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Microsoft Online Services
Partner Profit and Loss Case Study
Online Services-Related Revenues Increase
Net Income by 245 Percent Year over Year
Overview “I’m very bullish about cloud computing and the
Country or Region: United States
Industry: IT Services Business Productivity Online Suite.”
Ellen Jennings, CEO, BEI
Partner Profile
Since 1987, BEI has been designing,
installing, and servicing Microsoft
Windows Server-based networks for
commercial, non-profit, and membership
organizations in the metropolitan
Washington D.C. area. Business Engineering, Inc. (BEI) has been designing, building and
maintaining Microsoft® Windows Server®-based networks for
Business Situation
BEI wanted to find a way to meet the clients in the Washington D.C. area for more than 20 years.
messaging and collaboration needs of a Looking forward, however, it sees a future in which cloud-based
broader range of clients and to increase
its own revenues at the same time. computing plays a significant role. BEI wanted to find a
profitable way to offer a cloud-based solution to clients—
Solution
The Business Productivity Online Suite without having to build out or support the cloud-based
from Microsoft Online Services enables infrastructure itself. By reselling Microsoft Online Services, BEI
BEI to meet customer needs more cost-
effectively while simultaneously creating found the solution it needed. With the Business Productivity
new consulting opportunities. Online Suite from Microsoft Online Services, BEI can meet its
Projected Profit and Loss Impact clients’ need for enterprise-grade messaging and collaboration
Revenues derived from online services services. It can also support those clients with value-added
are projected to climb by 250 percent
CAGR for the next two years services that boost the company’s bottom line considerably.
Net profits derived from online
services are projected to climb by 245
percent CAGR for next two years
Business Focus lendaring and contacts, instant messaging,
Business Engineering, Incorporated (BEI) is presence, audio/video conferencing, and
a self-described “IT staff for small and mid- web conferencing. Yet because the
sized organizations.” The Reston, Virginia- applications supporting these services—
based firm of 20 consultants has tradition- including Microsoft SharePoint® Online,
ally set up, managed, and supported IT Microsoft Exchange Online, Microsoft
infrastructures for metropolitan Washing- Office Live Meeting, and Microsoft Office
ton D.C.-based businesses, organizations, Communications Online—run on servers
and associations that have little or no residing in state-of-the-art Microsoft data
internal IT resources of their own. centers, neither BEI nor its clients need to
invest in on-premises infrastructure to take
Yet as companies began expressing an in- advantage of these services. Indeed,
terest in cloud-based computing, execu- Microsoft hosts and maintains the servers
tives at BEI had but one thought: Either we with its own staff of hardware and software
BEI Projected Three-year CAGR participate in and support cloud compu- experts, supplies patches and security
Online Services- ting, or we get left behind. “For some of updates in real time, and guarantees 99.9
Related P & L CAGR (%) our clients,” says Ellen Jennings, CEO of BEI, percent uptime with a financially-backed
Total Revenue +250 “an online solution is absolutely the best service level agreement (SLA).
Gross Profit +248 way to go.”
Net Income +245 This cloud-based messaging and
The question, then, was how best to build collaboration service offers still other
out a business around cloud-based com- advantages. Neither BEI nor its clients need
puting. BEI did not want to build and sup- to purchase separate server or client
port a cloud-based service itself; that was licenses for infrastructure components such
not its core competence. Rather, it wanted as Microsoft Office SharePoint Server or
to find a way to connect customers to a Microsoft Exchange Server. Instead, BEI
cloud-based messaging and collaboration connects its clients to the applications they
service in such a way that it could continue want to use on a per-user, per-month
to add value through customer-focused subscription basis. Small and mid-sized
services. organizations can provide their users with
access to the entire Business Productivity
When Microsoft Online Services introduced Online Suite for one low monthly fee. If a
the Business Productivity Online Suite and user needs access to only one service—
promoted the Software Plus Services model Microsoft Exchange Online, for example—it
for meeting customer needs, BEI saw pre- is possible to subscribe to a single service
cisely the solution that would enable it to only for an even lower monthly fee.
build out a new, profitable cloud-based
messaging and collaboration business. Preparing to Go To Market
To prepare for entry into the online services
reseller market, BEI followed a five-step
Selling Online Services process recommended by Microsoft.
The Business Productivity Online Suite from 1. Perform market segment analysis
Microsoft Online Services enables BEI to 2. Define differentiating offerings
offer its clients access to a range of enter- 3. Prepare to generate demand
prise-class messaging and collaboration 4. Review and refine sales practices
services —including shared workspaces, 5. Review and refine customer services
workflow, desktop and mobile e-mail, ca- offerings
“Of our first 20 sales, For BEI, this exercise helped Jennings and one for the client.” But, she adds, the sales
her team refine tried and true approaches efforts are working and the growth
only three were that the company had had in place for 20 prospects for the company are very good.
years. For the smaller organizations in the
companies with which markets it planned to pursue, the Business Revenue and Margin Growth
we had an existing Productivity Online Suite offered a cost- For BEI and its clients, the Business
effective way to gain access to an Productivity Online Suite from Microsoft
relationship. The rest enterprise-class messaging and Online Services offers numerous benefits. It
collaboration solution—without the need
were new customers. to invest in the deployment and
enables the company to offer its customers
a low-cost, enterprise-class messaging and
And many of these maintenance of an enterprise-class collaboration solution that they can choose
infrastructure. For the larger organizations to run entirely in the cloud or that they can
companies were it expected to support, the Business integrate with existing in-house or hosted
Productivity Online Suite offered a way to
companies I simply gain increases in efficiency and reliability, as
solutions. At the same time, the Business
Productivity Online Suite creates ongoing
would not have called well as a way to offload the messaging and opportunities for BEI to add value through
collaboration support function so as to professional services, and this is projected
upon before with the on- enable existing IT departments to focus on to have a significant impact on the
matters of more strategic importance to
premises offerings we the organization.
profitability of the company.
had.” Increasing Growth and Revenue
For demand generation, BEI uses e-mail, a The revenue streams associated with this
Ellen Jennings, CEO, BEI monthly newsletter, seminars, webinars, new online business venture have two
and telemarketing campaigns. The components. The Partner of Record (POR)
telemarketing teams qualify sales leads and fees paid by Microsoft represent one
set up any follow-on calls that may be component; the revenues arising from a
required. The company has had its sales partner’s value-added services are the
support and migration engineers trained to other. Let’s look at the POR fees first.
support customers migrating to the
Business Productivity Online Suite, so they The Microsoft Online Services partner
can now answer any questions that program compensates partners for
customers may ask. bringing clients onto the Business
“The sales cycle has proven to be a little Productivity Online Suite. Every year, for the
longer than we initially anticipated it would life of a client contract, Microsoft Online
be,” says Jennings, “particularly if the idea Services compensates its partners with a
of using an online solution to meet an POR fee equal to six percent of the value of
messaging and collaboration need is a new the contracts under management. In
Sample Partner of Record Fee Scenario addition, Microsoft Online Services
Active Seats Year 1 Year 2 Year 3 compensates its partners with fee equal to
Cumulative New Seats 3,000 3,000 3,000 12 percent of the value of new contracts it
Cumulative Renewed Seats - 3,000 6,000
brings in during a given year. The net effect
Cumulative Seats 3,000 6,000 9,000
for partners is an 18 percent return on the
Partner of Record Revenues (Accrual basis) Year 1 Year 2 Year 3 value of new business during the first year
Initial-add (@ 12%) $43,200 $43,200 $43,200 of a customer contract and six percent per
Recurring (@ 6%) $21,600 $43,200 $64,800 year each year after that.
Total Partner of Record Revenues (per year) $64,800 $86,400 $108,000
Cumulative POR Revenues $64,800 $151,200 $259,200
Consider: If a partner such as BEI signs up
ten clients in January of 2010, each with an In 2009, BEI signed an average of two
average of 25 users and at an average Business Productivity Online Suite deals
subscription rate of U.S. $10 per seat, per each month. An average deal included 50
month, the value of those seats to BEI, in seats. The average distribution of
terms of total first-year POR fees, would be subscriptions breaks out as follows:
U.S. $5,400. That includes the 6 percent
recurring POR fee (U.S. $1,800) as well as BEI Service Distribution
the 12 percent first-year fee (U.S. $3,600). Monthly
“Over time, any Service Fee Users
If BEI were to continue to sign up Exchange Online $5.00 19%
objections people have customers at a rate of 250 users per month, Office SharePoint Online $5.25 2%
about moving online are it would have signed up 3,000 users by the
Office Communication $2.00 28%
end of the year, earning a total of $64,800
Online
going to go away. As in POR fees. Moreover, even if only 95
Office Live Meeting $4.50 1%
percent of those first year users were to
that happens, the continue to use the Business Productivity
Business Productivity $10.00 50%
Online Suite (Full)
numbers we’re using in Online Suite beyond the first year, BEI
would receive U.S. $43,200 in POR fees in
our projections could 2011 and 2012 for the customers it signed
For the purpose of a three-year profit and
loss projection, BEI assumes that the
up in 2010.
turn out to be very average company size remains at 50 seats.
However, BEI officials expect to see the
conservative” If BEI were to repeat its first year sales each
number of monthly sales increasing
year for three years, adding 250 users per
Ellen Jennings, CEO, BEI significantly over time. In year two of a
month, by the end of the third year it
three year projection it expects to sign up
would have signed up 9,000 users. It would
six new customers per month and in year
receive a total of U.S. $129,600 in recurring
three it expects to sign up 15 customers
(6 percent) POR revenue as well as a total
per month. Additionally, given the low cost
of U.S. $129,600 in first year (12 percent)
and high value of the Business Productivity
POR revenues. In this scenario, the total
Online Suite, BEI anticipates that only two
value of POR fees to a partner such as BEI
percent of clients will, for one reason or
accrues to U.S. $259,200 over three years.
another, decide not to renew their
contracts at the end of their first year.
A partner such as BEI can also provide
value-added services to its customers.
Using these figures, the BEI three year
Some of these services will be one-time
profit and loss projection shows 13,410
services—set up and migration services, for
seats under contract at the end of three
instance—whereas other services will be
years. It shows first year (12 percent) POR
recurring services. They might involve
fees growing at a compounded annual
SharePoint Online customization, help desk
growth rate (CAGR) 216 percent, and
services, or other managed services that are
recurring (6 percent) POR fees growing at a
offered for an annual fee.
CAGR of 286 percent.
Crunching the Numbers at BEI
How realistic is the scenario just outlined?
Let’s look at a more detailed profit and loss
scenario based on the projections from BEI.
Increasing Profitability through at a CAGR of 286 percent—and for BEI the
Value-Added Services accrued value of the revenues derived from
As noted, these numbers reflect the value these services is 50 percent greater than
of only one of the two Business Productivity the value of the accrued POR revenues.
Online Suite-related revenue streams. BEI Factor in cost of service delivery,
anticipates that fifty percent of customers depreciation, amortization, taxes, and
signing up for the Business Productivity similar real world elements, and the three
Online Suite will require set-up and year profit and loss projection for the
migration support, for which BEI charges an online services business at BEI is extremely
average of $50 per seat. Company attractive.
executives are hopeful that another 30 Total revenue grows at a CAGR of 250
percent of subscribers will also choose to percent
subscribe to a managed services package, Gross profit grows at a CAGR of 248
and for that they will pay an average of $60 percent
per seat per year. Net income grows at a CAGR of 248
percent
These fees add significantly to the POR Managed services revenue grows at a
revenues that BEI gains from bringing a CAGR of 286 percent
customer onboard the Business
Productivity Online Suite. In its three year “The Business Productivity Online Suite is
projection, the accrued value of revenues definitely a way for us to get our foot in the
associated with its managed services grows door of a lot of companies we might not
otherwise have called upon,” says Jennings. “I’m very bullish about cloud computing
“Of our first 20 sales, only three were and the Business Productivity Online Suite,”
companies with which we had an existing Jennings goes on to say. “Over time, any
relationship. The rest were new customers. objections people have about moving
And many of these companies were online are going to go away. As that
companies I simply would not have called happens, the numbers we’re using in our
upon before with the on-premises offerings projections could turn out to be very
we had. Those solutions were not right for conservative.”
them. With the Business Productivity Online
“For some of our clients, Suite, though, I’ve got something I can
an online solution is offer them that fits their needs.
absolutely the best way
to go.””
Ellen Jennings, CEO, BEI BEI Three Year Profit and Loss Projections
As a Percentage of Revenue Actual
Year 1 Year 2 Year 3 CAGR
Revenue
Partner of Record Fees 30% 29% 28% 241%
BPOS Set-up & Migration 34% 31% 28% 216%
BPOS-related Managed Services 36% 40% 44% 286%
Total Revenue 100% 100% 100% 250%
Cost of Service Delivery 32% 32% 32% 254%
Gross Profit 68% 68% 68% 248%
Operating Expenses
Sales 10% 10% 10% 250%
Marketing 3% 3% 3% 250%
General and Administrative 31% 31% 31% 250%
Total Operating Expenses 44% 44% 44% 250%
EBITDA 24% 24% 24% 245%
Depreciation and Amortization <1% <1% <1% -
EBIT 24% 24% 24% 245%
Interest, Taxes, Foreign Exchange 8% 8% 8% 245%
Net Income (Loss) 16% 16% 16% 245%
For More Information Microsoft Online Services
For more information about Microsoft Microsoft Online Services are business-class
products and services, call the Microsoft communication and collaboration solutions
Sales Information Center at (800) 426- delivered as a subscription service and
9400. In Canada, call the Microsoft hosted by Microsoft. These offerings help
Canada Information Centre at (877) 568- make it easier for customers to rapidly and
2495. Customers in the United States and cost-effectively access the most up-to-date
Canada who are deaf or hard-of-hearing technologies, and are designed for rapid
can reach Microsoft text telephone deployment to provide customers with
(TTY/TDD) services at (800) 892-5234. streamlined communications, simplified
Outside the 50 United States and management, and business-class reliability
Canada, please contact your local and security features.
Microsoft subsidiary. To access
information using the World Wide web, For IT staffers, Microsoft Online Services
go to: www.microsoft.com help reduce the burden of performing
routine IT management tasks such as
For more information about BEI products installation, provisioning, ongoing
and services, call (703) 528-8300 or visit maintenance, updates, and upgrades,
the web site at: www.beinetworks.com making it possible for them to spend more
time on initiatives that move the business
forward. The Online offerings are backed by
strong service level agreements and are
designed to meet the regulatory
compliance and reliability needs of
enterprise customers. On a technical level,
the offerings boast the sophistication and
reliability that customers expect from
Microsoft, which continues to invest heavily
in building data centers to support the
Online family of services.
For more information, visit:
www.microsoft.com/online
Software and Services
Microsoft Online Services − Microsoft SharePoint Online
− Microsoft Business Productivity − Office Live Meeting
Online Standard Suite − Microsoft Office Communications
− Microsoft Exchange Online Online
This case study is for informational purposes only.
MICROSOFT MAKES NO WARRANTIES, EXPRESS OR
IMPLIED, IN THIS SUMMARY.
Document published May 2010
