Microsoft Online Services
Partner Profit and Loss Case Study
/ Growing Net Income from Online Service-Related Revenues by 129 Percent per Year
Overview
Country or Region:United States
Industry:IT Services
Partner Profile
The recipient of four consecutive Microsoft Partner of the Year awards, Clearway is a global technology services firm, providing clients with innovative Microsoft-based business solutions designed to deliver sustainable competitive advantages.
Business Situation
Clearway has a clear understanding of its customers business needs and is always looking for profitable ways to meet those needs.
Solution
The Business Productivity Online Suite from Microsoft Online Services enables Clearway to extend the range of solutions it can offer its clients, even as it offers opportunities to increase company profits.
Profit and Loss Impact
  • Revenues derived from online services-related consulting and customization projects are projected to climb by 162 percent compound annual growth rate (CAGR) for the next two years.
  • Net profits derived from all online services-related activities are projected to climb by 129 percent CAGR for next two years.
/ “We have to be all over this. This is not only the future of our business—this is now.”
Gene Rodgers, President, Clearway Technology Partners
For more than 13 years, Clearway Technology Partners of Boston, Massachusetts, has been building messaging and collaboration solutions for customers working around the world. Until 2008, Clearway had been tailoring solutions that its clients would run on-premises, but the Business Productivity Online Suite from Microsoft® Online Services has changed that. By offering a cloud-based messaging and collaboration solution—and by delivering integration and customization services that can link existing on-premises solutions with this cloud-based solution—Clearway has dramatically expanded the range of solutions it can bring to bear on customer challenges. With net revenues from online-services related work growing at a projected 129 percent per year, Clearway has also found a way to increase its profits dramatically.

Business Focus

Boston, Massachusetts-based Clearway Technology Partners knows messaging and collaboration. The company has been building and refining messaging and collaboration solutions based on Microsoft Office SharePoint® Server, Microsoft Exchange Server, Microsoft Communications Server, and more since 1997. And, as four-time winner of Microsoft Partner of the Year awards, Clearway has proven itself to be very good at what it does.

It has also proven itself to be very good at understanding the opportunities presented by emerging technologies. “We attended the partner event in 2008 where Microsoft announced Microsoft Online Services and the Business Productivity Online Suite,” recalls Gene Rodgers, President of Clearway Technology Partners. “When I heard about the Business Productivity Online Suite, I turned to my business partner and said, ‘We have to be all over this. This is not only the future of our business—this is now.’”

From all the angles—service cost, security, availability, functionality, and more—Rodgers understood that cloud-based services had finally come into their own. In some cases, he speculated that customers might opt for an online messaging and collaboration solution in place of an on-premises solution. In other cases, particularly among clients that already had on-premises solutions, he could see that cloud-based services offered expansion and migration paths that had not existed before. Either way, the ability to offer the Business Productivity Online Suite opened up opportunities that had not existed before.

Selling Online Services

The Business Productivity Online Suite from Microsoft Online Services enables Clearway to offer its clients access to a range of enterprise-class messaging and collaboration services —including shared workspaces, workflow, desktop and mobile email, calendaring and contacts, instant messaging, presence, audio/video conferencing, and web conferencing. Yet because the applications supporting these services—including Microsoft SharePoint Online, Microsoft Exchange Online, Office Live Meeting, and Microsoft Office Communications Online—run on servers residing in state-of-the-art Microsoft data centers, neither Clearway nor its clients need to invest in on-premises infrastructure to take advantage of these services. Indeed, Microsoft hosts and maintains the servers with its own staff of hardware and software experts, supplies patches and security updates in real time, and guarantees 99.9 percent uptime with a financially-backed service level agreement (SLA).

This cloud-based messaging and collaboration service offers still other advantages. Neither Clearway nor its clients need to purchase server or client licenses for messaging and collaboration components such as Microsoft Office SharePoint Server or Microsoft Exchange Server. Instead, Clearway connects its clients to the applications they want to use on a per-user, per-month subscription basis. Small and large organizations can provide their users with access to the entire Business Productivity Online Suite for one low monthly fee. If certain users need access to just one service—Microsoft Exchange Online-based email, for example—it is possible to subscribe to one portion of the complete Business Productivity Online Suite only for an even lower monthly fee.

Preparing to Go To Market

Though it already had a strong understanding of the messaging and collaboration market, Clearway followed a five-step process in rolling out its online service offerings:

  1. Perform market segment analysis.
  2. Define differentiating offerings.
  3. Prepare to generate demand.
  4. Review and refine sales practices.
  5. Review and refine customer services offerings.

This process helped Rodgers and his team to determine how best to integrate the Business Productivity Online Suite with the company’s existing set of service offerings.

Clearway developed a questionnaire that would help its team identify businesses that would benefit from the Business Productivity Online Suite, and then it developed a set of packaged offerings that it could bring to the various business segments it identified. Clearway had a long history of working with customers with on-premises messaging and collaboration installations, so one business segment that stood out—those businesses that had not upgraded their messaging and collaboration infrastructures recently. For these organizations, Clearway could position the Business Productivity Online Suite as a way to gain access to the latest versions of Microsoft messaging and collaboration products without having to build new infrastructure to support those products. Clearway identified other business segments within its existing customer base too: those that had small IT staffs, for example, that could benefit from offloading the administration of the messaging and collaboration utility to Microsoft Online Services. That would provide the IT team with more time to focus on more strategic IT initiatives, which could in turn lead to more consulting engagements for Clearway.

To promote these different offerings within the targeted market segments, Clearway hired several new sales representatives. Their task was to focus exclusively on reselling the Business Productivity Online Suite. To further demand generation, Clearway also created a monthly webinar series that to promote the Business Productivity Online Suite and its services, and it developed a series of executive presentations that its representatives could use to educate potential customers on the benefits of an online approach. The company prepared email and telemarketing campaigns, too.

“What we soon realized, though,” says Rodgers, “is that we were not seeing the numbers we were anticipating from our new direct sales people. It wasn’t them. It was the way we were going about it. They were only selling online services—and we quickly figured out that we needed to position online as a part of a holistic solution driven not by the products but by the customer’s business needs.”

Today, the sales representatives at Clearway focus on listening to the customer’s business needs—and that drives the holistic solution that Clearway will recommend. Typically, those solutions have on-premises components, in-cloud components, and value-added services that integrate the two realms as a seamless whole.

Revenue and Margin Growth

For Clearway and its clients, the Business Productivity Online Suite from Microsoft Online Services offers numerous benefits. The Business Productivity Online Suite enables Clearway to offer a low-cost, enterprise-class messaging and collaboration solution that they can choose to run entirely in the cloud or that they can integrate with existing in-house or hosted solutions. At the same time, the Business Productivity Online Suite creates ongoing opportunities for Clearway to add value through professional services, and this is projected to have a significant impact on the profitability of the company.

Increasing Growth and Revenue

The revenue streams associated with the Business Productivity Online Suite have two components. The Partner of Record (POR) fees paid by Microsoft represent one component; the revenues arising from a partner’s value-added services are the other. Let’s look at the POR fees first.

The Microsoft Online Services partner program compensates partners for bringing clients onto the Business Productivity Online Suite. Every year, for the life of a client contract, Microsoft Online Services compensates its partners with a POR fee equal to six percent of the value of the contracts under management. In addition, Microsoft Online Services compensates its partners with a fee equal to 12 percent of the value of new contracts it brings in during a given year. The net effect for partners is an 18 percent return on the value of new business during the first year of a customer contract and a six percent return each year after that for the life of the contract.

For example, if a partner such as Clearway signs up ten clients in January of 2010, each with an average of 25 users and at an average subscription rate of U.S. $10 per seat per month, the accrued value of those seats, in terms of total first-year POR fees, would be U.S. $5,400. That total includes the 6 percent recurring POR fee (U.S. $1,800) as well as the 12 percent first-year fee (U.S. $3,600).

If that partner were to continue to sign up customers at a rate of 250 users per month, it would have brought 3,000 users onboard by the end of the year. At that rate, the partner would earn a total of $64,800 in accrued POR fees for that first year. Moreover, if one factors in a five percent churn rate and projects that only 95 percent of those first year subscribers continue to use the Business Productivity Online Suite beyond the first year, that partner would receive U.S. $43,200 in POR fees in 2011 and 2012 for the customers it signed up in 2010.

Continuing at this pace, a partner would sign up 9,000 subscribers over the course of three years, and the total value of POR fees would accrue to U.S. $259,200.

As noted, the POR fees represent only one of two revenue streams for partners. POR fees accrue just for signing up subscribers and accrue without regard to any value-added services a partner might deliver on top of that. These value-added services, then, represent the second of the two revenue streams. Some of these services will be one-time services—set-up and migration services, for instance—whereas other services will be recurring services. They might involve SharePoint Online customization, help desk services, or other managed services that are offered for an annual fee.

Depending on the types of value-added services a partner offers, the revenues from these services can add up to considerably more than the revenues derived from the POR fees.

Crunching the Numbers at Clearway

How realistic is the scenario just outlined? Let’s look at a more detailed profit and loss scenario based on the projections from Clearway.

In 2009, Clearway signed an average of two Business Productivity Online Suite deals each month. On average, each deal involved subscriptions for 400 users, with the distribution of subscriptions breaking out as follows:

Clearway Service Distribution
Service / Monthly Fee / Users
Exchange Online / $5.00 / 20%
Office SharePoint Online / $5.25 / 0%
Office Communication Online / $2.00 / 0%
Office Live Meeting / $4.50 / 0%
Business Productivity Online Suite (Full) / $10.00 / 80%

Clearway officials are bullish on the success of their online offerings and project not only a 30 percent CAGR in the number of new customers they will engage on a monthly basis, but also a 40 percent CAGR in terms of the average number of subscribers associated with each customer. With these projections, Clearway officials expect to see an increase of Business Productivity Online Suite subscriptions from two per month in the first year of a three-year projection to three subscriptions per month in year two and four per month in year three. During that same three-year period, the average number of seats per customer will grow from 400 in the first year to 560 and 784 in years two and three, respectively. Finally, given the low cost and high value of the Business Productivity Online Suite, Clearway anticipates that no more than five percent of clients will, for one reason or another, decide not to renew their contracts at the end of their first year.

Using these figures, a three-year profit and loss projection for Clearway shows nearly 66,000 seats under contract at the end of three years. It shows first year (12 percent) POR fees growing at a CAGR 98 percent, and recurring (6 percent) POR fees growing at a CAGR of 162 percent.

Increasing Profitability through Value-Added Services

As noted, these numbers reflect the value of only one of the two Business Productivity Online Suite-related revenue streams. Clearway anticipates that all customers signing up for the Business Productivity Online Suite will require set-up and migration support, for which Clearway charges between U.S. $50 and $70 per seat, depending on the kinds of setup and migration tasks involved. Clearway also anticipates that consultation and consulting fees, typically present in every deal they strike, will average U.S. $10 per seat per year.

These fees add significantly to the POR revenues that Clearway gains from bringing a customer onboard the Business Productivity Online Suite. In its three-year projection, the accrued value of revenues associated with its professional services grows at a CAGR of 107 percent—and for Clearway the accrued value of the revenues derived from these services is three times greater than the value of the accrued POR revenues.

Factor in cost of service delivery, depreciation, amortization, taxes, and similar real world elements, and the three-year profit and loss projection for the online services business at Clearway is extremely attractive:

  • Total online services-related revenue grows at a CAGR of 111 percent.
  • Gross profit from online services-related business grows at a CAGR of 113 percent.
  • Net income from online services-related business grows at a CAGR of 129 percent.
  • Consultation and customization revenues related to online services business grow at a CAGR of 162 percent.

“For 13 years, our explicit focus has been on building solutions that deliver a competitive advantage for our customers using Microsoft applications and technologies,” says Rodgers. “The Business Productivity Online Suite from Microsoft Online Services provides us with another arrow in our technology quiver.

“For our clients, the Business Productivity Online Suite opens up new doors,” Rodgers continues. “They can expand their messaging and collaboration environment without investing as much capital. That means they have more funds that they can direct towards more strategic projects and activities.”

That redirection of funds has meant more business for Clearway, too. “At first, we thought that we might be losing a source of revenue,” says Rodgers, “once we were no longer involved in setting up the entire infrastructure for our clients. That has not been the case at all. We can get clients up and running on the Business Productivity Online Suite very quickly—sometimes even faster than even we’ve anticipated. And clients will then very often say, ‘Well, we’ve still got some money in the budget—what else can we do?’ So our engagements are not getting smaller because of the Business Productivity Online Suite. This approach is opening up new opportunities for us to talk about strategy and direction—opportunities that we’ve not always had in the past because our clients were too busy focusing on the day-to-day needs of their infrastructure.”

For Clearway, these are exciting conversations to have with clients. “The majority of companies we work with have 250 or more users,” says Rodgers. “They already have some kind of messaging and collaboration infrastructure, and for a lot of reasons they often want to keep at least a portion of their infrastructure on premises. That opens doors to conversations about what they can or should put in the cloud and how they can integrate what’s in the cloud seamlessly with what’s on premises.

“We have one client that has a 5,000 seat subscription to the Business Productivity Online Suite,” Rodgers goes on to say. “They already had Microsoft Office SharePoint Server 2003 deployed on premises and were thinking about upgrading to Microsoft Office SharePoint Server 2007. Then they suddenly had 5,000 seats of SharePoint Online, and they really wanted to know what they should use when and where. We worked very closely with them to create the solution that they needed. Part of it is on premises—part of it is in the cloud. And the way we’ve designed and integrated it, what’s where is completely transparent to users. They can move from an on-premises portion of the solution to a cloud-based portion, and all they think they’re doing is moving to another page.”