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
Two items of note in the news this month deserve comment.
First, Microsoft has cut the “back-end” rebate percentages for
LARs who are selling Select Agreements, effective July 1 (Microsoft's new fiscal
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
Note this applies to Select licenses, but not to Enterprise Agreements, which
are sold directly from Microsoft with the LAR receiving a "service fee"
So, what does this mean for you?
- 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.
- 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.
- 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.
Scott Braden has helped more than 600 companies negotiate Microsoft volume
license deals. For a free case study, "How a Mid-size Company Saved over
$870,000 on a $3 million Microsoft Enterprise Agreement, in Less Than Three
Weeks," visit www.MicrosoftCaseStudy.com.