Whenever a discussion about Software-as-a-Service breaks out among solution providers, one issue that immediately pops up is where the channel will not only fit into — but also profit from — a scenario in which applications are delivered by vendors to end users as services.

Microsoft, which in the first half of the year plans to roll out Dynamics CRM Live, a Microsoft-hosted version of the Dynamics CRM 4.0 offering it launched last month, finds itself under the increasingly hot gaze of channel scrutiny. Partners feel they’ve been patient as Microsoft has worked to develop and articulate its own SaaS strategy, called software + services. But this year, partners are going to demand real answers.

With software + services, Microsoft gives customers the option of deploying their own on-premises servers, buying services from hosting partners, or — in what will likely be the cheapest option — buying ‘in the cloud’ services directly from Microsoft.

Microsoft executives say they’re aware that some partners are worried that the latter option gives Microsoft a powerful customer-facing position that it may have no compunction about leveraging in the future. To assuage partners’ concerns, Microsoft’s top channel executives have been busily circulating amongst their partner base as part of a campaign to explain how the channel fits into a software + services world.

Allison Watson, corporate vice president of Microsoft’s worldwide partner group, has been out in the field with partners in recent months, working hard to drive the software + services vision. “Software + services is a big opportunity for us and our partners to rock the world with the launches that are coming up,” Watson said.

“We hear concerns about SaaS all the time, but we believe this opportunity gives customers and partners more choice in the way they address their business,” said Robert Deshaies, vice president of Microsoft’s U.S. Partner Group. “We need to continue to ensure that partners understand that they are absolutely part of the equation of software + services.”

Arnie Bellini, president of ConnectWise, a Tampa, Fla.-based solution provider and Microsoft Gold partner, says it makes sense from a business model perspective that Microsoft would want to move away from selling new versions of their software in favor of a recurring revenue model in which updates are delivered to customers automatically.

For partners, one area of potential concern is how far Microsoft ends up taking its software + services strategy, according to Bellini. “If I’m Microsoft, why would I stop at hosting the Office suite or Exchange or Sharepoint servers — why not take on the entire line of business applications?” Bellini said.

In this scenario, Microsoft clients who choose the software + services route could eventually end up with very little IT infrastructure in their offices, Bellini said. “That’s the concern. As a reseller, I look at that and I’m not sure if I like it. I probably don’t like it,” he said.

Within the industrywide SaaS model, partners with domain expertise in various verticals that can integrate SaaS systems with legacy on-premise solutions will find the most long term traction, according to industry experts.

In serving its small and midsize customers, San Francisco-based Microsoft CRM specialist Workopia has found success by offering vertical expertise; for example, by offering a version CRM specially tailored for the publishing industry. “We try to build vertical templates, and even though we are a reseller, we also build vertical expertise from our consulting practices,” said Frank Lee, president of Workopia.

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