Redmond Negotiator

An End to Back-End Deals?

With changes in rebate percentages for LARs and Software Assurance, Microsoft is emphasizing service over reseller, Enterprise over Select Agreements.

• By Scott Braden
• 08/30/2005

First, Microsoft has cut the “back-end” rebate percentages for LARs who are selling Select Agreements, effective July 1 (Microsoft's new fiscal year).

In previous years, LARs could expect to receive rebates of between 3.5 and 6 points of margin, depending on the volume and value of Select Agreements sold. The new policy appears to limit that to just 1 point of margin, which is contingent on meeting certain sales targets for volume and specific product mixes. LARs I've spoken with aren’t happy but say they have little power to push back against Microsoft.

Note this applies to Select licenses, but not to Enterprise Agreements, which are sold directly from Microsoft with the LAR receiving a "service fee" from Microsoft.

So, what does this mean for you?

1. If your current deal with your LAR(s) included a significant portion of Select (not EA) licenses, make sure your terms aren’t affected. If your LAR has been selling Select licenses for “below cost,” then you may be facing a price increase of a few percentage points.
2. This also slightly skews the cost/benefit tradeoffs between Select and EA -- in effect, it's a price increase for Select Agreements, as LARs have frequently been forced to sell Select licenses “below cost” in order to win more of your overall software business.
3. It’ll make life harder (financially) for the “software-only” LARs (i.e., those resellers who only or primarily handle software licenses as their largest revenue source). Typically, Microsoft is their biggest supplier, and a margin adjustment of this size can impact the vendor's overall financial situation. Ask your reseller what percentage of overall revenue and profitability come from Microsoft license sales.

The second interesting bit of news from Microsoft is more enhancements to Software Assurance. You can get more details here.

Taken together, these are more evidence that Microsoft is guiding its Partners toward a "services" business and away from "reseller" business models. You should take this into account when negotiating with Microsoft and your prospective LARs for Select or Enterprise Agreements. For example, because your LAR basically receives a better paycheck for Enterprise Agreements than for Select licenses, expect subtle pressure toward an EA -- even if Select is the better deal for your situation. In fact, you may have to work just to get an accurate and fair analysis of the alternatives.

Software Assurance remains a challenging sale for Microsoft and an unpleasant purchase for many customers. The equation with SA has always boiled down to “Do we believe Microsoft will release the next version before our SA expires?”

From a strict cost-benefit perspective, there are only a few cases for most customers where buying SA is the better deal than "no SA." As more details about the new "sweeteners" come out, your options may change. But business decisions are rarely made from a strict cost-benefit perspective. In the case of SA, most IT shops are simply more comfortable with routinely purchasing “maintenance” and knowing they are covered for the cost of future upgrades that may or may not appear anytime soon.

This model has been called “software leasing.” If we think about leasing a car, that’s a decent analogy. But let’s think about the alternative: “buying” a car. Usually you go to the dealer, negotiate your price and terms, and somewhere along the way you decide how to dispose of your existing car. Do you trade it in or sell it on the private market? Conventional wisdom holds that “private sale” gets you more for your existing car than the dealer will give for a trade-in.

Now, why can’t we do that with software? In the case of Microsoft, suppose we buy licenses, but don’t sign up for Software Assurance. A few years later, Microsoft releases the new version, and we’re faced with another big purchase in order to upgrade. But what if there’s a way to sell those old licenses on the free market and recover some cost?

More on that next month.