It’s not easy being a Microsoft LAR…

Channel credit issues appear to be at the heart of Microsoft’s LAR shake-up

Tags: Microsoft Gulf
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It’s not easy being a Microsoft LAR… Microsoft says it is appointing a new LAR for credit, coverage and customer satisfaction reasons - but could it be that credit is actually more important than the other two factors? (Getty Images)
By  Andrew Seymour Published  September 5, 2010

The realities of operating in an environment still suffering the effects of constrained credit supply continue to be seen in the decisions taken by vendors in the Middle East market today, and I can't help thinking that's the case with Microsoft too.

Microsoft confirmed this week that it is in discussions to appoint a sixth large account reseller (LAR) in the UAE - a highly significant move when you consider the stability of its LAR line-up in recent years.

In a region where vendors are renowned for tweaking their channel structures on an all-too-frequent basis, Microsoft has not actually terminated a single LAR contract during the past decade. In fact, it has only made one change of any real note during that time - bringing on board Exceed IT Services a few years ago.

Alpha Data, Itqan, MDS and Seven Seas are the other VARs that make up Microsoft's ‘Famous Five', and as the only companies in the UAE authorised to sell three-year corporate software licences - otherwise known as enterprise agreements (EA) - they are responsible for generating around 70% of Microsoft's revenue.

In other words, they collectively transact US$7 out of every US$10 spent on Microsoft software in the UAE. Some sources in the Microsoft channel estimate that enterprise business to be worth in excess of US$100m a year.

Whichever way you look at it, their importance to the vendor's regional aspirations cannot be under-estimated.

Microsoft claims enterprise sales have doubled in recent years, although interestingly it doesn't use that as the justification for needing to recruit an extra LAR. Instead it cites credit capacity, coverage and customer experience as the primary factors shaping its decision.

Out of those three elements, ‘credit' undoubtedly stands out from the other two when you consider the pain that the IT market has felt in the last year or so, which is perhaps why Microsoft's channel chief, Zaid Abunuwar, was candid enough to admit it's a topic the vendor is taking incredibly seriously. "Given the recent credit challenges in the market we want to be very diligent on the way we manage risk and help our partners themselves to manage risk," he said this week.

To understand why credit is such a major issue, you only have to look at how the LAR business is actually set up. In a nutshell, it works likes this: the LARs sell the software, the LARs are liable to pay Microsoft, and then the LARs collect the payment from their customers. Or as one LAR says: "It's referred to as an indirect model, but it's actually a tri-party model where the licence is delivered directly to the customer by Microsoft, but the commercial risk is taken by the reseller."

What all this means is that to thrive as a LAR, you must have the fiscal capability to finance business carried out on a multi-year basis.

That hasn't been a problem during the past decade (which could partly explain the stability of Microsoft's LAR line-up) because end-customers were largely free of liquidity issues. And even if there was the odd slow payer, there was invariably enough good business flowing in from elsewhere to make up for it.

In the past 18 months, however, the financial strength of every reseller has been severely tested due to the difficulties of collecting money from large customers. According to one senior LAR source, part of the problem lies with customers putting pen to paper on three-year licensing agreements before the economic landscape shifted, only to then default when the second and third year invoices came around.

If we return for a moment to the earlier point of Microsoft's justifications for needing a sixth LAR (i.e. credit, coverage and customer satisfaction), it strikes me that credit is the common denominator here.  

Look at this way: without the necessary financial and credit capabilities, a LAR isn't going to be in a position to offer the sort of coverage that Microsoft demands. And you can bet it isn't going to satisfy as many of its customers that Microsoft would like either.

This could also explain why Microsoft is willing to admit that the appointment of a sixth LAR could be followed by the departure of one of the original five.

After all, if the business was growing so strongly, surely it would be better to have six partners than five? What this therefore suggests is that Microsoft has issues with the financial strength of at least one of its existing LARs, and it wants somebody competent to come in and fill the gaps.

Those close to the Microsoft channel in the UAE claim some LARs have become uncomfortable addressing certain vertical sectors notorious for slow or non payment, which would further support the theory that Microsoft needs somebody capable of carrying out the business the others are struggling or unwilling to fulfill.

As one LAR suggests: "Perhaps Microsoft wants a new company that doesn't know much to take those deals on the table that might not be very good in the long term!"

Whatever the next couple of months have in store for Microsoft's UAE LAR community, the latest developments reaffirm one thing: that irrespective of claims that the worst of the crisis is over, the effects of tight credit supply continue to leave their mark on even the most seemingly stable parts of the Middle East channel.

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