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Pondering the Partner Repercussions of Microsoft's Reorg

Microsoft's announcement that it is realigning into three business units and—probably more importantly—appointing Ray Ozzie to help it deliver more software-based services has the partner community wondering what it all might mean to their businesses.

The realignment news is straightforward enough. Microsoft is assigning each of its existing seven business units to one of three new divisions: Platform Products and Services, Business and Entertainment and Devices (see story here). Each division will have its own president, all reporting to CEO Steve Ballmer. (The Platform division will have two presidents until Jim Allchin retires after Windows Vista ships, at which point Kevin Johnson will head up the unit solo.)  

The thinking, according to Ballmer, is that the streamlined structure will speed decision-making and execution. Both could be construed as lacking given how long it is taking the company to deliver on major initiatives including Vista (a.k.a. Longhorn) and SQL Server 2005.  

Ozzie's role is the real wild card for partners. Microsoft's statement on the realignment says only that, "Ray Ozzie will expand his role as chief technical officer by assuming responsibility for helping drive its software-based services strategy and execution across all three divisions."

"Software-based services" can mean many things, but it's pretty clear from various statements in the last few months that it is likely to involve some form of hosted applications. Ballmer told the Wall Street Journal that he wants Ozzie to create a broad “foundation” for making all software available as a service across Microsoft.

Paul DeGroot, an analyst with the research firm Directions on Microsoft, notes the pace of growth in Microsoft's software business has slowed. "Microsoft had its first single-digit increase in history at end of the 2005 fiscal year—its first time under 10% revenue growth," he says. Additionally, its stock price has been essentially flat for about three years. "They really need to convince Wall Street that they are a growth company if they plan to move that stock price at all."

Services could be key to that effort. Microsoft has been making noise about services for months, notably at the Worldwide Partner Conference in July when Ballmer made reference to the idea of exploring new services opportunities during his keynote. He told partners to expect things to “evolve,” including the role of the Internet and hosted services. “We are 100 percent absolutely, totally positively committed to our partnerships. But neither you nor we should be 100 percent committed to doing things exactly the way we do them today for the next 10 years,” Ballmer said.  

It's not yet clear, though, whether Microsoft envisions hosting services itself, or helping its partners take on that role. So should partners that currently offer services be concerned? What about those that sell products that may one day become hosted?

“At a recent meeting with financial analysts Microsoft was talking about how huge the services market is and how much money is in it,” DeGroot says. “Guess who's in that market today?   In many cases, it's Microsoft partners and that's how they make their living.”

Keith Ackerman, Director of Marketing and CIO for Software ONE, a large account reseller in New Berlin, Wisc., likewise says services partners have reason to be concerned, given the uncertainty over how the services play will shake out. He's also concerned about hosted services cutting into his company's volume licensing business.

"The dilemma for us is how it's going to roll out on the hosted side," he says. "Is there still going to be a role for us to handle the licensing side of the arrangement?"

Hosting also creates issues for Microsoft, in terms of how it architects products. And if Microsoft does use partners to host products, in many cases the partners will want to customize applications to add value, such as for varying vertical markets. "That's an area that has to be looked at," Ackerman says, in terms of how to handle the licensing side of the arrangement and whether there's a role for a LAR. "So yes, those are all concerns. I wish I had a crystal ball."

"We shall await further explanation," agrees DeGroot. "But I think the work that Ozzie is doing is where I would focus today as a partner."

About the Author

Paul Desmond, the founding editor in chief of Redmond Channel Partner magazine, is president of the IT publishing firm PDEdit in Southborough, Mass. Reach him at paul@pdedit.com.

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