How to prepare for 2022 Microsoft licensing negotiations
What happened with Microsoft Licensing in 2021
Let's recap some of the pain points our customers have seen.
Everybody thought we could forget about on-premise licensing and focus on Cloud, Azure, and Office 365. That promise hasn't matured. On-premise licensing is here to stay. We will probably be dealing with and managing on-premise licensing for the next five years at a minimum.
Complex hybrid licensing rights
They add another layer of complexity to the overall Microsoft licensing puzzle. You have to manage both on-premise licensing and the hybrid benefits on your various cloud deployments: Microsoft Azure, AWS or Google.
Tools have been around for ten years, helping you manage your on-premise licensing. They have matured to the next phase of managing your cloud environments, but still, they don't do everything. The human factor is key to successful cost, financial management of licensing and hybrid benefits. So you need to take a different approach when looking at tools. Consider that you need highly qualified, trained, experienced professionals to manage them. And remember, no one tool provides a 360-degree solution.
What's happening with budgets?
We have spoken to many CFOs over the last 12 months. And there's one thing in common between them – budgets are out of control. CFOs are seeing over 35% cost increase over budget on Azure and office 365.
The CFOs are not only dealing with increased costs. They are dealing with moving from CAPEX to OPEX, which is always tough when you're a CFO of a publicly-traded company. You always want to control your operational expenses, while the Cloud has changed things around completely.
Multi-cloud environment mobility,
promoted as the "big promise" of easy migration and transition between Microsoft, AWS, and Google Cloud, hasn't materialised, with no easy way to move between "Clouds".
But still, the best practice is introducing a multi-cloud approach to contain your costs and create negotiation leverage.
What's happening with audits? Are they on the rise?
No, external audits are decreasing, but internal audits are increasing. Our customers are seeing increased pressure by internal compliance, audit and governance divisions validating and auditing their financial management practices and Cloud spend budgets.
The result of these challenges is to the benefit of Microsoft. Server and Cloud revenue is up 27%, over $41 billion. Office and cloud services are up 11%.
So the trend is evident: increased complexity and a massive movement toward the Cloud by enterprise organisations. COVID-19, as well as digital transformation, are pushing up Microsoft's revenue.
You need a new approach in 2022
We need a new, 360-degree approach. It's a holistic view of your Microsoft financial expenses. It needs to include FinOps, on-premise licensing, unified support and best practices around Bring-Your-Own-Licenses or Azure Hybrid Benefits. It must emphasise skilled professionals with the knowledge and ability to control the entire picture.
Microsoft likes to negotiate in silos: first, the enterprise agreement, then separately your Azure contract, followed by Unified Support, resulting in a weakened position for the enterprise. Your strategic approach in 2022 needs to unify your relationship with Microsoft. What's required is to change the way you work with them and create one negotiation motion.
Microsoft needs to recognise the entire value of the relationship and not divide the financial cake into multiple small pieces. So, what you need to do is:
First, look at your on-premise contracts, and validate that there's no overspending.
Understand your bring-your-own-license Azure hybrid benefit rights and plan how to utilise those licenses as part of your overall Azure strategy and maximise your return on investment from your current infrastructure and contracts,
Financially plan what your Azure commitments will look like and what your consumption will look like. You need to monitor your Azure spending continuously. Optimise it on an ongoing basis. Be in continuous contact with the team managing the on-premise environment to utilise your Bring-Your-Own-License benefits.
If you are a Unified Support customer, you need to add the overall costs for Unified Support and understand how that contributes to the overall relationship. Remember that Unified Support costs are linked to your EA and Azure spending.
Once you combine everything into a holistic view, you can build a new relationship with Microsoft and leverage the various components of your overall spending to your advantage.
What's the number one action you can take tomorrow?
Start preparing for the Microsoft price increase coming in March. It is huge. Prices are going up on average between 8% to 25%. Add to that the recent changes in the CSP program, and your cost can go up by as much as 50%.
Microsoft is deliberately not increasing the 365 E5 offerings. Why? They want everything else – all the components – to become more expensive, so the 365 E5 offering looks that much better.
Don't be in a rush to move to 365 E5, as that will go up eventually as well, and then your next renewal will be even more costly.
If your agreement is up for renewal – second quarter, third quarter of next year – look at an early renewal. Start negotiations with Microsoft on January 1st, and try to get that renewal before the price increase. An early renewal can save you between 10% to 20% on your predicted three years spend.
Enterprise organisations that have had a long ongoing relationship with Microsoft, starting with a premier agreement that migrated to the Unified Support contract, have realised tremendous cost increases due to the overall cost based on a percentage of actual Azure and enterprise agreement spend. Hence, as your EA and Azure spending increase, you will pay more for your support agreement. It doesn't mean you're getting more; you're just paying more.
So, what can you do about your next Unified Support contract? First, create a baseline that both Microsoft and you agree upon (EA and Azure spend), and then negotiate the percentages on which the agreement is based. In addition, don't forget your fundamentals and prepare a BATNA – the best alternative to a negotiated agreement, and in this case, it's a third-party support vendor. Some vendors provide Microsoft support based on the old premier model, which is very transparent and cost-effective.
When you negotiate with Microsoft, you need to consider how the Microsoft sales teams are compensated, as what drives Microsoft. Ultimately it is their compensation, bonuses, salary increases, and promotions, just like any sales team worldwide. Yet, how they are compensated and measured has changed over the years. They used to be rewarded on committed revenue in the past. Today, it's about the actual consumption, i.e. the number of deployed 365 licenses and Azure consumption. For example, suppose you commit to a specific Azure consumption threshold. In that case, you can potentially negotiate Azure credits (the level of credits depend on actual consumption thresholds) or a discount off the Azure price list.
Everybody asks me, what is the best practice on discounts? First, Microsoft's policy is to reduce discounts aggressively worldwide, resulting in organisations with over 5,000 users seeing a double-digit decrease in discounts for the same bill of materials. Current EA renewal discounts, on average, are around 15%, depending on geography and size. The way to mitigate that is to implement a multi-tiered negotiation strategy, leverage your Azure consumption, pick and choose 365 security components and introduce an alternative to your Unified Support contract.
Anchor your price and, more importantly, anchor your 365 user profiles.
Is it going to be Microsoft 365 E5? Is it going to be E3? Is it going to be a combination? Our best practice is a combination of profiles to meet your user needs.
Introduce a multi-cloud approach and let Microsoft know about it.
Not only do they need to know about it, but you also need to implement a multi-cloud strategy, even if it's a small workload. Make sure Microsoft is aware of it.
One Microsoft negotiation motion.
I believe that's key to the 2022 Microsoft negotiation. Microsoft has been brilliantly smart about dividing organisations, especially enterprises, pushing Azure to specific business groups, and selling products and projects to silo groups within the organisation without notifying or bypassing decision-makers. It would be best if you were clear with Microsoft that there is no longer a separate Azure, EA or unified support negotiation. There's a single motion to negotiate all components together.
Have a T-12 plan when you enter into negotiations to renew your Enterprise Agreement or your Azure commitment.
You can't wait until the last minute. Microsoft is probably one of the most complex contracts on your table; it takes 12 months to get organised and prepared.
LSPs (Enterprise Agreement resellers) are losing their monopoly on enterprise organisations.
Microsoft has set in motion the move from EAs to CSP agreements. As a result, you can add new competition to your LSP through CSP resellers.
If you'd like to discuss this further, please feel the form below, and our leadership team will be in touch with you as soon as possible.
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We are an independent consulting business that sells no licenses or Cloud services. That is on purpose, so our advice is unbiased.
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