Microsoft and the Decline of the On-Premise Renewal Discount

By Dan Brewster

Director of Client Services – Microsoft, NPI

February 14, 2017

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(This post was updated on October 24, 2017)

Microsoft hit a major milestone in July 2017. For the first time, the vendor’s Office 365 online workplace tools brought in more revenue than its on-premise version of Office. While Microsoft continues to experience growing pains as it tries to replicate this cloud success in other areas of its business (layoffs and restructuring is one example), it does signal that Microsoft’s bet on cloud is paying off.

It also underscores one of Microsoft’s top priorities, which is to make its cloud offerings more profitable – a mission that’s affecting the trajectory of renewal negotiations for some customers. Historically, Microsoft focused on the total dollar amount at renewal time, and the underlying product mix was not particularly important from a discounting and deal negotiation perspective. This is definitely changing.

Over the last several months we have seen many clients who are not yet moving to Microsoft’s cloud solutions receive the news that Microsoft will no longer discount on-premise renewals. These clients decline to move to the Microsoft Cloud for a variety of reasons (HIPAA concerns, data privacy/location issues, and more) – but in almost all instances Microsoft has refused to discount the Software Assurance renewal. It’s no longer the heady days of robust discounts…and this can translate to a big price increase for your next renewal if you’re a “no cloud now” customer.

What’s the best way to combat this position? First, know that most Microsoft account teams view this policy with the same dismay as Microsoft customers. Account teams are more than willing to discount online solutions, oftentimes at or near the same price as an on-premise solution. Consider whether there is an advantage to buying the cloud products now at a very competitive price. Next, it’s not always an all-or-nothing proposition – you may be well served to consider some online products such as Microsoft Azure. There are many different compute, storage, and networking options with Azure and many clients are finding it worthwhile to consider placing certain workloads in the cloud.

There will be some that are unable or unwilling to migrate to a cloud-based offering. What then? Will Microsoft take the tough zero-discount position for renewals? Early indications point in that direction. Our recommendation would be to leverage executive relationships and to actively consider alternatives. We have also seen several clients walk away from a Software Assurance-only renewal. Time will tell whether Microsoft continues with this approach.