Channel woes dog Microsoft

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

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

When the company announced its quarterly results recently, CFO John Connors had some harsh words for Microsoft Business Solutions (MBS), the business software group that includes Great Plains, Navision and Microsoft CRM 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 value-added resellers (VARs) 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 and Navision channels it inherited when it bought those companies. The addition over the past year of new personnel managing the MBS channel also has contributed to problems, he said in an e-mail.

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

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 slowdown, which he attributed to salesforce and channel realignment issues. At the time he said 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% over 2003’s third quarter, to $153 million. That’s a long way from Microsoft CEO Steve Ballmer’s forecast of $10 billion in annual sales 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 – says 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 upfront sales.

For Ben Holtz, CEO of Green Beacon Solutions, a Watertown, Mass., CRM services firm, the change meant that he could no longer buy his clients’ CRM licenses directly from Microsoft. Instead, he now works via a 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 says. “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 midsized companies, organizations that typically don’t buy in bulk and don’t have a deep relationship with Microsoft, Holtz says. For those customers, and for the small consultancies that support them, the changes have added obstacles and bureaucracy to the buying process.

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 into the small and midsize business market, such as SAP and PeopleSoft, and from smaller vendors already there, including Salesforce.com, NetSuite and Intuit.

“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. 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,” says Rafael Zimberoff, president of Z-Firm, a Santa Rosa, Calif., firm that makes add-ons for MBS products, including Microsoft CRM. “All the players are basically treading water.”

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 says. Software to handle sales, accounting, marketing and customer service tasks 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 says. “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 might be crimping sales. The vendor has talked publicly 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, which is expected to start shipping in 2006.

“The elephant in the house is Project Green,” says Directions on Microsoft’s Rosoff. “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 committed to a date for a 2.0 version. That release, 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.

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 says. Lance Kyle, managing director of Seattle CRM services firm Acetta, says 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 says he considers Acetta’s dealings with Microsoft fairly smooth.

Evers and Cowley are correspondents with the IDG News Service’s San Francisco bureau.