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The Nuances of Doing Business with Microsoft

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by Louis Pellegrino

As part of a full-scale reinvention of its software business, Microsoft has invested billions of dollars in a worldwide network of large-scale datacenters to shift away from its legacy License and Software Assurance (SA) offerings toward a complex set of end-user and datacenter subscription alternatives: Office 365 and Azure, otherwise known as Microsoft Online Services. These datacenters are designed to provide thousands of commercial and government tenants with Microsoft’s Office Productivity Suite and host tens of thousands of servers that run Exchange, SharePoint and Skype for Business, replacing customer datacenters that traditionally have supported these workloads.

To recoup its investment, Microsoft is relying on its traditional enterprise customers transitioning from License and SA to Online Services. To that end, all customers currently enrolled in Microsoft’s Enterprise Agreement (EA) program have account plans designed by their Microsoft sales teams to increase their annual Microsoft 365 spend by double-digit percentages.

In most cases, these customers are receiving unsolicited EA renewal offers from Microsoft that contain numerous Office 365 licensing alternatives – alternatives that may or may not represent a true “like for like” functionality. These account plans depend on upselling or overselling Microsoft products, services and subscriptions, including license compliance revenue.

To dissuade customers from renewing into an SA-only EA, Microsoft is reducing or eliminating its traditional SA discount if the renewal lacks a material commitment to cloud service offerings. Because many customers cannot properly account for all their devices that either run or need access to Microsoft software but want to avoid an intrusive software audit, Microsoft is waiving previous under-licensing in exchange for a move from SA to Online Services.

By acquiring new technologies, Microsoft has evolved an extensive inventory of Online Services offerings that have steadily increased in cost, and customers need to fully understand the “price to value.” New security technologies have manifested as “add-ons,” and entirely new Online SKUs allow Microsoft to enter new markets – as in unified messaging and voice solutions – in which customers have had other viable non-Microsoft solutions in place.

Microsoft claims its “stack,” as packaged in its various Online Services, will provide superior price performance to bundled non-Microsoft alternatives. Though Microsoft has been pricing these Online Services SKUs aggressively, other non-pricing components of the deal structure can distort the measure of a good deal, which we track as “time to value.” And, while there may be some benefit to bundling, it’s not clear that the all-inclusive Microsoft stack is truly a functional equivalent or even the actual low-price leader. 

Since it was introduced in late 2003, the EA has been the cornerstone of Microsoft’s volume licensing business and enterprise growth. Today, the typical Microsoft EA is saturated with virtually all the software benefits a customer needs or can operate. But this runs contrary to Microsoft’s ambitions of double-digit revenue growth; hence the aim of moving customers to Online Services as part of the EA renewal. And because many customers never actually use all the SA upgrades they’ve paid for, Microsoft is trying to change the playing field by redirecting customers to Online Services, where it can control the customer’s consumption of productivity workloads.

This plan harbors a major caution: In many instances, the real migration efforts and costs are not properly accounted for, and it could be months, if not years, before the customer realizes any true value from Online Services. To that end, Microsoft has been actively promoting its newest flagship end-user online service marketed as Microsoft 365, a solution that allows customers to mix both online and on-premises options.

Customers should assess Microsoft 365 carefully. For customers that continue to run and support the Office workloads from their own datacenters, Microsoft 365 can be a clear “oversell” that costs more without achieving any operational savings. While Online Services make it less likely that unintended traditional software installations can occur, the cost premium of using Online Services as a compliance strategy needs to be in proportion to a customer’s historical software compliance costs.

Without at least 18 months of full production use of any Online Service, there is a strong probability that customers will have overspent on their EA renewal and failed to generate a reasonable return on investment. Modeling a “time to value” formula and determining a fair market value of the cost of an Online Service subscription will provide customers an accurate means to evaluate a renewal proposal.

Microsoft is a strategic provider to virtually every large enterprise worldwide and has the systems and processes in place to execute its sales plans. ISG helps companies ensure successful outcomes in structuring and negotiating their Microsoft estates. Contact me to learn more.

About the author

Louis joined the ISG team in early 2014 after nearly 20 years with Microsoft Corporation. Louis has compiled a track record of Enterprise client success underpinned by customer focus, strategic thinking, organizational agility, problem-solving acumen and impactful knowledge transfer which has established his reputation as a Microsoft licensing expert.

During his time with Microsoft, Louis worked in both the Consulting Service Group as a Practice Manager and in the Worldwide Licensing and Pricing Group as a Director responsible for designing and negotiating Global Volume Licensing relationships. As a highly effective and influential communicator/negotiator, Louis has delivered consistent business results across both revenue and quality of service performance targets.