Microsoft motivation for Exchange Online: "Customers will write us bigger checks."

March 11 2009

Yes, Microsoft senior vice president says it that bluntly in the pages of Forbes.com today:

The behemoth of Redmond, Wash., is methodically rolling out business software that's sold as an online service. There's a very compelling reason: For Microsoft, selling software-as-a-service means more revenues, and eventually profits, out of each transaction.

Microsoft Senior Vice President Chris Capossela puts it bluntly: "Customers will write us bigger checks." ... Microsoft is charging $10 a month per mailbox for its online Exchange service. That's more, Capossela says, than Microsoft's current cut of the average $18 a month per mailbox that customers spend with his firm and others. (He won't divulge how much more.)
OK, at least now that's out in the open.

It's OK in these times to use a sales pitch of "if you spend some money with us, you'll save money in the long run".  And the Forbes article certainly tries to make Microsoft's case on this, mentioning 2-and-a-half customers who have made the decision to switch out my product for Exchange Online.  However, nobody knows whether the promised savings are real.  Further, the analysts don't buy it -- both Forrester and Gartner have published reports in the last few weeks that say that an enterprise >15,000 employees (Gartner says greater than 10,000) run an e-mail system more economically than a SaaS/cloud model... our analysis shows that this number is even lower (and that's just for e-mail only...no collaboration).  And these customers who are saying that they are switching their email to a cloud system...what about their collaborative apps?  How much will they continue to spend to operate Notes applications, and for how long -- and is that factored into the supposed payback?  More importantly, did they examine their on-premise deployment as Gartner suggests, and find that "collaboration economics" could improve their operational costs without the trauma and expense of a migration?  We are regularly doing that exercise at customers around the world, and finding substantial savings (see, for example, slide 13 of my Lotusphere presentation).  It will be interesting to find out.  Meanwhile, Microsoft's motivation is to keep the money coming at a time when their core businesses are increasingly under threat, their stock price is the lowest it has been in 12 years, and the best they can say is "give us more money".  Haven't they had enough already?

Link: Forbes.com: Microsoft: Capturing Spend >
(Slight update @9:35 CST regarding customer size)

Ed Brill | Highland Park, IL USA Category:  Microsoft  Add/View Comments [28]

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  1. 1  Keith Brooks http://www.vanessabrooks.com | 3/11/2009 9:06:11 AM

    LOL! That's a great line. Will have to use this article in friday's post.

  1. 2  Smithwill  | 3/11/2009 10:00:55 AM

    When can we expect to hear such candor from IBM? With all their advertisements about "smart this or smart that" isn't the motivation exactly the same?

  1. 3  Ed Brill http://www.edbrill.com | 3/11/2009 10:09:06 AM

    I think there's a huge difference between having solutions in market where you spend money to save money and saying that what you really want is more of that customer's money. IBM are in business to make money, sure, but IBM's goal is to sell customers solutions to their business problems.

  1. 4  Jim Casale http://www.jimcasale.net | 3/11/2009 10:33:05 AM

    Ed, I think as much as it is hard to believe there are companies out there that either don't care that they might be wrong or are too naive to know they don't have all the facts. I am speaking from experience on this (you know the situation).

    The driving force behind moving to the cloud is to save money. Some might say they want to get out of the email business to concentrate on their "core" business. But I am sure most people would agree that saving money is the main driving force.

    So assume you will eliminate support costs, storage costs, hardware and software costs (and I am over simplifying this). Are all these costs really gone?

    I am pretty certain the monthly fee you pay does not pay for desktop support costs associated with using the email client or any other user issues related to email. Even if this support was included how would a user call in a support issue? Through the web? The same way they do now? How fast of a response will you get?

    What happens when performance is slow? Will they upgrade the storage? Will the company get more network capacity? More importantly, if the online version of Exchange 14 is really Exchange beneath the covers, what happens when there is a major problem with the information store? Will you get the same response time and effort from the cloud?

    And what about those users that need extra handling? We all have some users like that. What about those users? What about when rules have to be bent? Well, we don't allow forwarding of emails...so how is the cloud going to let some VIP forward emails?

    Other issues to consider from my experience…

    Email Compliance - How are all those emails going to be capture? If you use the existing system is this still going to be covered under that original monthly fee?

    SMTP Routing for in-house applications? Who will handle issues with these types of emails? Will the monthly cost include tracing what happened to application generated emails that seem to have never been delivered? (Notes apps or other wise)

    Employee terminations (the ones where the employee is being escorted off premises and accounts have to be terminated ASAP) How quickly can this be done? If people in-house have access to do this then how are you saving money since they are still there?

    How will a user get email restored? What if the user needs a copy of a mail file?

    There are too many “yeah but what about” scenarios to make a clear cut case that off premises email will save money.

    I heard a quote here that really sums a lot of the mentality surrounding the email cloud - "The managers take their yearly trip to Silicon Valley and hear the big sales pitch how they can save huge amounts of money by moving to the cloud- they come back believing all that bull ---- , not taking a real, hard, objective look at the costs associated with moving on premise to off premise. I don't see how they are going to save money"

  1. 5  Henry Bestritsky http://www.binarytree.com | 3/11/2009 1:44:24 PM

    Ed, I am a bit confused by your obvious adverse reaction to the cloud. Isn't IBM trying to do the same thing? I have been seeing a lot of IBM banner adds popping up everywhere. Also, you are assuming that Notes apps will suffer if users move to the cloud. Many customers I speak to look at Notes apps as legacy similar to COBOL and Foxpro and are just willing to let them die on the vine assuming there is proper coexistence between Outlook and the Notes apps.

  1. 6  Ed Brill http://www.edbrill.com | 3/11/2009 1:48:43 PM

    @5 Henry, I think the cloud is a great place for certain kinds of collaboration and applications. I'm using LotusLive for sharing documents, activities, e-meetings, connections. I'm looking forward to the Outblaze acquisition and it's tie-in for low-cost e-mail. I do not think either is a *migration* target for Notes customers to move either their mail or apps today.

  1. 7  Henry Ferlauto http://www.geniusinside.com | 3/11/2009 3:58:04 PM

    Reminds of the carnival scene in the "The Jerk" with Steve Martin where he realizes, "Ah! It's a profit deal! Takes the pressure off!"

  1. 8  Kevin Mort http://www.theglobalmind.com | 3/11/2009 4:57:24 PM

    Thus Microsoft is back with a new series of

    "people_ready" ads, interviewing folks and trying to fool more customers into believing MS is the only vendor in the space...for anything.

    Because of course they aren't specifically talking collab.

  1. 9  David Bell  | 3/11/2009 6:57:01 PM

    @8 - makes me laugh that MS, with its predominantly document-centric view of the world and obvious weakness in their portfolio around social software pick the term "people ready".

    But hey, at least they're trying move on from the 1st collaboration paradigm to the 2nd, meanwhile IBM/Lotus is already well into the 3rd.

  1. 10  Darren http://www.dadams.co.uk | 3/11/2009 7:24:55 PM

    "Ed, I am a bit confused by your obvious adverse reaction to the cloud. Isn't IBM trying to do the same thing?"

    Sure, IBM is providing hosted and SaaS offerings. However, in the case of hosted Notes (sorry, LotusLive Notes), there's a question I always ask customers... do you know how much your e-mail system costs to run today? Because if you don't know, then you should pause for thought before you make that mad dash towards the cloud. How do you know the cloud is going to save money if you don't know what your starting point is?

    Domino 8.5 has some capabilities to seriously reduce cost of ownership. So forgive us a moment of hesitancy in recommending a hosted solution. The first step for businesses should be to look at what they can do on-premise to reduce costs... then decide.

  1. 11  Henry Bestritsky http://www.binarytree.com | 3/12/2009 10:18:57 AM

    One customer told me that it takes him about $100 per user per year to run his messaging infrastructure of over 20K users. When they are presented with numbers of $35 per user per year, they are hard to ignore. When I hear things such as "Domino 8.5 has some capabilities to seriously reduce cost of ownership", I cringe because to me it's nothing but marketing speak. Please don't take offense, I do believe that Domino 8.5 will save money, but how much? CFOs today need hard numbers and they get those numbers by looking at hosted solutions.

    You are correct that businesses should look on-premise to reduce costs but when you are told in this economy to cut IT expenses by 30% in 3 months or else, what would you do?

    IBM needs to have a serious strategy on how existing Notes customers can save real money with real numbers behind them.

    Ed quickly put in a link to Project Liberate. Where is the link to Project Justify?

  1. 12  Ed Brill http://www.edbrill.com | 3/12/2009 10:49:19 AM

    @11 Henry, we are doing it every day with customers, e.g. the slide 13 of my Lotusphere presentation referenced in the main blog post. We call it "collaboration economics". And it's working well. Any customer that wants to have that conversation with me or their IBM rep should let me know...we have a very solid model to show how to cut operational costs -- now, without having to migrate to something else -- with Notes/Domino. Sorry that that takes your migration/coexistence tools out of the picture.

  1. 13  Henry Bestritsky http://www.binarytree.com | 3/12/2009 11:06:33 AM

    @12 Ed,

    LOL, I appreciate your concern.

    Please note that we also have analysis and consolidation tools that help people with their Notes environments. Those numbers on slide 13 are very interesting. Any chance this 70K company can be an open reference?

  1. 14  Darren http://www.dadams.co.uk | 3/12/2009 12:03:47 PM

    @11 - the very first engagement where we had the opportunity to convert a customer to hosted Notes actually resulted in keeping it on-premise, a TCO exercise to show the potential cost savings and a plan to streamline and improve the existing infrastructure. So the risk and disruption is minimised - two factors which are often overlooked when considering the cloud-based nirvana.

    Most customers who have looked at DAOS have reported 40 - 60% reduction in required e-mail storage... storage is a major part of TCO. So it's not marketing speak. We can provide hard numbers when we engage, but numbers differ per customer.

  1. 15  Keith Brooks http://www.vanessabrooks.com | 3/12/2009 12:11:19 PM

    Decided to post an answer about the costs saved here:

    { Link }

  1. 16  Henry Bestritsky http://www.binarytree.com | 3/12/2009 1:15:46 PM

    @15

    Keith, I love the comment on your blog and could not agree with you more. Regarding this specific comment...

    "There is no price for headaches, they are priceless. Going to the cloud may limit the ones you feel today, but will create other ones potentially even greater or worse. (Worse would be when Fred's Cloud goes under)"

    I am curious, besides the potential crashes that can happen as they just recently did with Gmail, what other headaches do you see for companies going into the cloud?

    @14

    IMHO, Storage is not a major TCO saver, reduction in FTEs is.

    Let's face it, if you do not honestly believe that in five years we will not be doing most of our computing out of the cloud then you are really just being argumentative for the sake of it. The signs are everywhere, just look at the explosion of Netbooks. This is the perfect Crossing the Chasm paradigm here. The beach head is established and the cloud is moving inland. There is absolutely no way of stopping it. Today's decision makers are scared for their jobs and would rather blame Google for going down than one of their data centers somewhere in Asia.

    I am always amused by people saying that in a perfect world where a company runs a tight IT ship, the TCO is amazing. Let's face it, we have all been in messaging environments (Domino or Exchange) that would make your skin crawl. Also, as the hardware ages, it's very difficult to justify the expense of replacing and maintaining it in this economy. There is a common belief that the cloud is getting stronger and stronger and the risks of moving onto it are less and less. Please try to remember the discussions about the cloud 2 years ago as opposed to now. Where do you think they will be 2 years from now? We all know it's only a matter of time. The best IBM can do is delay it long enough to come up with competitive offerings that can rival Microsoft, Google, Oracle, Cisco, Zimbra, etc.. Their recent relationship with Amazon is a good start.

  1. 17  Paul Robichaux http://www.robichaux.net/blog | 3/12/2009 1:31:09 PM

    @4: Jim, I can say that Exchange 14 has answers to some of the questions you ask, but I can't say what they are yet.

    @10: right on! The same is true, btw, for "green computing" projects. In general, if you don't know how much X costs, you won't know which, if any, alternative is the best to replace or supplement it. Too many people don't ask that basic question up front.

  1. 18  Darren http://www.dadams.co.uk | 3/12/2009 6:52:11 PM

    @16 - very interested in the Netbook comment. Today I see them in the hands of the gadget fans and the technically adept, but not in the hands of the user population.

  1. 19  Mike Lazar  | 3/12/2009 9:01:36 PM

    For everyone saying that 8.5 gives you better I/O, CPU utilization, DAOS reduces disk usage, etc...so that wipes out the reason to move to a cloud provider, I ask you this: Why would you think that the providers aren't utilizing the SAME things to drive their costs (and hence, customer prices) down? The main thing a provider has over an in-house operation is economies of scale. Whether it's Microsoft, Google, IBM, or any major provider (mine included), we do this for a living. This is how we make money. Our customers manufacture cars, ship products, create drugs...they do not sell and provide IT services to others. IT providers have huge datacenters and help desks. We have enormous shared SANs. We spread these costs out over hundreds of thousands of users. I have seen some extremely well run shops in my day. I've seen some incredibly poorly run ones as well. I'm not disparaging anyone. There are many people I meet at customers who I'd hire if I could to help me sell to others. However, no matter how good the people are, or tightly the ship is run, when you factor everything in a hosted solution, cloud solution, whatever you want to use, is usually cheaper than an in-house solution. In these times where I can go to a CFO and say, "your bill is now going to be static at $xxx/month, and you don't have to lay out a dollar up front to get there", I have that person's attention. I guarantee I do. I then come in and do a true TCO which shows how close or how far apart the in-house solution is to the industry norms as well as my offer. I then highlight the true SLAs I can offer (in-house is SLO only...you can't offer a SLA if there is no penalty associated with it), as well as the beauty of not having capital outlays and the headaches of hardware replacement...it becomes a very compelling alternative.

    Now, cloud services certainly aren't for everyone. Some folks don't want to give up control. Some don't trust a 3rd party to house their data. I've even gone to a few places and found their costs were as good or better than mine. They ran on a skeleton crew and really cut things to the core, but that was their choice, and like I said, the cost was very low. That being said, the movement to the cloud is real and it's growing everyday. It is time to study it, understand where it can help you, and embrace it.

  1. 20  Henry Bestritsky http://www.binarytree.com | 3/12/2009 9:15:27 PM

    @19

    Mike, can I hire you to be my speech writer? :-)

  1. 21  David Bell  | 3/12/2009 9:34:00 PM

  1. 22  David Bell  | 3/12/2009 9:41:26 PM

    @11 - "cut IT expenses by 30% in 3 months or else"

    I assume this would be a cold turkey cutover ? Otherwise, companies of any size at all would be hard pushed to achieve this transition in < 3 months.

    @19 - "your bill is now going to be static at $xxx/month, and you don't have to lay out a dollar up front to get there"

    Somewhat related to the above. Do you think a cold turkey cutover from on-premise to cloud so that there are no "up front" costs is a realistic proposition for most customers ? What about all the legacy data ?

    That transition can be very costly, not quite as bad as a full on migration between products, but it's definitely not $0.

    When Microsoft comes up with $15 a user per month, they conveniently leave out all of the transition activity, no consideration for existing data, etc.

  1. 23  Mike Lazar  | 3/12/2009 9:54:11 PM

    Things can be moved around, amortized, however you want to slice it. Yes, transitions can be very difficult and costly. No one is disputing that. But providers have ways and business models to help soften that blow. If we didn't, we wouldn't have customers. You wouldn't see me with as many seats as I have, and you wouldn't see the huge shops like GSK making the move. Legacy data can be handled in more ways than I can list. Some are more costly than others. Many, however, can be done fairly easily and cheaply.

    As for your comment on "cut costs 30%...", what I see there is existing customers coming to their providers and demanding lower pricing due to downturn clauses in contracts, or they go to a provider and do the scenario I mentioned in the previous paragraph. Over the life of a 4 year deal, you can see significant savings. I just quoted one today to a customer with about 6,500 users showing $1.4M savings vs. the existing TCO over 48 months. The initial reaction? It wasn't quite good enough...they're trying to squeeze more out of me. THAT'S the reality of IT budgets in today's economic climate.

  1. 24  Ed Brill http://www.edbrill.com | 3/12/2009 10:01:35 PM

    I think my issue with the notion, Mike, if there's an issue at all, is the ridiculous proposition that Microsoft approaches the customer with saying that migrating to a different e-mail system from the e-mail and collaboration system they have today is the route to that savings. The analog is to go to someone and say they should move out of their house and into a condominium/flat because it has better winterproofing and their heating bill will be lower. Saving money on the heating bill is good, but the space will be smaller, not as useful, and I'll have to figure out what to do with all that furniture and the big screen TV I use. If I have to replace all that with smaller scale stuff to fit in the new place, I've got a lot of sunk cost going out the window. I think the answer is to better winterproof the current house, no? Your business model makes sense as you are talking to the customer about cutting their existing heating bill. So does LotusLive Notes in that same way, or anyone else who does Notes hosting. It's this silly migration thought so that the Microsoft landlord gets bigger checks that shouldn't be swaying anyone.

  1. 25  Mike Lazar  | 3/12/2009 10:28:18 PM

    Ed -- Well, we'll probably have to agree to disagree there. Large enterprises aren't "giving up" space or usefulness, in their opinion. They feel that the move gives them as many if not more tools, and the flexibility they gain from not managing all of those systems is a tremendous burden to lose. As long as they determine what data to move (if any, as many just flip their mail into an archive and are done with it) and make it as painless as possible, it's going to find benefit. It absolutely is a pain, but that goes away over time, and people adapt and move on.

    Your argument is really geared towards companies going from in-house or hosted Domino to BPOS. The folks moving have obviously decided that for some reason, it is worth it. Perhaps they don't utilize Domino for applications anymore. Or they have a few key apps that they can keep alive for the time being and migrate over the next few years. Hardware depreciates, so if you're at the end of your hardware cycle, why would you shell out huge dollars for hardware you're going to dump in 4 years when someone else will handle that for you?

    Moving from in-house Domino to hosted Domino (including IBM's offerings) has none of the perceived losses you mention. Again, the decision to move to a provider is usually about focusing on core competencies and removing a thorn in the side of the CFO. IT budgets barely exist anymore. Over the past 2 years, companies have cut to the bone. No one has excess staff sitting around. If you need to cut costs today, you really can't cut people and not have your service suffer. Also, you can't cut enough heads to really make a dent. You need to look at other ways of providing the service your people demand for a fraction of the existing cost. Many companies are finding that savings by having service providers handle the hardware, OS, app, and all of the associated services. You can cut out your huge overhead costs for space, power, hardware, etc., as well as your most expensive IT resources and still provide excellent service levels...service levels that often exceed what you were providing previously. Is it right for everyone? Of course not, and I have never said it is. But it is absolutely a viable alternative for many companies, including the big boys that the analysts say could do it effectively in-house. I've seen more than a few major shifts in the way IT is handled in the past 15 years. Cloud/SaaS/managed services is the next big one, IMO. It's going to be the rule rather than the exception before it's all over.

  1. 26  Mike Lazar  | 3/12/2009 10:29:57 PM

    Oh, and I know my Domino managed service discussion is slightly off target for your posting, and I apologize for that. But, it is very much part of this discussion. This isn't just about BPOS and Exchange in the cloud. It's about all apps in the cloud. We really need to re-evaluate how we are going to deliver services to our customers (internal & external).

  1. 27  Ed Brill http://www.edbrill.com | 3/12/2009 10:39:59 PM

    Mike, we are actually agreeing, more or less. I was using my example as a customer switching from Domino mail and applications to Exchange Online or BPOS and still having to run Domino applications.

  1. 28  Henry Bestritsky http://www.binarytree.com | 3/13/2009 9:43:45 AM

    @27

    Ed,

    This whole "can't migrate applications" approach you have been advocating for the past five years is hurting you big time. Do you really think that companies are just accepting this and saying.."Oh ok, that means Lotus is great"? As you know we have Application Coexistence solutions that make sure that applications work "as is" when the user moves to Outlook. I am not trying to do a plug, but since you mentioned this in an earlier post here, you need to understand that we are just writing software responding to market demand. The question is why is there market demand? In my opinion you are positioning Notes apps as the "Asbestos" of IT and not the "Glue" of IT. This is extremely dangerous. Instead of trying to justify why the Notes application platform is viable, you are saying the opposite.