Rather than benchmarking other software companies, I studied industries that had solved analogous problems. The State Farm agent model was the most instructive. Independent companies were agents of the parent in the legal and commercial sense. They didn't set price, didn't hold inventory, and didn't compete by discounting. They competed by being better advisors, with activity-based economics that rewarded top performers. That research became the foundation of the Enterprise Software Advisor (ESA) model.
At a closed-door meeting at the Hilton Chicago O'Hare, Henningsgaard brought in the CEOs of three of Microsoft's most influential LARs: Howard Diamond of Corporate Software, Keith Coogan of Software Spectrum, and Paul Jarvie of ASAP Software. When one of them asked how Microsoft would define exactly what services partners had to perform to earn advisory fees, I answered with a philosophy rather than a checklist. We'd give partners the categories and focus areas that mattered, then let the market and customers establish the service levels. Over-specification would commoditize the advisory role. A thoughtful framework would elevate it. That answer defined the architecture of the ESA model for the next twenty-four years.
The economic insight that made the model work was structural. Microsoft was already giving LARs a 17.7% discount on software as part of the existing indirect model. Moving to a 4% activity-based advisory fee was well inside that existing budget. The transition wasn't asking Microsoft for new money. It was redirecting money it was already spending, converting an undifferentiated volume discount into a targeted performance-linked fee.
When I presented this in a mid-year review attended by about forty people including Gates and Ballmer, Ballmer's immediate reaction was: "This is a perpetual motion machine!"
It sounded too elegant. Henningsgaard pulled me aside afterward and was direct. I needed to come back with the math made explicit, and to do that I needed data Microsoft didn't have, on what the channel was actually earning under the existing structure. I got it the only way I was going to get it. During my research and collaboration with our key channel partners, I had cultivated strong relationships and built trust. Howard Diamond of Corporate Software was one of those key partners. During a visit to his company's offices in Boston, Diamond cleared the room of his own VPs and the Microsoft account team, opened the company's live SAP system, and walked me through the actual margin on every deal, line by line. Diamond didn't share that data because he was naive. He shared it because he trusted me to use it to protect the channel's economics rather than exploit them.
That session gave me the verified picture I needed. The mechanics held up. Ballmer accepted the framework and told Henningsgaard to take it forward.