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July 8, 2024

Microsoft's New Financial Year and Enterprise Agreement Renewal Negotiations

SAMexpert Podcast

In this episode, Microsoft negotiations expert Daryl Ullman discusses the challenges and strategies for negotiating Microsoft renewals in the upcoming fiscal year. He shares insights on Microsoft's aggressive tactics, the push for E5 and Copilot adoption, rising Azure costs, and the complexities of budgeting. Daryl provides valuable tips on how to maintain leverage, avoid vendor lock-in, and secure the best possible terms for your organization. If you're facing a Microsoft renewal, this episode is a must-listen.

28.57 MB

Alexander Golev: Microsoft's new year is coming, which is not as it is for every normal human being. It's not January 1st. It's July 1st, which also happens to be my birthday. Yes, Microsoft placed their financial year on my birthday. Daryl, do you want to say a few words about what we should expect on July 1st?

Daryl Ullman: Let's start with those organisations closing off their contractual renewals in June. June is a very engaged month of discussions and negotiations with Microsoft for those of you who are closing off the year. My recommendation for those of you who are still negotiating is not to be intimidated by any type of threat that Microsoft puts on the table. They have become super aggressive in their approach to on-time renewal and potential penalties for non-on-time renewal dates.

If you've received an email saying that if you do not renew on time, then your EA contract or your terms and conditions will not be kept and that you potentially will have a 3% cost increase on top of your negotiated prices, I can tell you that, from experience, we haven't seen that take place. For those of you who think maybe it's specifically for you, no, it's a formal disclaimer that we're seeing cross-regions, yet I haven't seen that come into effect. We have had several negotiations taken past the actual renewal period. Not that I'm recommending that you go over your on-time renewal, yet if it's a substantial, complex, high-stakes negotiation, remember that the pressure is not only on you; it is on the Microsoft team to renew on time as they are compensated for bringing that contract on time.

Keep that in mind. Never get intimidated. You'll be okay if you've got a good plan and a good BATNA (best alternative to a negotiated agreement).

Remember one more point regarding your renewal process: finalising your legal terms and conditions. Don't leave that to the last minute. If you are negotiating your commercial terms or closing off on your commercial terms, don't negotiate them in sequence. You're often so embedded in your commercial negotiations that you postpone the legal discussions.

I recommend putting that in parallel, and you might even find that you can leverage certain legal concessions against commercial concessions. You need to be flexible in your negotiation thought process. It's not only about commercials; it's about mixing and matching commercials, legal, tech, and relationships into one cohesive strategy.

What to Expect in the Coming Year

Daryl Ullman: What can we expect in the coming year? I'd say more of what we've seen this year: hardball negotiations around E3 and its components. Microsoft is continuing to push organisations away from E3 or E3, E1, and all the F's, fantastic F's, trying to push everybody up the ladder. The holy grail is still E5 plus. Plus what? Plus Copilot. I don't think I'm saying anything you don't already know, at least for those who have negotiated this year.

But for those of you coming off three- or five-year agreements, this message is for you. If you're on an E3 platform or profile plus add-ons, be aware that there will be a hard push to E5. On top of that, they'll want a certain amount of Copilot adoption – not for your entire organisation but for a portion.

Those on E5 who continue with E5 and add Copilot can expect an average price increase of around 50% per user, depending on how widely you adopt it. You need to be aware that Copilot will significantly drive up your overall IT/Microsoft budget. Prepare for it. I'm not discussing whether Copilot is good or bad; I'm just discussing the economics and the bottom line.

You need to prepare your finance team and adjust your budget accordingly. If you're budgeting for a 25% increase, factor in the potential percentage of users you'll want to migrate to Copilot and the 50% increase per user.

The expense is even higher if you're on E3 and adding Copilot. Copilot has no tiers. It's one-price-fits-all, relative to your overall cost. So, the relative price increase for E3 will be higher.

Prepare for that and adjust your budget as needed.

For those coming off three- or five-year agreements with a decreasing discount structure, something we've seen often for organisations that adopted E5 three or five years ago, expect that your negotiation starting point will be your exit discount, not your average or high watermark discount. If you didn't negotiate your previous contract, please review it. Understanding the historical view of your discounts and preparing "what if" scenarios is crucial for your negotiation strategy.

Increased Azure Focus and Consolidation of Negotiations

Daryl Ullman: We'll also continue to see an increased Azure focus from Microsoft. For those of you who are not there yet, at least you'll see that the discussion is more around the Azure contracts as the budget and the overall spend on Microsoft has shifted drastically from EAs to Azure. We are seeing many organisations where their relative Azure spend is 3x, 4x, or 5x more than Enterprise Agreement.

So you can also understand where Microsoft's emphasis is going, and the importance of Microsoft growing the Azure business because it's a more lucrative business, and that's where account teams are compensated. That's where potential additional benefits can still be achieved.

Take that into consideration. Try to consolidate negotiations by combining an EA negotiation and an Azure negotiation, and understand that your overall spending with Microsoft is essential going into fiscal year 2025 (starting in July 2024 for Microsoft).

If your negotiations are segmented today between EA, Azure, Unified Support, and maybe some other bits and pieces, combine them. It's critical as negotiations are getting tougher and more complicated. You must unite as one company and combine your spending into one cohesive negotiation strategy. That means you must build up your negotiation story on the three pillars of your main expenses.

You are losing substantial leverage if you don't do that going into 2025. It is what we have learned from the last 12 to 18 months. Discounting on EAs is declining and getting really tough to negotiate. Small and mid-size organisations struggle to negotiate, especially if they're not bringing something new to the table.

Large organisations still have leverage. I'm talking about the 30,000-40,000-user organisations. And Azure spend, Microsoft is entertaining discussions with organisations willing to commit 100, 150, 200, 300 million.

The numbers, compared to the past, are enormous. If you bring 2 to 3 million per year on Azure, it's generally not that interesting. Yet again, it goes back to understanding your importance to that particular account team you're dealing with and in which geography you are negotiating.

Geography's Impact on Negotiations

Daryl Ullman: You're not strategic if you're negotiating a 3 million euro a year contract in France. But suppose you are negotiating a 3 million euro Azure contract in Saudi Arabia, Georgia, or any Eastern European country. In that case, that is strategic because you are in a so-called growth geography.

Numbers have different importance based on the geography you're working from or your HQ. Small Azure contracts and small EA contracts are getting tricky to negotiate. You need to have key leverage points.

If you don't come with any leverage—and leverage is not only something new, it could be a relationship, it could be some kind of competitive landscape (yes, Microsoft still has competitors), or anything else, and there are multiple other negotiables that we can discuss—you're going to have a really tough time getting any kind of concessions.

Unified Support: Costs and Value

Unified Support has grown in spend tremendously. Budgets have increased, and value is flat. For those of you who may not be acquainted with the Unified Support pricing structure, it is a multi-tier pricing model based on your overall spending. What is your Azure spend? What is your EA spend? And then that's broken up into various buckets. Each bucket has a different percentage.

As your Azure spend grows, as your EA spend grows, your Unified Support costs grow. It doesn't mean that you're getting more value. It just means that you're paying more.

Going into next year, budgeting-wise, please take that into consideration. Otherwise, you will be in a budget deficit, which is a challenging conversation to have with your finance department.

Budgeting Challenges and Lessons Learned

Let me leave you with another point for 2025. We had an enterprise organisation that renewed four months ago. When they budgeted for this renewal, the individual who was budgeting forgot to consider a considerable reservation for Microsoft 365 that took place a year before.

They looked at the baseline spend and Azure, but that year, they had a massive reservation for M365 E5 users. And the way it was billed and came through a different channel didn't fit into that budget. It was like $400-500k, and it wasn't in the budget.

And when they came to the renewal, those reservations turned into baseline renewal licenses. And the baseline cost was, of course, inclusive. The budget didn't include it. You can imagine what kind of damage that, first of all, caused that individual personally. It's not a good place to be. Now, go and find the budget somewhere else.

Budgets are becoming increasingly challenging to forecast due to reservations, fluctuations, true-ups, Azure, and EAs. It's a moving target and declining discounts. So please, part of that FY25 planning, budget, budget, budget. Be super careful on that.

Budget Planning: A Critical Aspect of Negotiation Preparation

Daryl Ullman: One of the things that I always recommend when we prepare for negotiation is I want to see what that budget looks like and what that expenditure stream looks like from the organisation's budget, and then what it looks like from Microsoft's budget. And then we try and play around.

There are sometimes advantages to playing that and moving things around a bit.

Taking into consideration last year, April, there were price increases. Various products went up at various percentage points. On average, just say 10%, 12%. Don't forget that when you budget, don't forget that when you negotiate. That's a crucial point. If you are a Dynamic 365 user organisation with a substantial infrastructure using Dynamics 365, there are double-digit price increases from 9% to 17%. Keep that in mind. That's going to drive your overall increase in costs.

Alexander Golev: Here's my question, Daryl. If my renewal is hypothetically November 1st, and these prices go up on October 1st, is there anything I can do to avoid having to budget that in my renewal budget?

Daryl Ullman: Absolutely. First of all, I always recommend getting an early start on the negotiations and fixing a specific price list. What you need to make sure of is that when you start the negotiations and you get your first price quote, ask your reseller or Microsoft, depending on who you're negotiating with (direct, indirect – there are different regions, and each region has a different channel structure), ask to have in writing what price list is being used for the quotation. Will the price list be for June, July, August, September, or October? Have it fixed, and then make sure that as you go forward in good faith, that month's price list. If, by chance, prices go up during your negotiation period, or Microsoft tries to move you to a new price list, be very assertive and use that good faith clause; as we are negotiating, we expect to continue with the initial price list. It's all based on relationship, and relationship to Microsoft is a very, very strong word.

And they take it seriously. That's the only way to offset price increases during your term of negotiations.

One more point. I'm not saying anything new, but it's often overlooked: the point around Azure or cloud alternatives. I've said this for years, and I'll keep on saying it: Organisations are drastically underestimating Azure's ongoing and future costs.

There are two parts to it. One is cost optimisation. Needless to say, you need to manage your costs on a monthly basis. Hopefully, that's understood today, and everybody's got that practice. And that's not FinOps; it's economic optimisation every month. So you have that in place. Yet organisations have chosen too often one hyperscaler or one cloud provider, causing substantial lock-in.

I had a conversation today, a few hours ago, with an organisation, and I could be very blunt, but I will be very careful how I word myself. Those who know me know that I voice my opinion very strongly. Over the last three years, they have based everything, the entire future, on Azure. They had AWS. They not only migrated everything off AWS, they announced to Microsoft that everything in the future will be Azure. They have pre-promised growth without getting any kind of return on that promise or that roadmap in advance. And now, when negotiating a renewal, Microsoft says, "But you've got a 90 million commit that you've got no alternative."

They didn't exactly say it that way, but that's what they meant. "Why do they need to provide you with any kind of incentives? You're not going anywhere. Give us more than 90M. Commit to 110M, 120M, then we'll discuss what's that worth." So, the 90M already pre-planned because of consumption is worth nothing. 90M is out the door. Now it's 120, 130, so let's commit more. I know that there are complexities around technology and disciplines. I've been in the tech business for almost 30 years, yet you must always keep your eye on alternatives and competition.

Otherwise, you're missing out on the economic bottom line of your investments. And you're losing out. And at a certain time, it will start hurting because budgets aren't endless. And CFOs will start pushing back. Cloud is not on-prem. It's not hardware. If you've had a bad year, you can't just continue with the same hardware without investing for 5, 6 or 7 years. The light switch is on. You can't live in the dark. Just keep that in mind, just from a conversation I had earlier today. It's very painful from a bottom-line perspective.

Q&A Session

Mohamed: Can I add one unit of Dynamics on September 30th and then add all licenses to that subscription in November?

Alexander Golev: It depends on the channel from which you buy the licenses. This language rather applies to CSP. Enterprise Agreements work differently. You lock the prices when you renew.

Daryl Ullman: I'm assuming that the question is, "Can I lock in a price for one unit, and then if I need to increase or true-up or reserve in the future, then I'll have that price fixed?"

Yes, absolutely. If you are looking to invest in future products and don't know what that commitment will look like, lock in at least one product, if it's an EA, of course, and then you're locked in for the next three years. At least you've got price protection—one of the benefits of an EA.

Alexander Golev: Mohammed confirmed that that's under CSP. CSP subscriptions don't necessarily align to a specific three years. When you start the subscription, your alignment date is set. And, of course, if you started before the price increase, then you will probably, as far as I understand, if you're on annual or three-year subscriptions, you should be able to lock in the price. That's how they work, anyway. The cost of the monthly subscriptions goes up every month. It could go up; I'm not saying it does.

Maxim: Is it possible to get a discount on Copilot?

Daryl Ullman: No simple answer. It depends. There is almost zero discount on small commitments, and I'm talking about hundreds of licenses. Very, very challenging. Microsoft will open a discussion on Copilot discounts only for significant commitments. And large commitments are in the thousands of user licenses. And even that, it's not those high-level discounts that you might be used to under an EA.

If you are an EA customer, don't expect to get the same discount you got on your EA to get the same discount on Copilot. It's a separate negotiation. If you have a significant commitment to Copilot, negotiate that in parallel. You can bring benefits to the table that can be cross-referenced between various products to drive that value in the future.

Alexander Golev: Thanks, Daryl. Can you negotiate Copilot licenses on a private equity level to cover multiple companies?

Daryl Ullman: That's not a trivial question. Depending on the structure of your organisation—I'm not sure if you're talking about an Enterprise Agreement with multiple affiliates, that's one structure that we can look at, and then is the commit going to be a total commit under one agreement, or are we looking at multiple entities under, just say, a CSP that are purchasing individually. Still, you want to combine the spending to leverage a discount structure for everyone individually. It's two different approaches.

I can tell you that, in general, it's easier to negotiate Copilot discounts under an EA than under a CSP. And if it's multiple affiliates, you need the proper structure to leverage the total spend.

Always remember that it's the same for Microsoft, Oracle, SAP, and all the large vendors when you negotiate. Of course, you are dealing with a larger organisation, but ultimately, you negotiate with individuals with a budget. They won't put in that extra effort if they don't see the money that goes to others' pockets in Microsoft. Remember that.

Alexander Golev: Thank you, everyone. Find Daryl on LinkedIn and check his posts and events there to learn how to negotiate with technical companies. And we'll see you soon at our next event. Thank you everyone. Cheers. Thank you very much.

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