With much fanfare, Microsoft Tuesday introduced Office 365, its next generation suite of productivity tools that takes the place of its Business Productivity Online Suite (BPOS) hosted Exchange product as the crown jewel of its increasingly vital cloud strategy.

Much has changed from BPOS to Office 365 – the infrastructure has been updated to Exchange 2010, SharePoint is better integrated, and the more robust Lync unified communication tool replaces the aging Office Communicator.

But one of the biggest channel headaches around Microsoft’s cloud-based offerings remains the same – although partners are noted as a “partner of record” for their customers, the software titan continues to insist on owning the billing relationship with the customer.

Jason Brommet, Microsoft Office group manager at Microsoft Canada, acknowledged that concern over customer billing is one of the most frequently asked questions from Microsoft’s partners. Still, the company is holding firm on the line, and Brommet argued that once partners get used to the idea, many even like it.

“We will continue to manage relationship with customers billing on behalf of our partners,” he said. “I think there’s an initial emotional response from partner’s to that, with the notion that Microsoft is taking over the customer, but for most of the partners we see today have become very successful reselling BPOS, it becomes a non-issue. In a lot of cases, they don’t want to manage the billing infrastructure, so it takes that piece of it off and allows them to focus on value-added services.”

Vancouver-based managed service provider Fully Managed was among those incensed by the initial announcement. “Two year ago, we were really up in arms about it,” said CEO Chris Day.

But fast forward to today, and Fully Managed was one of a select few partners on hand for Microsoft’s grand unveiling of 365 in New York, coming almost a year after the company earned a keynote mention as a top BPOS partner. At the time it had more than 30 customers on BPOS. Today, that number’s more than doubled. So what changed?

“Over time, we realized that we can separate out the infrastructure platform from the services we provide – the price of Office 365 is the price of the platform,” he said. “The rest of the money [customers] pay on a monthly basis goes to us to manage the platform, support the staff and provide other services.”

Day said that far from the grim profitability predictions many partners have had around Microsoft’s cloud offerings, his company is actually more profitable around BPOS than it was around traditional Exchange deployments. That’s because while the cost of doing a deployment has gone down (in one case, Day said the company was able to do a 150-seat migration in two days with just one person on the job) the amount companies are willing to pay for the migration and ongoing service has remained consistent. But it does a require solution providers with a more traditional background to think a little differently about what they bill for and how they bill for it.

“We just allocate the budget to other things, higher value things,” Day said. The company also makes its billing outcome- or value-based rather than based on the hour – that way there’s incentive for the company to be more efficient. His advice to other partners?

“Get really good at it, and then charge what it’s worth.”

If there’s one complaint for Fully Managed in the billing scheme for Office 365, it’s that it adds a bit of complexity for end users – on any given month, a customer gets two bills – from Microsoft for the actual platform, and from Fully Managed for the services and support around it. “It would be nice to get it down to a consolidated, single bill,” Day said.

Going Head to Head with Bell

One competitive specter on the horizon – Microsoft is inviting some big players to the Office 365 game. At its launch-day press event in Toronto, Brommet and Microsoft Canada president Eric Gales were joined at the main table by Bell Canada’s Strahan McCarten, director of product management for hosting and cloud computing. Microsoft and Bell have been working together on cloud computing for a year now, and the company has a significant base of BPOS customers that it will look at migrating to Office 365. The company plans to start actively selling Office 365 early in the third quarter, after it can train its sales call centres on the new product.

McCarten said that while small businesses “are intrigued by the cloud,” there is some level of confusion as to where to go and who’s responsible for cloud services – the service provider or the application provider. Bell’s pitch: a familiar name that both offers the app and the network.

Day said Fully Managed is coming up against Bell more often than it has in the past, but with his company’s focus on two markets – Vancouver and Edmonton – he believes it has the agility and local knowledge to beat out its much larger competitor. Still, “we have to be sharp and ready for them,” he said.

“If an MSP is heavily focused on providing infrastructure support with very little value-add, there’s going to be some struggles for them” against the big telcos, Day suggested. “That’s a natural progression, and those who play in this space have to be good at what they do and pay a lot of attention to.”