Microsoft’s services transition an uphill climb

If Microsoft wants to succeed in becoming a services company it will have to undergo a major transformation in its corporate culture, business model, and partner and customer relationships.

It’s a seismic shift, one that Microsoft itself recognizes, and one that partners, analysts and users say will determine whether the software giant can turn itself from a packaged-software company into a provider of what it calls “software plus services.” And it will determine whether corporate users view Microsoft as a trusted provider of Web-based computing resources.

At last week’s Worldwide Partner Conference, CEO Steve Ballmer laid out the most complete picture yet of his company’s enterprise future, detailing the ways it plans to deliver software and services. While on-premises software won’t go away, Ballmer said services hosted by a partner or hosted by Microsoft itself — or any combination of those two — will lead a revolution that combines today’s technology with new service models.

Ballmer told 8,000 partners during his keynote address that the move is “a long-term migration to bring the best of the Web together with the best of the enterprise. We need to bring together rich user-interfaces, offline and online access, and what I call personal integration to go in and bring things together, integrate them, store them and link them together in unique and arbitrary ways.”

Microsoft sees an intersection between its fledgling Microsoft Managed Services business and the acceptance by smaller companies of pure online services, such as Microsoft’s Dynamics CRM Live. Ballmer envisions a world of various client devices talking to a managed services-based infrastructure that delivers all the capabilities offered in Microsoft’s packaged software, such as Windows Server, Active Directory and Systems Center Operations Manager.

“Priority No. 1 in terms of our long-term outlook is this transformation,” Ballmer said in his conference address. “It is an ambitious project for us, but it is very important.”

Ambitious is a word many outside of Microsoft also are using. “This is a huge cultural shift for Microsoft,” said Ken Thoreson, president of Acumen Management Group, who led a conference session on the skills needed by managed-service providers. “It’s okay to make products, test them, quality-assure them and send them out to someone else; but when you are on the other end of the phone talking to a business, the sensitivity level changes [especially] on the support side,” he said. The front line of defense becomes a critical issue when hosting services for large numbers of customers, he added. Microsoft has to learn that skill, and the partners that come along on the services bandwagon also must have it.

Microsoft also will have to change in other ways including redesigning software to work in a services model, according to those already in the services trenches. That means adding multitenant capabilities, which let multiple companies use a single application. Microsoft will release its first multitenant software later this year when Dynamics CRM Live is launched.

The multitenant approach reduces the overhead of hosting applications by ensuring there’s one version of the software, one hardware platform and one application to patch and upgrade. Hosting traditional software results in supporting unique infrastructures for each customer that must be managed individually, a model that is management intensive and has limited scalability.

“It is easy to understand the benefits of software-as-a-service; what is not easy to understand is how you get from where you are today and delivering that in a services model,” says Robert Krygowski, director of product management for Computer Sciences Corp. The global company and Microsoft partner, which posted $14.9 billion in revenue last year, launched a software-as-a-service program in February to go along with its established outsourcing, hosting, system integration and consulting services.

Microsoft also will have to change the way it interacts with customers, who will not disappear into their corporate networks once a purchase is completed.

“Microsoft will have to answer questions about what a service does, not how the software is built,” Krygowski says. “It has to get its arms around security, availability, bandwidth and power consumption; and combine service delivery with Tier 1 support.”

For its part, Microsoft is approaching the challenges with its usual bravado, but the software giant is not starting from ground zero: It provides e-mail, instant messaging and other services to hundreds of millions of users via Windows Live. But the company freely admits that corporate users’ tolerance level for downtime will be much different than the tolerance level of consumers using free services.

On the enterprise side, Microsoft Managed Services — an application-hosting service for companies with at least 5,000 users that was launched three years ago — is an incubator providing services to Energizer, XL Capital and two companies as yet unnamed. They are buying managed services around Exchange, SharePoint Server, Live Communications Server and desktop management.

Microsoft also has a number of data centers around the globe, including one in Tukwila, Wash., that host much of its managed-services operations, two it recently bought in Santa Clara, Calif., for $200 million, and new ones in Quincy, Wash., and San Antonio, Texas.

On the programming side, Microsoft is adapting its .Net Framework for the services model and creating new client tools, such as the Silverlight browser plug-in that supports rich multimedia application development.

“What you are seeing is a number of efforts we think come together over time,” says Jeff Price, senior director in Microsoft’s server and tools business.

Microsoft also plans later this year to launch Version 1 of a 12- to 24-month project to create Windows Live Cloud Infrastructure Services, Web-based services such as directory, identity and storage. The operating system services target companies and developers, who will wrap them around their applications, such as tapping an online directory service to generate a Kerberos ticket that a user would present to gain access to an on-premises or service-based application.

“We want to give enterprise customers and partners the choice of not having to deal with on-premises infrastructure management and overhead issues, so these services will be available in the cloud,” says Tim O’Brien, Microsoft’s director of platform strategy.

Partners see promise in the model but also realize Microsoft could become a competitor.

“I think there is an opportunity to make the services side a key to our back end,” says Dan Kock, product development manager for Professional Computer Systems in Denison, Iowa. The company offers accounting and billing for electric companies, and already uses Web services and an industry-specific integration specification called MultiSpeak.

Kock says his software is delivered now via Terminal Services but he can envision giving users a rich client with connections to various backend services for reporting, application mashups or customer service in the software-plus-services model. That also could be the start of new business opportunities, he says.

“If we wrote a complete billing-utility service, we could offer that to others besides electric companies,” Kock says.

Given those opportunities, he likes Microsoft’s services push and doesn’t see it as a competitive threat.

“We are in a special market and we don’t think Microsoft would come into it,” he says.

Others, however, see the chance for a head-on collision, but instead of fretting they are looking for ways to adapt and go beyond what Microsoft may offer.

“Microsoft’s strategy to provide choice for procuring functionality is correct,” says Steve Lewis, CEO of Teneros, which offers a disaster-recovery appliance for Exchange. “But doing what we do is hard. Microsoft lives in a world that allows you the flexibility to do what you want, but the minute you do that as a service it does not work.”

Teneros recently introduced its appliance as a service and sees overlap with Microsoft’s Forefront security offerings. Lewis welcomes the competition. “We have to be more flexible, faster-moving, and get it precisely right,” he says. “Microsoft has to build within itself a profoundly different organization. They have to get the services culture right, because what changes is everything — policy, procedures, control systems, it all changes.”

They are changes that Microsoft says will come sooner rather than later.

“In many regards Microsoft has proven an ability to evolve with markets,” says Ray Solnik, president of OpSource, which supports software-as-a-service deployments. “But there are definitely challenges to overcome, such as figuring out where they draw the line between what their partners are going to do and what they are going to do. It is early in the game, and it is going to be a marathon as the industry goes through this transformation.”

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