A deal for BT to provide a platform for the delivery of Mircosoft's business applications is the software supplier's next step in moves to sell software as a service.
The companies are targeting the small and medium-sized enterprise market with "a la carte" applications as well as software bundled with broadband services.
Microsoft already works with other telecom providers in the US and Europe.
BT selected Microsoft over its incumbent middleware provider, BEA Systems, to build an application delivery platform and provide business software specifically targeted at the large and potentially lucrative SME market.
The agreement, valued at $7m (£3.65m), builds on BT's strategy of building out broadband services amid falling fixed-line revenues.
"This is a great opportunity to exploit the market for both software services and broadband," said Brendan O'Rourke, BT's general manager of retail internet networks.
He said that BT selected Microsoft over BEA because it could easily integrate Microsoft products into its existing infrastructure, and for the applications' sophistication. BT plans to introduce its first service, Microsoft's Hosted Exchange, in July.
Daren Mancini, Microsoft's UK communications sector director, said that Microsoft hopes to provide affordable and easy to use applications and then evolve the offerings to more sophisticated software that businesses can share with their partners and customers.
For BT, the software services are also clearly a way to roll out bundled broadband and Wi-Fi offerings. While 69% of SMEs in the UK have internet access, only 37% have broadband.
BT will offer Microsoft's e-mail, calendar and collaboration applications on a subscription basis.
BT's new hosted application services are also being developed with the help of systems integration provider Tata Consulting Services and Hewlett-Packard, which is providing services to deliver Microsoft's Hosted Exchange infrastructure within BT.
Scarlet Pruitt writes for IDG News Service