FY27 incentives: Microsoft is filtering for partners who grow with AI

Microsoft FY27 started with a figurative bang. There are pretty big changes to incentives for both direct bill and indirect resellers plus some new rules designed to prevent price pressure and highlight the importance of partners having additional income streams outside of Microsoft incentives.

Beyond the incentives changes per se, Microsoft has also raised prices on particular SKUs. For direct bill partners, changes are also coming to the required support plan in January 2027.

Looking at the overall picture, the phrase that comes to my mind is: “multi-directional squeeze.” Before walking through the individual changes, let me try and put the whole market movement into some perspective.

Some context first

Microsoft introduced online services in 2009 with the launch of  the Business Productivity Online Suite (BPOS), and Office 365 followed in 2011. The CSP program arrived in 2014, Microsoft 365 launched as a brand in 2017, and NCE came to fruition in 2019.

Microsoft's transition from a software company into a cloud service provider has been going on for about 18 years now — old enough to legally drink alcohol in many countries, though in the US it still has three years to wait.

Over the years, the services have become more mature and, with that, more complex. Back when computers were first introduced, they were a strategic competitiveness lever — the companies that adopted computerized processes quickly became more competitive than their peers.

The specialized companies that implemented those processes were at the forefront of innovation, more or less considered scientists and wizards. The ones that made it were the ones who doubled down and dedicated themselves to helping customers maximize their technology investment, because let's face it, a computer was a big investment.

Recent changes

The last couple of years have seen a stabilization in the market. Focus has shifted to making sure everyone runs on Microsoft services, and partners have been well compensated through the incentive programs for doing exactly that.

Then, in late 2022, OpenAI launched ChatGPT, and almost overnight the AI revolution began. Just like when the computer made its entrance, the first movers have an advantage, and done right, AI-powered or AI-assisted business processes can make a company more competitive than its peers.

And here's where the explanation for the big changes to CSP incentives lies: Microsoft has a huge existing customer base that can benefit from its AI products, and it needs partners who are willing to go all in with them on that. With about 500,000 partners to choose from, the giant in Redmond needs to sift the wheat  from the chaff, and its most direct lever to do that is the CSP incentives.

The new focus on AI-related growth

The FY27 version of the CSP incentives clearly favors the partners who can drive AI-related growth. Amongst this group, the ones who'll benefit most are those who can drive it focused within a solutions area while collaborating with other partners, or the ones who can excel across many solution areas.

Partners who share Microsoft's vision for the future and are willing to invest are getting plenty of material and help to transform: benefits packages, training, and free certification vouchers, all helping position your business to make the most of the AI revolution for you and your customers' success.

I'm not saying transforming and shifting focus is easy, but it can be very profitable.

My expectation is that, now more than ever,  the most successful Microsoft partners will see incentives and available funds as margin enhancers — the cherry on top — rather than their main profitability driver. They will treat licensing and funded engagements as multiple income streams, not a single bet.

Top three changes

Instead of copying and pasting all the details, I'll just summarize the top three changes for you here. You can take a deeper dive by clicking this link https://incentiveguide.partner.microsoft.com/ or, of course, get in touch with your SoftwareOne contact.

1. Core incentive replaced by Global Strategic Product Accelerators

   The sweeping Core incentive is gone on Microsoft 365 and Dynamics 365. That money has moved to two Global Strategic Product Accelerators, paid on the billed revenue of the products — just like the Core incentive, but only for products Microsoft considers strategic. The accelerators are segmented into two tiers, where Tier 2 pays best.

   Microsoft 365:

   Tier 1: M365 Business Premium, M365 E3, M365 Copilot Business, M365 Business + Copilot Business bundles, Microsoft Defender Suite, Microsoft Purview Suite, Microsoft Defender Suite for Business Premium, and Microsoft Purview Suite for Business Premium
   Tier 2: M365 E5, M365 E7, Agent 365, M365 Copilot, Copilot Studio

   Dynamics 365:

   Tier 1: D365 Supply Chain Management, D365 Finance, D365 Project Operations, D365 Human Resources
   Tier 2: D365 Business Central

   Based on the products now paying incentives, it's clear that laying the foundation for AI usage on a human level is the priority. Every user should have a license that either drives AI usage or enables secure adoption of AI.

2. Azure moves further toward growth

   For Azure, the consumption-based incentive is still there, though it's been adjusted, and the money has moved to three growth accelerators paid on incremental year-on-year growth, on a monthly basis. This means the core covers base consumption, and the earnings opportunity sits with adding to and growing Azure consumption.

   Tier 3 workloads: SQL Managed Instance, SQL Database, Azure Database for PostgreSQL, Azure Database for MySQL, Azure Cosmos DB, Azure Managed Instance for Apache Cassandra, Microsoft Fabric

   Tier 2 workloads: Foundry Models, Foundry Tools, GitHub, Microsoft Defender for Cloud, Sentinel,

   Microsoft Copilot Studio (including Cowork)

   All other workloads sit in Tier 1

   Looking at the workload tiering, it's clear this year is all about getting data into Azure and then attaching AI to it: every product in Tier 3 is database-related, and everything in Tier 2 has to do with AI. One interesting note: Pay-As-You-Go Cowork and agent spend sits in Tier 2, making that usage pretty profitable.

3. Change of Channel Partner (COCP) gets tighter

   Historically — as in, last year — a partner would earn incentives when a customer moved over from another partner. Because Microsoft also built tooling to make it easy to move between partners, this became very common and created price pressure in the market. That's not necessarily bad for customers, but it doesn't do much for overall market growth either.

   So, this year's changes mean that if a customer moves between partners, the new partner won't earn any incentives on the existing revenue, only on the growth. This applies for the first 12 months. The real-world impact is that it'll likely be harder to move a customer over purely on license price. But with a good service offering, it should still be doable in a profitable manner, and year two incentives come back to add to the margins.