The last few weeks have been pretty unsettling for companies who make a living selling consulting services based on the Microsoft platform. In recent columns, I’ve discussed the consulting tailspin that some of the big guys have fallen into (“Is the end of the traditional consulting era at hand?”) and Microsoft’s entry into the small and medium enterprise space with its acquisition of Great Plains (“Why Microsoft bought Great Plains Software”). Then, early in January, Computer Reseller News reported that Microsoft had decided to reinvent their Microsoft Consulting Services practice as a for-profit division.

Why is this significant? Microsoft has always said that the focus of their Consulting Services group (MCS) was to drive the adoption of new technologies. Microsoft didn’t expect MCS to turn a profit, only to break even by billing out their resources to companies and partners to help with architecture, training, and best practices on new technologies.

But if MCS were its own separate company, it would be a $400 million consulting organization with more than 3,000 employees. MCS expects the headcount to grow more than 30 percent annually and for the practice to achieve 20 percent margins. To meet these objectives, MCS will have to recruit top executives with experience managing P&Ls in the highly competitive consulting services space. In theory, after MCS and the company defined their architecture, the Solution Provider would step in and help with the product deployment.

Changing the rules of the game
But the rules have been changing for some time. Last March, Microsoft and Andersen Consulting formed a new company called Avenade. Microsoft invested $385 million in the venture, ostensibly to train 25,000 current and future employees in Microsoft technologies.

What’s really happened is that Avenade has become a headhunting company, extracting the 25,000 positions from Microsoft’s existing partner base. They’re hiring the chief architects and technologists from major partners and offering salaries that run from 10 to 30 percent above the current market rate. These kinds of deals sent a clear message to the Microsoft partner community who focused on solutions for large enterprises—get big or get out.

Then in September, Microsoft, IBM, Andersen Consulting, and Avaya jointly invested $100 million to launch Enfrastructure, a hosting operation aimed at small to medium enterprises (SMEs). The Microsoft acquisition of Great Plains gave Microsoft a huge chunk of the business applications business in the SME space.

Other investments in bCentral, Plural, USInternetworking, DataReturn, and WinStar Communications clearly outlined Microsoft’s strategy partners focused on the SME (many of whom got here because they got out of the big enterprise space).

If you want to deliver Microsoft products and services into the SME space, you should be prepared to work with a Microsoft hosting partner or to become one. Not many partners have the capital (financial or intellectual) to become major regional hosting providers—especially while MCS and companies like Avenade (not to mention other major hosting providers) are cherry-picking their best technical talent.

To be fair to Microsoft, it should be noted that as a percentage of revenues, Microsoft services will only be about 2 percent, whereas Oracle, IBM, and Sun still generate 30 to 50 percent of their revenues from services. Microsoft still has the best partnering infrastructure and programs.

Unfortunately, this hasn’t translated into a large group of well-educated and profitable partners that can help drive Microsoft’s enterprise technology into large companies. The CIO at a Fortune 500 company wants Microsoft to have some skin in the game before he or she will shell out millions of dollars for software licensing or services.

Does bigger mean better?
The impact on consumers of high-end consulting services will be profound. In the past, if you needed help implementing Microsoft enterprise products, you had a choice of dealing with MCS, one of the big 10 national consulting providers, or one of several local Microsoft consulting organizations. The choice really boiled down to whether you had the time to use more local resources and pay less for consulting but have a longer deployment cycle. Unfortunately for Microsoft, when a company lengthens the deployment cycle, it takes longer for Microsoft to be paid for its software.

Having larger and more capable consulting companies—where Microsoft gets a piece of the consulting revenue—does two very important things. First, it shortens the deployment cycle dramatically. This means faster revenue recognition and the assurance that when the renewal period comes around, there’s a reason to repurchase. Second, there’s a new revenue stream to provide continual cash flow between the close of the licensing deal and the actual deployment of the product.

The net result is that companies with 2,000 or more PCs in major markets will be able to adopt new Microsoft technologies faster and take advantage of them earlier. This is good for business in general and very good for Microsoft specifically.

The downside is that the number of choices for high-end consulting services will be drastically reduced. This will generally result in higher bills for consulting as the larger companies have to match the greater overhead.

For companies with fewer than 2,000 PCs, their choices will actually increase. As more consulting firms go “down market” and hosting services settle into the five- to 2,000-seat range, CIOs and MIS managers will have more companies and types of services to choose from. Of course, with more supply than demand in this space, the shakeout of ASPs and boutique consulting firms (those having fewer than three locations) will be deafening.

If you’re in this space, it’s a good time to make long-term deals for attractive consulting or hosting rates. You just have to make sure that the company will be around long enough to deliver the services for which you’ve contracted. Look for privately held firms with major backers and run away as fast as you can from the publicly held firms who are dependent upon their stock price to support their payroll.
Do you see Tim Landgrave’s assessment of Microsoft’s strategy as accurate? Join the discussion.