Reversal by Microsoft for Partners: Keep Using Our Software

Keeping expenses in check was a key consideration for Microsoft when it initially planned to remove its partners' licenses for software for their own day-to-day use -- AKA internal use rights -- as of July 1, 2020. As Gavriella Schuster, Corporate Vice President of Microsoft’s One Commercial Partner unit said to GeekWire during last week: “It really overran my budget this year. When I started to do the calculations, I was like, ‘Wow, look at this.’ And so I had to cut back on things that I was going to invest in … so that I could pay both bills.” Although Schuster did not reveal a specific number relating to costs for internal use rights by partners, ZDNet’s Mary Jo Foley reported that annual figure was around $200 million.

With monthly partner program growth around 7,000 new members, that quickly becomes a very expensive offering from Microsoft for partners according to Schuster.

Following the initial announcement, members of the partner community reacted strongly on social media and other channels. Many felt like $200 million dollars was a small investment relative to the benefits the trillion-dollar company earns through its partner program with the sale of products and services. After all, 95% of the company’s cloud business revenue comes from partners.

Once one understands exactly what internal use rights are -- these provide partner companies no-cost licenses to use Microsoft products and services -- then you can get an idea of why partner reaction was so intense. After talking to members of the partner program over the last week, many of whom preferred to speak off the record, it seems the disruption to internal use rights was going to predominantly impact small to medium-sized businesses and independent partners like consultants.

Various iterations of the partner program at Microsoft have been around since the early 1990s. The current iteration, One Commercial Partner (OCP) program, was unveiled at Microsoft Inspire 2017 and it combined Microsoft for partner programs spread across the company under one umbrella; this change took place a year after. Schuster was put in charge of the entire partner program.

Historically, Microsoft understood that incentives are a key part of any partner program because they encourage businesses to build out support scenarios run and managed by those partner companies. Early on, Microsoft understood that access to software and services internal use rights was a valuable commodity for their partners. Those internal use rights have grown from just software access to now encompass cloud-based products and services. By offering partners internal use rights, that enabled those partners to then turn around and say this is how we run our business on these solutions, thus lending technical credibility to the sales pitches partners made to their client base.

Of course, what many may not realize that while it is simple enough to sign up for Microsoft's partner program, to gain the gold partner status currently requires an annual payment of approximately $5,000 in addition to other requirements such as having a certain number of existing customers and the completion of competencies in various technology areas around Microsoft products and services. That status conveys internal use right licenses for services like Office 365 E3, plus the potential to receive referrals and other business opportunities from the partner marketplace. One partner, who asked not to be identified, indicated that while Microsoft touts the potential referrals that can originate from within the partner marketplace, not all referrals see their way to all partners. For this partner, many of the referrals they receive are small businesses rather than large corporate customers.  

After quietly posting the company’s plan to drop internal use rights for its partners beginning in July 2020, then hearing the subsequent reaction from partners across the globe, Schuster took to the Partner Network blog a week later and explained the company’s reversal on the decision to pull those internal use rights:

“Your partnership and trust matters to us. Given your feedback, we have made the decision to roll back all planned changes related to internal use rights and competency timelines that were announced earlier this month. This means you will experience no material changes this coming fiscal year, and you will not be subject to reduced IUR licenses or increased costs related to those licenses next July as previously announced.”

As you might imagine, this news was very well received by partners, many of whom are at the annual Microsoft Inspire partner conference in Las Vegas this week.

However, it might not be the end of the discussion around partner benefits and other related costs for the company. Internal use rights do have a related cost to Microsoft, and someone pays those bills each year. As we have learned over the course of the last 10 days, between the revoking and restoral of those rights for partners, that bill has been landing on Schuster’s desk each year. 

As pointed out at the beginning of this article, running businesses can be very challenging and expensive. Decisions must be made in the interest of maintaining efficiencies across all operating expenses. As Schuster said last week to GeekWire, paying that $200 million internal use rights bill meant that she had to reduce or eliminate other program offerings to remain within her business units’ budget. While we have not heard from partners who will be impacted by those decisions as we did over internal use rights, understand there are partners who will find fewer opportunity because of those program reductions.

At the kickoff of Microsoft Inspire earlier this week, Schuster addressed the internal use rights issue right at the top of the opening keynote stating that the company’s relationship with their partners “means more to us than anything”. That is why after hearing the massive amount of feedback about the decision to revoke internal use rights, the company reversed the decision late last week. As she wrapped up this part of her keynote, she clarified by stating there would be no changes to competencies or internal use rights in the company's fiscal year 2019.

Reading between the lines, changes are still coming to the program at some level. By specifying no changes in fiscal year 2019 -- which actually ended for Microsoft at the end of June 2019 --  there is still room for adjustment since Microsoft's now on fiscal year 2020.

Most likely, the company may still plan to address the cost of internal-use rights -- they'll only change how they do so. Expect some transparency as the company considers the changes necessary to continue running an efficient business for partners and maintaining their partner relationships. Potentially they could choose to grandfather current partners' internal use rights and then cut back, eliminate, or offer a reduced subscription fee for new licenses as new partners enter the program.

Shortly after taking over leadership of the partner program at Microsoft in 2016, Schuster announced the company would double partner access to software and services through internal use rights. While that helped the company achieve record cloud revenue over the last few years, perhaps that decision had a direct impact on the rising costs related to the Microsoft for partners program. Perhaps that growth strategy will also impact the partner program in some way in the next couple of years as the company looks to reduce costs associated with internal use rights.

Although any partner program is supposed to be a mutually beneficial relationship, the balance of those benefits can often be skewed. The return on the investment for a program like Microsoft for partners or something similar with another company impacts a company's bottom line. While benefits such as reduced or free usage licenses can be helpful, partners need be prepared to reabsorb that cost down the road because anything can be changed at the discretion of the program owner.

In the fine print, there is almost always an escape clause to allow for future program changes by the company offering the partner program.