By , ChannelWeb
9:43 AM EDT Thu. Jul. 03, 2008 

www.crn.com/software/208802329

With Microsoft (NSDQ:MSFT)'s software-as-a-service strategy likely to be Topic No. 1 at next week's Worldwide Partner Conference, the experiences of solution providers who have been working with Dynamics CRM Online since it became available in April offer some insight.  

Dynamics CRM Online is an option in 60 percent of the deals Spinnaker Network Solutions Inc., an Irvine, Calif.-based solution provider, currently has in its sales pipeline. And, most surprisingly for Spinnaker President Mitchell Cannady, those potential customers include midsize and large businesses as well as small companies. "I thought that online was going to be small deals only. We figured the average [Dynamics CRM] Online deal would be under 10 seats. I was grossly wrong," he said.

Cannady had created a new Spinnaker division using less-senior (and lower- salaried) people to sell the Dynamics CRM Online service, given its lower profit margins. But with the service appealing to businesses of all sizes, Spinnaker has reorganized into divisions focusing on small and midsize/large customers, with Dynamics CRM Online sales cutting across both.

While some Microsoft partners are worried about whether online applications directly available from Microsoft will compete with them, Dynamics CRM solution providers generally shrug off such concerns. "Most of our revenues come through professional services and consulting," said Mike Snyder, principal at Sonoma Partners, a Chicago-based solution provider.

Sonoma resells the on-premise and partner-hosted versions of the application and the Dynamics CRM Online. "We've seen good demand across all three," he said. Before Microsoft began offering Dynamics CRM Online there were times Sonoma couldn't meet customer requests for such a service. "That hurt us," Snyder said.

Like Sonoma, Customer Effective Inc., a Greenville, S.C.-based solution provider, generates most of its revenue through consulting and other CRM-related professional services rather than margins on the Microsoft software. "We look at the software as something that enables [those services]," said CEO Scott Millwood. Customer Effective resells Microsoft Dynamics CRM in on-premise, partner-hosted and Microsoft-hosted versions. "Most of our customers are on-premise," Millwood said.

Customer Effective developed different bundles of services for the on-premise and hosted/online versions of Dynamics CRM: The former includes more implementation and customization services while the service package for Dynamics CRM Online puts more emphasis on training.

Spinnaker's Cannady said Microsoft now offers 15 percent margins on the first-year subscription fee for Dynamics CRM Online and 10 percent on subsequent years. Like Sonoma and Customer Effective, Spinnaker relies mostly on services to generate its sales. "We love software sales. But it's what drives our services. Our business is our services," Cannady said.

Of the 15 percent margin on Dynamics CRM Online, Customer Effective's Millwood said: "It's a decent incentive, but it's not something you can build a company around." Sonoma Partners' Snyder agreed, but noted that fees from Dynamics CRM Online recur each year while reselling on-premise Dynamics CRM generates a bigger, one-time payment.

Cannady said Microsoft has been aggressively providing him with sales leads for Dynamics CRM Online generated through Microsoft's Web site and its 30-day trial of the service.

While Cannady doesn't see Spinnaker making the upcoming online versions of SharePoint and Exchange a big part of its business, he says the company could resell those services as they relate to the solution provider's core CRM business. "I'm very interested to hear about their online direction and what their margin plans are for hosted and on-premise applications and if those are going to change," said Cannady, speaking about next week's partner conference.