipment sales and hands-on money-earning potential that went with it.

It earns margins of 18 to 20 per cent on delivering a system in-house. Even if a customer installed its own hardware, Content And Code can get a 12 to 15 per cent margin on a maintenance contract and 20 per cent on training.

It makes little more - 22 to 25 per cent - on hosting software as a
service. But Wallis expected this to be 50 per cent of its business in a year, and the cost of sale is three to five per cent lower because its easier to keep hold of customers when they are paying a subscription and don't have to fork out capital for the next upgrade.

The upshot of this is that Microsoft's foray into direct sales does not look quite the partner opportunity the vendor makes it out to be.

For now, it will only sell a basic version of Sharepoint online, so if
any partner's need to modify the software, as they often need to do, they still get the sale. So Wallis is trying to persuade Microsoft to register him as an Independent Software Vendor selling add-ons for Sharepoint.

The real reason why Wallis said he sees Microsoft's direct sales as an opportunity is because he chose to. The software business happens to be going direct: "It's a great opportunity if we look at it as an opportunity." µ