The Hosted Microsoft Dynamics CRM Opportunity for Partners

The Hosted Microsoft Dynamics CRM Opportunity for Partners Abstract Of all Software-as-a-Service applications to date, none has received more attention and better market traction than Customer Relationship Management. Microsoft has released Dynamics CRM 4.0, a deployment-neutral product that partners can equally leverage for both hosted and on-premise deployments. Partners should add the profitable hosted CRM offering to their solution portfolio. July 2008 The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 1

Table of Contents Executive Summary... 3 Introduction... 4 SaaS and the Hosted CRM Market... 4 Business Model for Microsoft Partners... 6 Profit: Comparing Hosted and On-Premise Solution Models... 7 The Effects of User Numbers on Profitability... 8 Partner Revenue Sources... 9 Subscription Fees... 9 Professional Services Revenue... 9 Partner Costs... 12 Best Practices / Success Factors... 13 Summary and Conclusions... 16 Appendix... 18 Methodology and Approach... 18 The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 2

Revenue Costs Executive Summary Software as a Service (SaaS) has emerged as a growing trend in the software industry. Instead of purchasing perpetual software licenses deployed on IT hardware, customers buy subscriptions to actual applications that are maintained at hosting facilities. SaaS lowers upfront fees and minimizes IT involvement. Customer Relationship Management (CRM) is a leading SaaS application. With the newly updated Microsoft Dynamics CRM 4.0, Microsoft has created a deployment-neutral product that partners can equally leverage for both hosted and onpremise solutions. Value Prism Consulting, a management and financial analysis firm analyzed is a 50- user CRM deployment over a five year period which included one major software upgrade. 1. The profit from a hosted CRM deal is comparable to that of a traditional on-premise deployment. 2. It also may be more secure due to the stickiness of the application. 3. Hosted CRM deals will provide comparable professional services to on-premises deployments. This includes options for full customizations and industry specialized solutions. Such benefits can be obtained with minimal partner investment. The hoster handles most software, hardware and operations. In fact, as can be seen from Table 1, hosting actually simplifies the revenue and cost structure for partners. Partners should strongly consider hosted CRM as a solution deployment option for their customers. Partners may be in danger of losing deals to competitors who do offer hosted alternatives. Subscription Hosted On-Premise Hosted On-Premise Revenue Hoster Fees Consulting: initial and upgrade Sales commissions Hardware Revenue Consulting Labor: initial and upgrade Software Revenue Support/Help Desk Software Maintenance Hardware Support/Help Desk Software Licenses Software Maintenance Table 1: Major Revenue and Cost Components for Microsoft Dynamics CRM Deals Figure 1: Comparison of annual total costs, revenue and profit between Hosted and On Premise CRM Solutions The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 3

Introduction The software industry worldwide has witnessed a shift in delivery approach. Consumers and enterprises alike are recognizing the benefits of Software as a Service (SaaS). SaaS customers license a software application and, rather than deploying and maintaining it internally, they pay a subscription fee and a separate hosting company runs and manages the application for them. Particularly successful with customer relationship management (CRM) solutions, this approach spares customers the high initial costs and IT resources required by traditional on-premise solutions. SaaS is becoming a significant and pervasive force at Microsoft. The market has seen the early launches of Windows Live network of Internet services, Microsoft Office Online and now Microsoft Dynamics CRM Live. The opportunity that offering hosted (SaaS) CRM solutions using Microsoft Dynamics CRM 4.0 represents a significant opportunity to the Microsoft partner community. Research shows rapidly growing demand in the market from small, medium, and large organizations in both the public and private sectors. Microsoft Dynamics CRM can provide Microsoft partners with some unique competitive advantages in the hosted CRM space. Unlike its competitors, Microsoft designed its state-of-the-art technology around dual-deployment models: hosted or on-premise. With the hosted model, partners can earn revenue from consulting, custom development, and other services in addition to the software subscription revenue that they share with the hosters. Partners adding hosted CRM offerings to their existing onpremise CRM solutions will expand the addressable market, making Microsoft Dynamics CRM more affordable without sacrificing world-class capabilities. Hosted Microsoft Dynamics CRM may even be more profitable in the long term than on-premise deployments. It represents a sticky annuity revenue stream with expected low turnover, good growth, and minimal investment requirements for the partner. Today, hosted CRM represents a great opportunity for partners and their customers. SaaS and the Hosted CRM Market SaaS is one of the most important trends in the software industry to date. Also referred to as ondemand software, SaaS describes an application that is deployed and operated by a third-party company called an application service provider (ASP) or hoster. Hosters take responsibility for maintaining the software on their own hardware and give customers access rights to the software to use as they wish. The customer pays a per-user fee for access for a limited period of time. This is in contrast with traditional on-premise software deployments, in which customers acquire perpetual usage licenses and deploy the software using their own hardware and facilities. Although SaaS is beginning to have a major impact on the software industry, it is not a new concept. However, it is only recently SaaS has trended upwards in both horizontal and vertical markets, surfacing in such software categories as video games, messaging, security, training, CRM, and Enterprise Resource Planning (ERP). Several trends are causing this rise in SaaS demand. Over the years, software complexity has been growing exponentially. This complexity manifests itself in greater specialization, upward spiraling maintenance, and increased IT costs. The software industry has been addressing these concerns through legacy replacement, new architectures, and standardization, but the complexity still The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 4

Case Study: Advantage Technologies, Inc. Situation: Advantage Technologies (www.adv-tech.com) is a premier provider of technology integration solutions for dental and medical practices. Orbit Imaging, a service provider to the dental industry, came to them with a request for a CRM solution to help them better serve their customers and improve patient care. Since Orbit was growing quickly, they needed to maximize capital for investment in new centers and not in IT. The CRM solution needed to be scalable and customizable yet low in investment and minimal need for full-time IT resources. Solution: Advantage Technologies teamed with CRM OnTarget (www.crmontarget.com), a leading Microsoft Dynamics CRM hosting service provider, to provide Orbit with a complete hosted CRM solution. The solution included Microsoft desktop products such as Office 2007 and picture management as well as Dynamics CRM, Exchange and SharePoint. The solution was delivered completely through Advantage Technologies using their own consulting and white-label hosting services from CRM OnTarget. Benefits: Advantage Technologies was able to offer a solution for Orbit, building a relationship with a customer where a traditional on-premise solution would not fit. The solution provided significant consulting and implementation work and an on-going cash flow to Advantage without the need to do their own hosting and provided Orbit with a remotely managed, scalable, flexible solution which minimized initial capital investment and IT workload. For more information on this case study see http://www.microsoft.com/casestudies/ remains for most companies whose core business is not IT. SaaS is a way for such companies to transfer the complexity and risk to those who are specialized to handle it. Another trend enabling SaaS is technology itself. While some argue that technology is growing too complex, it also is overcoming old obstacles that ASPs couldn t properly overcome in the past. Security advancements, shared storage, ubiquitous broadband, virtualization, and new software features have eliminated most of the problems that customers initially faced with SaaS offerings. What s left becomes a very compelling offering that reduces upfront (capital) investment, potentially increasing ROI while simultaneously minimizing maintenance and complexity. From an overall software industry perspective, SaaS is expected to grow much faster than onpremise software. Gartner has forecasted the SaaS market to grow from U.S.$5 billion in 2007 to more than $11 billion in 2011, a 22.4 percent annual growth rate. IDC is more optimistic, projecting a 35 percent annual growth rate over the same period. Today, SaaS still represents a small piece of the overall software market (under 2 percent), but market pundits say that will change. Gartner forecasts that SaaS will be 25 percent of new business software purchases by 2011, and Deutsche Bank is even more bullish with a projection of 50 percent by 2013. 1 Regardless of the number, the magnitudes are huge and the effect will be understated in the statistics. SaaS revenues come from subscriptions over time, depressing initial results compared with onpremise licenses. This means that Microsoft partners should act now because when those numbers do 1 Software-as-a-Service: Opening Eyes in 07; Half the Market in 13; Tom Ernst, Jr and Greg Dunham, CFA, Deutsche Bank Microsoft Dynamics, Market Facts & Trends for MBS (Covering analyst reports published September 07-March 08), Arne Kiel, April 2008, page 21 The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 5

reflect massive growth, it will be too late. Take notice, revisit business plans, and ensure that SaaS is factored into the plans Value Prism s interviews with partners confirmed that most on-premise CRM customers are interested in exploring hosted options. Today, SaaS generates 12 percent of CRM software revenue (Gartner) and it is increasing. 2 CRM applications are excellent candidates for hosted solutions because they require less integration than other business solutions, are not as data intensive, and are often deployed for geographically distributed teams meaning that subscribing through a hoster may be much less expensive than a full network upgrade investment. CRM is therefore the perfect storm for hosted applications. It is no wonder why other service providers have already entered the market with significant success even with reduced feature-sets. The introduction of Microsoft Dynamics CRM 4.0 may change the game even further. Other providers have had trouble customizing hosted CRM offerings. In contrast, every feature available in on-premise Microsoft Dynamics CRM also is available in a hosted scenario. In addition, existing players removed many former roadblocks such as those related to hosted security and market cannibalization. Most customers now agree that hosters provide adequate security. Partners tend to view hosted deployment options as opportunities for market expansion, opening doors to customers who previously couldn t or wouldn t deploy and maintain an on-premise solution. Business Model for Microsoft Partners Hosted CRM presents a profitable business opportunity for Independent Software Vendor (ISV) as well as Systems Integration (SI) partners. These solution partners do not directly implement hosting services but instead rely on a hoster. Partners are responsible for the ongoing service level agreements (SLAs) and support, even if it is just a pass-through from the hoster. This business model where the solution partner are prime will be explored and assumes that partners already market Microsoft Dynamics CRM as a traditional on-premise software solution and therefore have the basic infrastructure in place to support such sales. Thus, only incremental revenues and costs are considered in the evaluation of whether to offer a hosted CRM solution. Figure 2: Partner Business Model - Hosted Figure 3: Partner Business Model On-Premise 2 Microsoft Dynamics, Market Facts & Trends for MBS (Covering analyst reports published September 07-March 08), Arne Kiel, April 2008, page 21 The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 6

On-Premise Hosted To analyze the opportunity, a single sample deal is examined consisting of a hosted CRM offering set over a five-year period. Value Prism selected this scenario to demonstrate value over a reasonable time that includes at least one major software upgrade (e.g., Microsoft Dynamics CRM 4.0 to Microsoft Dynamics 5.0), numerous dot releases (Microsoft Dynamics 4.1 to Microsoft Dynamics 4.2), and updates. Partner Profit: Comparing Hosted and On-Premise Solution Models Profit is a critical factor when deciding which solutions to offer. To analyze the hosted and on-premise solutions, a 50-user Dynamics CRM deployment over a five year lifetime with a software upgrade in year 3 was considered. The deal was for a customized CRM solution for a vertical industry and therefore consulting service revenue was a major component of both solutions. Analysis results show comparable overall profits between hosted and on-premise deployment. Profit Year 1 Year 2 Year 3 Year 4 Year 5 Cumulative Total Revenue Hosted $143,000 $60,000 $90,000 $60,000 $60,000 $413,000 Total Costs Hosted $88,000 $43,000 $59,000 $43,000 $43,000 $276,000 Hosted Profit $55,000 $17,000 $31,000 $17,000 $17,000 $137,000 Profit Year 1 Year 2 Year 3 Year 4 Year 5 Cumulative Total Revenue On-Premise $260,000 $35,000 $67,000 $35,000 $35,000 $432,000 Total Cost On-Premise $204,000 $21,000 $38,000 $21,000 $21,000 $305,000 On-Premise Profit $56,000 $14,000 $29,000 $14,000 $14,000 $127,000 Table 2: Comparison of estimated profit earned from Hosted and On-Premise sales of Microsoft CRM While later sections of the paper discuss revenue and cost components in detail, the key points are: Overall lifetime profit is the similar for our analysis. Hosted solutions provide lower initial revenue followed by higher revenue over the life of the deal. This means lower up-front costs (entry price) to the customer thereby expanding the addressable market for partners. The corresponding costs to the partner are also lower initially. Software and hardware are handled by the hoster. The partner doesn t have to maintain data centers. The hosted profit stream may be more secure than on-premise streams due to monthly contractual and fixed obligations to upgrade to new software. After the initial sale, on-premise revenue is at risk to customers dropping maintenance, not upgrading and simply using the solution as is. Consulting services revenue is similar (see Table 3). This is exactly what discussions with Microsoft CRM partners have indicated. Hosting is simply another deployment model that doesn t really affect the amount of consulting services required to create a custom CRM solution. Lastly, hosted requires less IT resources and sophistication for the customer. This is a major selling point supported by Value Prism interviews with partners. The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 7

The Effects of User Numbers on Profitability Profitability and customer feasibility will vary according to the size of the deal (number of users). Figures 2 and 3 illustrate price per user and profit per deal analysis of the paper s sample scenario. From the partner s perspective (Figure 2), one can see that both hosted and on-premise deals are profitable but hosted profitability increases very quickly for the partner while on-premise deals tend to flatten out. The partner can therefore expect higher profitability for hosted deals as the customer s user base grows over time and can provide volume discounts. In summary, hosted CRM is a profitable option for Microsoft partners. Profitability increases quickly as customers add users, and the revenue/profit stream from hosted deployments is likely to be more predictable, more secure, and potentially more profitable than on-premise deployments. The hosted model also includes similar levels of services fees to on-premise deployments. From the customers, perspective (Figure 3), the following are the key points: Hosted provides a much more economical per user cost than on-premise for small user bases. On-premise requires a much larger up-front investment in hardware and software. As the user base increases, the cost/user decreases significantly for on-premise since the large initial capital investment is spread over more users. The cost/user also decreases for hosted but not as rapidly. This means that rapidly growing customers may eventually desire a migration from hosted to on-premise deployments. Fees such as consulting services are not determined by the number of users but rather by the planning, development, and configuration work involved. This is reflected as the entry cost for a customized CRM solution. Customers who cannot afford the consulting may therefore buy standardized one-size-fits-all solutions. Figure 2: Comparison of profit per deal for small and large deployments between Hosted (no volume discounts) and On Premise Figure 3: Comparison of cost-per-user (i.e., paid to partner) for small and large deployments between Hosted and On Premise The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 8

In the example, the cost to the customer from the partner on a per user basis is identical when the user base is between 40-60 users for hosted or on-premise. This is NOT customer total cost of ownership (TCO). It clearly ignores the customer s internal costs for deploying and operating an on-premise solution. Partner Revenue Sources Hosted CRM can grow market size. Customer who could not justify on-premise deployment can take advantage of the low entry costs of a hosted deployment. The main revenue sources from a hosted CRM offering are monthly subscription fees and one-time professional service fees and training fees. Some one-time fees may also be generated with a major software upgrade. Subscription Fees The monthly subscription fee for a hosted CRM solution is the per-user fee paid by the customer for access to the CRM solution and associated software running at the hoster s site. The partner and hoster take care of all software maintenance (e.g., applying critical updates) and support, and they provide the appropriately sized hardware to meet set performance and reliability SLAs. Therefore, the customer can always assume that its CRM solution has received the latest software updates and is the correct size for the company. Typical of subscription model businesses, a fixed-term contract provides the customer with price protection and the partner with a guaranteed number of months and users (e.g., 100 users for 3 years at $100 per user). Monthly subscription fees for hosted CRM solutions range from approximately $75 to $175 for industryspecific solutions. Although volume discounts also may be part of the mix along with lower fees for non-profit organizations and standardized offerings financial models indicate that this fee range will ensure profitability for both partners and hosters. In this example, a figure of $100 per user per month has been used. This price assumes some industry specialized and customer modified solution is assumed including invested (value added) partner development. Professional Services Revenue Professional services represent another major revenue source for partners. These services include upfront business strategy consulting, process and requirements consulting, implementation consulting, and training. In the past, hosted CRM offerings have been limited in functionality compared with on-premise solutions. This reduced the potential for professional services opportunities because customers assumed that they had to sacrifice functionality in exchange for a quick alternative. This isn t true for Microsoft Dynamics CRM 4.0 partners can offer their customers the same full range of features in a hosted as well as an on-premise solution. This implies that CRM software functionality no longer limits professional service opportunities, although some market education to that effect may be necessary. The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 9

Upfront consulting helps set customers expectations as to what a CRM solution can do for them and ensures that the software customized or not will enable each customer s business processes. Upfront consulting revenue for partners should be the same for similarly sized hosted or on-premise deals because it is equally valuable in both deployment scenarios. Implementation consulting, which consists of customization, installation, configuration (including testing), and integration, for hosted deployments is similar to on-premise deals, with the exception of installation. The software is already installed at the hosting facility therefore there is no installation revenue in a hosted deployment. However, on-premise deployments involving straightforward software installations typically take less than one day per environment, given hardware and network availability. Customization consulting involves making changes to the software to fit specific industry standards or individual business processes and requirements. Fees for these services are common for CRM deals and should apply equally for hosted and on-premise solutions of similar size. After all, a customer s business processes should not be dependent on its software deployment strategy. Integration consulting refers to connecting the CRM and associated software with the customer s existing software systems. It could include links to legacy mainframe applications for source data, e-mail applications, and remote access technologies. Hosted CRM runs on remote servers so the customer s firewall/security setup may need modification. T he integration effort for a hosted solution should be similar as for an on-premise CRM deployment. Configuration consulting includes tasks such as setting up accounts, importing data, and conducting functionality and acceptance testing to ensure that the CRM software works in the customer s environment. Unlike customization and integration, configuration is a mandatory part of a CRM solution, and it is extremely unlikely that the effort would be much different for hosted or on-premise deployments. The professional services component of CRM deals will vary widely based on the maturity level and environment of the customer. Below is a conservative sample showing tasks and the time associated with them and using a $1,500 per day for blended rates. Hosted Estimated On-Premise Estimated Task Required Person Days Required Person Days Upfront Consulting 2 2 Customization 20 20 Integration 20 20 Configuration 10 10 Installation 0 1 Training 3 3 Total 55 56 Table 3: Example Professional Services Tasks and Associated Times Training also presents an opportunity for partner revenue. Custom or standardized training classes on how to use the Microsoft Dynamics CRM software are applicable for both hosted and on-premise deployments. Although customers may be more tempted to forego training for hosted solutions, the deployment method does not reduce the need for it. Software upgrades will become available over time. The cost of the new versions is included in the subscription fee for hosted. However, transitioning a customer to a new major software version still The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 10

On-Premise Hosted requires work. Data needs to be moved, customizations rewritten, software possibly reconfigured, the solution retested, and customers trained. All this implies that there will be a professional services opportunity at the time of a major software upgrade. From a services perspective, hosted software upgrades do not differ much from on-premise upgrades. Another point to note is that the pressure to upgrade to a new version may be even stronger in a hosted scenario than on-premise one, thereby generating more services revenue for the partner. As with onpremise solutions, new software versions and maintenance/support costs will drive upgrades. Hosters typically serve many customers using the same equipment and may not be able to maintain dual systems (old and new versions) for a long period of time. Therefore, when a customer contract expires, they may not give the customer a choice about upgrading. Hosted Estimated On-Premise Estimated Task Required Person Days Required Person Days Upfront Consulting 2 2 Customization 5 5 Integration 5 5 Configuration 5 5 The following is a revenue model of a Installation 0 1 partner offering a hosted CRM versus on-premise solution. It uses the Training 3 3 assumptions and figures discussed Total 20 21 above. The model compares hosted CRM Table 4: Example Upgrade Tasks and Times and on-premise solutions in a single, 50- user customer environment over five years with a major upgrade in year 3. The on-premise case assumes a reseller margin of 15 percent on hardware, software, and maintenance (software assurance) in a redundant configuration with 100 hours/year of ongoing support (e.g., help desk, custom code updates, etc). Ongoing support is assumed to be included in the subscription fee for the hosted solution. Year 1 Year 2 Year 3 Year 4 Year 5 Cumulative Subscription Revenue $60,000 $60,000 $60,000 $60,000 $60,000 $300,000 Consulting initial $83,000 $83,000 Consulting upgrade $30,000 $30,000 Total Revenue Hosted $143,000 $60,000 $90,000 $60,000 $60,000 $413,000 Year 1 Year 2 Year 3 Year 4 Year 5 Cumulative Hardware Revenue $61,000 $61,000 Software Revenue $80,000 $80,000 Consulting initial $84,000 $84,000 Consulting upgrade $32,000 $32,000 Software Maintenance $16,000 $16,000 $16,000 $16,000 $16,000 $80,000 Support $19,000 $19,000 $19,000 $19,000 $19,000 $95,000 Total Revenue On-Premise $260,000 $35,000 $67,000 $35,000 $35,000 $432,000 Table 5: Comparison of estimated sales and services revenue between Hosted and On-Premise Microsoft CRM solutions The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 11

Partner Costs This section focuses on the incremental costs for an on-premise Microsoft Dynamics CRM partner to add a hosted CRM option to its portfolio. The largest incremental cost to the partner will be fees paid to the hoster. There also may be additional labor, sales costs but allocated costs such as development, marketing, and general administration are not considered incremental. The costs are discussed in detail below: Hoster Fees: The hoster will provide hardware, redundancy, security, disk space, and a service level agreement specifying expected downtime per year and support. They will also take care of the day-today operation of the system from the operating system, database, and application perspective including installation of both routine and critical CRM system level updates. Since the hoster will not be familiar with the partner s customers or any CRM software customizations, the partner will need to spend time with the hoster both initially and on a continual basis. Hosters subscription fees usually are about $40 to $75 per user per month. Alternatively, hosters may charge on a per-server (or per-rack) basis, which would be cheaper but places more operational risk on the partner. Because partner research indicated that the per server basis is undesirable, the example below uses a $54 per user per month fee. Professional Services: The services previously described in the Partner Revenue Source section are delivered by billable resources that also could be used to implement on-premise CRM solutions. Therefore, dedicated consulting resources are not required and only actual cost is included in our analysis. That cost is assumed to be a blended rate of $350 per person per day. The costs incurred by the partner from developing custom industry solutions generally would not be incremental for the hosted CRM offering. Anything that a partner developed for an on-premise Microsoft Dynamics CRM solution should also be able to work in a hosted environment. Upgrades to a new version do not produce additional software costs because they are built into the hoster fee charged to the partner. The professional services involved with an upgrade will be similar but of lesser magnitude than the initial CRM implementation. Ongoing customer support can be delivered by the same people, help desk, and tools that the partner uses to support its on-premise customers. However there may be some incremental costs. First of all, support personnel will have to interface and interact with the hoster adding to their current duties. In addition, since customer IT departments are less involved with hosted solutions, they may not provide an effective buffer between end-users and the partner. Both factors may therefore increase call volume and problem resolution time. To account for this, this analysis assumes 10% additional support costs for hosted versus on-premise. Sales costs will be dominated by sales commissions paid to field personnel. A correctly structured sales compensation plan for hosted CRM will be critical to its launch and ongoing success, for this analysis 10% of revenue has been used. This will be discussed in the Best Practices section. The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 12

On-Premise Hosted Marketing costs will generally not be incremental for hosted. The partner can continue to market as before, possibly modifying collateral to discuss the hosted deployment option. The following is an example cost model of a partner offering hosted versus on-premise CRM solutions. As with the revenue model, it s a five-year analysis of one 50-user environment. For the on-premise case, 15 percent margins on hardware, software, and maintenance is used. Year 1 Year 2 Year 3 Year 4 Year 5 Cumulative Comment Hoster fees $32,000 $32,000 $32,000 $32,000 $32,000 $160,000 $54/user/month net Sales Commissions $14,000 $6,000 $9,000 $6,000 $6,000 $41,000 10% of Revenue Consulting Labor (initial) $37,000 $37,000 $350/day; table 3 Consulting Labor (upgr.) $13,000 $13,000 $350/day; table 4 Support/Helpdesk $5,000 $5,000 $5,000 $5,000 $5,000 $25,000 On-premise +10% Total Costs Hosted $88,000 $43,000 $59,000 $43,000 $43,000 $276,000 Year 1 Year 2 Year 3 Year 4 Year 5 Cumulative Comment Hardware $54,000 $54,000 15% margin; table 5 Software Licenses $68,000 $68,000 15% margin; table 5 Sales Commissions $26,000 $3,000 $7,000 $3,000 $3,000 $42,000 10% of revenue Consulting Labor (initial) $38,000 $38,000 $350/day; table 3 Consulting Labor (upgr.) $13,000 $13,000 $350/day; table 4 Software Maintenance $14,000 $14,000 $14,000 $14,000 $14,000 $70,000 15% margin; table 5 Support/Helpdesk $4,000 $4,000 $4,000 $4,000 $4,000 $20,000 $350/day; table 5 Total Cost On-Premise $204,000 $21,000 $38,000 $21,000 $21,000 $305,000 Table 6: Comparison of estimated cost of sales of Hosted and On-Premise Microsoft CRM solutions Best Practices / Success Factors Hosted Microsoft Dynamics CRM 4.0 represents an incremental opportunity for Microsoft partners to better serve their customers. Yet to maximize this opportunity, partners need to understand best practices and success factors. One of the most obvious benefits of a hosted Microsoft Dynamics CRM solution for the end customer is that it relieves the end-customer s IT staff from supporting the infrastructure required to deploy and maintain a world-class CRM solution. This reduction in the IT staff s role also makes the relationship between the Microsoft partner and the customer s business stakeholders all the more critical. Partners can focus their sales efforts on smaller, department-driven opportunities that allow faster deployment and quicker ROI. Plus, partners can use the successful results from one department as an internal reference for the rest of the customer s organization. In addition, partners should capitalize on some of the innate qualities of hosted solutions. Because the hosted solution is already deployed at the hoster, it s ready and waiting for new customers. Partners can take advantage of their relationship with the hoster to set aside a number of trial subscriptions for The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 13

short-term pilots and demonstrations. Customizations may not be feasible for such short-term projects but there is no better proof than a working solution. Hosted deployments have actually been around a long time. Partner sales forces must therefore be prepared to counter various misconceptions concerning hosted CRM. Let s address the major items individually. Security. The customer s IT staff may not allow a hosted deployment because of security policies. IT staff may be concerned with having CRM data and application access control handled by the hoster and sensitive corporate data stored off-site. While valid concerns, hosters have become very sophisticated in terms of authentication, administration, and data encryption. Even though hardware and software may be shared across companies, only the customer has access to its own data. Most IT departments are aware of these improvements and will accept hoster SLAs regarding information access and security. For example, in the United States, most corporations and state and local governments have become very open to hosted applications. Integration. Integration of hosted CRM solutions with customer internal and legacy applications is a valid concern for customers. The hosted and on-premise application(s) need to have sufficient communication and information exchange rights with each other. Actual integration work will be similar between on-premise and hosted deployments but because the hosted application operates outside the customer firewall, customer IT staff may need to modify ports and routes that previously were not open to external applications. Although such modifications could conflict with security policies, they are technically feasible and usually represent very low risk.. Customization. Historically, custom development and configurations were not as feasible for hosted CRM customers as they were for on-premise solutions. The hoster had to dedicate specific hardware to any custom implementation and manage that customer differently from others. This not only significantly increased operating expenses and the ongoing cost to the customer, but it also reduced the partner s opportunity to sell consulting/custom development services. Today, Microsoft Dynamics CRM provides multitenancy functionality, plug-in code customizations, security isolation, database separation, and numerous other benefits that ensure that Microsoft Dynamics CRM in a hosted environment delivers all the same features as an on-premise implementation. In addition, hosters can use advances in hardware and operating system virtualization technologies to fill in any unanticipated gaps. The conclusion is that partners can and should sell the same consulting and development services for hosted deployments as they do for on-premise deployments. And while hosted Roadblock Security Integration Customization Speed Ownership Solution Hoster SLAs better than most IT policies Similar to on-premise; educate customer Fully available via Partner professional Services Typical DSL/WLAN is fine Show business case Table 7: Typical Roadblocks to Software as a Service, and Solutions to Overcome those Roadblocks The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 14

offerings with limited customization do exist, they are targeted toward the low end and do not take advantage of everything Microsoft Dynamics CRM has to offer. Speed. Because hosted applications are not located within the customer s network, they must be accessed from the Internet, but with broadband networks and cheap data costs this is no longer the issue it once was. Ownership. A hosted CRM solution may not give customers the same pride of ownership that they have with their on-premise solutions. Proper business analysis along with pilot and small deployments should help overcome this objection. Once the partner has addressed the above challenges, it must ensure that it can provide value to the customer throughout the lifetime of the hosted agreement. Strong customer support is therefore crucial to preserving what is likely to be quite a profitable revenue stream. The partner needs to remain the customer s main point of contact for all support, whether it s a Microsoft issue, hoster problem, custom development/configuration issue, or problem with proper software usage. Choosing the right hosting vendor(s) is absolutely critical to the ultimate success of any hosted CRM offering. The partner is relying on the hoster for quite a lot, including initial setup and ongoing operations most likely across more than one of the partner s customers. Ultimately, the customer will look to the partner (i.e., the relationship manager) to ensure that the SLA is met. To ensure success, the partner must dedicate time and labor to the hoster. If possible, work with multiple hosters diversification lowers risks. More time/labor will be required in the beginning to help get the hoster up to speed but ongoing support also needs to occur. Given similar functionality between hosted and on-premise deployments, the choice will depend on the customer s organizational and financial situation. The partner should guide this decision during presales or through upfront consulting services. For example, a departmental implementation may benefit from a hosted solution due to lower upfront costs and less IT involvement. In fact, the correct deployment method for a customer may vary over time. That same hosted departmental implementation may evolve to a companywide on-premise solution with high investment and lots of IT involvement, perhaps based on the value demonstrated by initial department solution. A final factor to consider when offering a hosted CRM solution is sales force compensation. Traditional sales compensation plans are based on bookings or revenue. For on-premise deployments, this tends to result in a large commission check upon initial deployment. In selecting a hosting vendor(s), partners should: Look for hosters that are willing to make an investment and deploy multi-tenancy and virtualized software and hardware platforms. Demand an SLA at least as good as the IT departments of the partners customers. Ask about redundancy and backups within the hosting site as well as geographic diversification. Ensure that the hoster is prepared for the incremental network traffic. Talk to hosters with Microsoft Dynamics CRM experience The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 15

Revenue from hosted solutions is much more distributed over time; consequently, a purely time based revenue compensation plan would not provide equivalent incentive. The challenge of determining the best compensation plan is not unique to CRM offerings, and there are many ways to address it. Some companies in similar situations compensate sales based on the contract value discounted to time value of money and cancellation risk. Others adjust on-premise compensation. The point is that the sales compensation plan should be neutral to the hosting versus on-premise decision. In conclusion, the best practices to follow when offering a hosted CRM solution are: Focus sales efforts toward customer business stakeholders. Help customers pick the correct deployment method for them, based on their individual needs. When necessary, provide knowledge and pilot solutions to overcome objections related to past hosted solution limitations. Ensure that value is being added throughout the life cycle of the customer engagement starting with sales, consulting, services, and custom development and continuing with strong support and relationship management. Conduct detailed due diligence on hosters and work closely with the hoster, forming strong relationships, preferably with more than one. Ensure that sales compensation plans do not favor one deployment method over another. Summary and Conclusions The SaaS market is growing rapidly and represents an extremely important trend in the software industry. CRM in particular is a key application that has had considerable initial success with the hosted deployment model. Microsoft Dynamics CRM software provides key competitive advantages for partners. Unlike many competing products, Microsoft Dynamics CRM supports all functionality regardless of deployment model. This provides Microsoft partners with a unique opportunity to expand their portfolio of on-premise solutions to include hosted CRM offerings. Primary and secondary research, plus financial analysis, shows that adding hosted CRM to an existing Microsoft Dynamics CRM practice can be both profitable and market expanding for a partner. Services revenue should be similar to on-premise deployments, including fees for consulting, customization, and configuration services. Partners also will gain a piece of the subscription revenue via re-sales of hoster services. When combined, the services and subscription fees make a compelling, profitable revenue stream. CRM applications, especially customized versions, tend to be quite sticky which helps to ensure annuity as well as future consulting and migration services related to upgrades. From an investment perspective, the incremental cost of offering hosted CRM solutions appears to be quite low for partners. They should expect some labor both initial and ongoing with the hoster. Customer support also may be a bit higher due to the reduced customer IT involvement with hosted solutions. The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 16

Key to the success of a partner s hosted CRM offering is its relationships with customer business stakeholders, the hosting services provider and the partner s ability to properly address both organizational and policy roadblocks within the customer. Also important is ensuring that partner salespeople are appropriately compensated so that they provide unbiased advice to customers regarding which deployment model to choose. Partners should embrace Hosted CRM as a profitable opportunity and another deployment option for their customers. Contact Microsoft for more information about Microsoft Dynamics CRM 4.0 and available hosting vendors. http://www.microsoft.com/dynamics/crm/default.mspx http://www.microsoft.com/dynamics/crm/partners/default.mspx The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 17

Appendix Methodology and Approach Value Prism Consulting, a management consulting and financial analysis firm, developed this white paper based on investigation and validation of the partner opportunity for hosted Microsoft Dynamics CRM solutions. The methodology included both primary and secondary research as well as detailed analysis and financial modeling, with the results and conclusions summarized in this white paper. Starting with secondary research from firms such as IDC and Gartner and investment banks, Value Prism analysts were able to gain understanding on the overall SaaS market and the hosted CRM market in particular. The secondary sources not only provided market sizing estimates, but they also provided qualitative information concerning past and current roadblocks within various types of customers. Analysts then combined this data with product research from various internal Microsoft sources to understand the features, functions, and competitive advantages of Microsoft Dynamics CRM 4.0. Value Prism used all this secondary research to guide the primary research discussions. The source of the primary research was a set of interviews with Microsoft partners both ISVs and SIs who currently offer Microsoft Dynamics CRM on-premise solutions but do not yet offer a hosted alternative. Analysts spent at least 90 minutes interviewing key individuals within each partner; usually the interviewees were chief operating officers, partners or practice leads. Partner organizations ranged in size from fewer than 20 employees to more than 500. The partners were interviewed about their current CRM business, customer base, challenges, and views regarding the hosted CRM opportunity. Interviewees provided valuable insight into the real market for hosted CRM solutions within their existing and potential customer bases, the types of ancillary solutions and investments that could be repurposed from their on-premise offerings, and incremental revenue and costs that they envisioned from offering hosted CRM solutions. Based on the primary and secondary research, Value Prism analysts created a high-level financial model representing the partners business. They based the model on the preferred business model discussed with the partners and borrowed from previous analysis of the hosted CRM opportunity from the perspective of the hosting services provider. This perspective was deemed critical because the hoster is a key vendor to the Microsoft partner and the overall opportunity depends on the success of both parties. Therefore, this white paper represents an amalgamation of the thoughts, experiences, and conclusions of the surveyed partners combined with secondary research and analysts own analysis and conclusions. In particular, Value Prism used the partner financial model to analyze various what if scenarios and construct the examples used in this paper. The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 18

The information contained in this document represents the current view of Microsoft Corporation on the issues discussed as of the date of publication. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information presented after the date of publication. This White Paper is for informational purposes only. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS DOCUMENT. Complying with all applicable copyright laws is the responsibility of the user. Without limiting the rights under copyright, no part of this document may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise), or for any purpose, without the express written permission of Microsoft Corporation. Microsoft may have patents, patent applications, trademarks, copyrights, or other intellectual property rights covering subject matter in this document. Except as expressly provided in any written license agreement from Microsoft, the furnishing of this document does not give you any license to these patents, trademarks, copyrights, or other intellectual property. 2008 Microsoft Corporation. All rights reserved. Microsoft, Dynamics, Windows Live, Outlook and Windows are either registered trademarks or trademarks of Microsoft Corporation in the United States and/or other countries. The names of actual companies and products mentioned herein may be the trademarks of their respective owners. The Hosted Microsoft Dynamics CRM Opportunity for Partners Page 19