Microsoft Performance Standard
In the final post of our 3-part series, detailing the new Microsoft Performance Standard for Direct-bill partners, we wanted to take a deeper look into the numbers
As part of this series we have covered the announcement and what it means along with the reaction and feedback from users through a survey:
Microsoft is indicating two things – they no longer want to manage the business risk associated with smaller transactions and the $300k threshold is what makes the most sense, financially. In the analysis below, we have a listing of the application, systems, and operating components required to operate the CSP (recurring revenue) business. We have compared what a Direct and Indirect Partner may need from an operating cost:
|Operating Costs:||Direct Partner||Indirect Partner|
|Ticketing and Billing||25,000||25,000|
|Customer Self-service Portal||2,000||–|
|Microsoft Advanced Support for Partners||15,000||–|
|Total (Operating Expenses)||108,000||50,000|
There are more up-front investments as a Direct-bill partner. The CSP business requires an investment however, this doesn’t convey the full story. To go along with the costs we need to model the revenue and margins that are generated.
With the Direct Bill Model, partners enjoy a bigger margin, more automation, and a deeper relationship with Microsoft. below is an example of a profile of a partner servicing the SMB segment:
|Revenue and Margin:||Direct Partner||Indirect Partner|
|Office 365 (per user per month)||$20||$20|
|Azure Consumption (per customer per month)||$500||$500|
|Partner Margin on Microsoft Elements||20%||15%|
|Additional Partner Support Fees (per user per month)||$40||$40|
|Partner Margin on Additional Support Fees||40%||30%|
A quick example…
Assume you’re a Direct-bill partner and you have 25 users per account. Based on the charts above, your breakeven client number is 50 customers between the direct and indirect program.
That said, with 25 customers in your CSP business you could be very close to meeting the required revenue threshold. Although this number looks large, you may not be far off with the correct strategy.
The CSP program has been around since 2015 and has been a high-growth area since launched. The number of customers moving to the cloud isn’t going to decrease. If this pandemic has taught us anything, it’s that digital transformation and moving to the cloud will accelerate in the coming months and years. Adding just one customer per month would result in over 50 customers in 5 years.
Although there is a greater operating cost associated with maintaining Direct-bill status, there is also a larger revenue opportunity, in the form of margin percentages. This structure incentivizes those who are motivated to scale their business quickly, enabling them to earn greater revenue as they add more clients. Those who think of the CSP business as an opportunity and invest in the infrastructure and systems can realize the scale and better margins to fuel growth.
As you can see from this chart, there is an initial upfront cost, but your breakeven is achieved when you reach about 25 clients. This calculation assumes about 25 users per client and the strategic investments outlined in Table 1. What’s more, is this your revenue at this number of clients and users would generate $300,000 in revenue, fulfilling the requirement to maintain Direct-bill status.
- If your CSP footprint is small and recurring revenue is not a growth area for you, you shouldn’t be in the direct program, it just doesn’t make much financial sense.
- There are great partners out there to help you in these areas.
- It is significantly more challenging to scale Azure through an indirect provider, so remaining a direct partner can make a big difference in your ability to sell and manage Azure billing.
- If you have a significant CSP footprint in the indirect program, you could have much greater margins and be doing much better financially in the Direct-bill program.
- To be successful in the Direct-bill CSP program, it requires investment in systems, people, and process.
As with many Microsoft announcements over the years, this one takes some thought and evaluation. What we hear time and again is that reinvestment of capital into your business in the form of automation can significantly help your business achieve scale, then accelerate growth. That has never been clearer for direct bill CSPs as it is now, which should pave the way for an even more successful 2021.
Work 365 wholeheartedly understands how challenging it can be to scale and grow your business. Contact us to learn more about how we’re helping businesses embrace, scale, and accelerate recurring revenue.