Microsoft Commercial and Enterprise CVP to analysts: Aggressive cloud investment can co-exist with customers’ hybrid, on-prem interests

By:  Dann Anthony Maurno

Perhaps Microsoft’s cloud-first strategy seems to some like a runaway train, leaving partners and slower-moving customers on the platforms with their “baggage” of on-premise products and expertise.

Or, perhaps that’s not the full story. Microsoft’s appearance at last week’s Credit Suisse 21st Annual Technology, Media & Telecom Conference reveals more forethought and learning than that. There, the company’s CVP & CFO for Commercial and Enterprise Dave O’Hara, whose territory includes Office, Dynamics, AI, and Research, answered questions by Credit Suisse Analyst Michael Nemeroff.

As O’Hara observed many times in the interview, he offers a CFO’s perspective; he is not one of Microsoft’s frequent keynote speakers like Judson Althoff, James Phillips, or Toni Townes-Whitley.

But O’Hara offers a healthy understanding of enterprise software and the partner ecosystems. He joined Microsoft in 2001 as part of the acquisition of Great Plains Software, where he was a VP. Over the years he has transitioned from the Dynamics business to be CFO of the online business, CFO for Office and then Cloud and Enterprise and finally, all of them together. As Nemeroff summarized, “So, basically everything that grows at Microsoft is what you’re responsible for.”

Following are a selection of his forward-looking observations from the Credit Suisse interview about Microsoft’s market position, now and over the next decade, based on a SeekingAlpha transcription.

Expect a five- to ten-year hybrid transition to cloud

Hybrid is absolutely “where it’s at” for Microsoft for the next 10 years, possibly, says O’Hara.

“Some  of the numbers I’ve seen is that like 10% of the workloads are in the [public] cloud…so, I think we still have lots of opportunity [that] will take place not over the next year or two years but more like over the next 5 to 10 years…So, it’s just going to be a hybrid environment for years to come.”

That long-term outlook may come as a surprise. While CEO Satya Nadella seems to think “cloud first” (as do analysts and the industry press), the company is realistic about its customers’ cloud comfort. O’Hara observes that enterprise customers are increasingly ready for a cloud transition, but not a one-time cutover:

“Two years ago, there were still people saying “Do I need to move to the cloud and if I do, when does that all need to happen?” We’re… past that point. Any customers that we talk to are clearly in the mode of we need to move to the cloud.”

“I think there was a lot of fear at first for customers because they saw it as you don’t need to move this environment to this environment, you need to move from on-prem to cloud. That’s one of the things that’s caught on with our hybrid offering…being able to offer some services in the cloud and some on-prem [is] what’s resonating the most with customers. And so, the shift for me over the last two or three years is they all get it…they also get the fact that [they can] migrate over there in a more responsible and reasonable way.”

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Azure maturing, exceeding growth expectations

Regarding the cloud business itself, O’Hara observed:

“It’s actually exceeding our expectations in how fast the market can grow. And [we are] well-positioned to grow in the cloud, on Azure. I think Azure has had a really good couple of years, that’s due to a lot of hard work and a lot of forward thinking and working directly with a lot of customers. And so, I think the cloud business is by far the most immediate opportunity for us to grow.”

Nemeroff remarked upon Credit Suisse’s own surveys, which revealed an inflection point for Azure, and a renewed acceleration of growth in Q4 2017. O’Hara recalls of Microsoft’s Azure journey:

“[In] a meeting a few years ago where we said, look, we really need to double down on the engineering [and] build out more services within Azure, and we did and we just – we made a bet, and I think the bet has paid off. We hear from customers that the Azure service is in much better shape, they feel it’s much more competitive.

“[And] we’re candidly just better selling it. It wasn’t something that came natural to us. [We] had to figure out how to sell an online product in a consumption environment. [But]I feel like the sales force has figured it out, and we’re able to articulate the value prop better. [All] of that adds up to faster growth.”

The Microsoft cloud value proposition goes beyond cost to areas like compliance and security.

Cost-conscious customers necessarily consider AWS and Google Cloud; but, cautions O’Hara, they will miss Microsoft’s value propositions, and even a lower total cost of ownership. He observes of enterprise customers:

“[Every] conversation quickly evolves into a cost conversation, and “Can you guys really do this cheaper than we can do it?” [But when we] show them the benefits of scale and the geographic footprint we [offer] along with security and everything else that’s in our cloud, then I think they understand it that there is a difference between just running at low cost and running at low cost with all the compliance and security and everything else that goes along with it.”

“I would say [TCO is] almost always double-digits lower than what they could do [themselves].”

He feels that Microsoft has both cost-based and value-add answers to AWS and Google Cloud, among them:

“Premium Services is growing faster than core Azure, and we will expect that to continue forward.”

“[The] global footprint is something that’s hard for everybody else to match…for anybody who is doing business outside of the US, that’s super important.”

“We are getting much better about explaining innovation that we are adding to the cloud and some of the things that we offer…[and I think] the market is going to go to being price-based and innovation as opposed to just low cost.”

Dynamics seen as “biggest opportunity for growth” and healthy gross margin.

Credit Suisse’s Nemeroff had attended Salesforce’s Dreamforce Conference, where the company gloatingly displayed an CRM market share slide with Dynamics trailing far behind SAP and Oracle. How then will Microsoft “pour some gas on the fire in the Dynamics business?” asked Nemeroff. O’Hara described nothing but possibility ahead:

“Satya would say Dynamics [is] our biggest opportunity for growth and I think it’s [our] biggest opportunity for good healthy gross margin.”

“The history of biz apps has been about big monolithic applications where people need to pay a lot of money and then pay even more money to get them implemented. And by the time you are done, you are years into it and tens of millions of dollars. [We’ve] been on a path to take that tech and break it down, so it’s more digestible and it’s more disruptive to the marketplace. [You can] buy only the set of services that you need or [just] a subset of those services [in] a very cost effective way. [We offer] a great collection of biz app services that can be broken down and you can just take pieces of it at a time. So, if you already made a big investment in some ERP system, [we can] augment that.”

“The real opportunity Dynamics when you see that low share is – it’s all growth. We just feel like it’s all upside.”

On-prem, legacy apps are competitive strengths

The message at this year’s Inspire partner event (which caused rumblings in the channel) seemed to be that Microsoft’s vision has no place for on-premise or “general purpose” partners who just want to implement. But O’Hara describes a need to suit all types of customers – thus, a need for all types of partners, and products:

“We see legacy as a great asset because we have all these customers running these products. And our responsibility is to make sure that our cloud offerings work with those existing products, so that they don’t have to go through some nasty transition…there is no other company on the planet that has the array of offerings that we have.”

“[We’re] uniquely positioned [to be] the vendor who can go to [customers] and say, “This on-prem stuff that you’ve been running, we can continue to support that and take care of that and help you run that well to have these cloud offerings, and you can do all that and [the only] company you need to go to is Microsoft.”

“There has been an assumption that our on-prem products will just sort of fade away and then the cloud will grow and the question as always is [about] cannibalization. [Using] Windows Server as an example, we’ve seen a lot of our on-prem products continue to grow while we’re also growing the cloud business. And I think that reflects the success of the hybrid strategy, which is people don’t want to just throw out what they’ve invested in.”

Partner ecosystem is hungry, innovative, a competitive strength

Whatever its market position, Credit Suisse observes that Microsoft has always enjoyed the largest partner ecosystem and network in the field. Asked how that ecosystem has changed and will change as it adapts to cloud, O’Hara observes of Microsoft partners:

“In some way they are hungrier [now]. They know that they just need to keep paying the bills every day. And so they want that innovation and they want that newness. And the partner ecosystem has shown an amazing propensity for making big bets and big investments. They are just — a lot of them just come to us and say tell us that you are working on, we want to get in front of that; we want to build a new practice.

True, some partners are more focused upon serving existing customers than on innovation, or investing in new Microsoft offerings:

“But we need a balance of that. I mean, we need partner ecosystems kind of take care of all of our customers’ on-prem, in the cloud, wherever they are. And so, I feel like I am a big believer in the partner ecosystem. I know a lot of partners, personally spend time with them and I think we have a partner network that’s second to none, and we’ll continue to have that.”

About Dann Anthony Maurno

Dann Anthony Maurno is a seasoned business journalist who began his career as International Marketing Manager with Lilly Software, then moved on as a freelancer to write for such prestigious clients as CFO Magazine; Compliance Week;Manufacturing Business Technology; Decision Resources, Inc.; The Economist Intelligence Unit; and corporate clients such as Iron Mountain, Microsoft and SAP. He is the co-author of Thin Air: How Wireless Technology Supports Lean Initiatives(CRC/Productivity Press, 2010).

Dann can be reached at [email protected]