Microsoft’s focus on becoming a cloud–first business is altering how it does business with its largest customers. Companies that plan to renew their Enterprise Agreements, or purchase the vendor’s cloud or on–premise offerings for the first time, can leverage the forces driving Microsoft’s behavior at the negotiation table.
Microsoft’s transformation from an on–premise software giant to a cloud-first leader has been nothing short of impressive over the last three years. The company’s perseverance and focus have been rewarded by soaring quarterly profits and stock prices, and a successful reorganization of its business.
It’s clear the vendor is committing its most powerful R&D, sales and marketing resources to the cloud. Yet, the reality is that most Microsoft enterprise customers are still operationally and contractually locked into on-premise implementations.
This has created some misalignment between Microsoft and its enterprise customers. It’s also prompted the vendor to take aggressive measures to migrate these customers to the cloud. Outcomes include several pricing and licensing changes, a spike in formal and informal license audits (often disguised as Software Asset Management engagements), and increased contractual complexity and inflexibility.
There are a number of risks to navigate when doing business with Microsoft, as well as new opportunities on which to capitalize. As Microsoft continues its metamorphosis, customers should prepare for a more challenging sourcing and vendor management environment.
WHAT'S DRIVING MICROSOFT'S FRAME OF MIND
The conditions that have precipitated more aggressive contract negotiation behavior from Microsoft are varied. NPI has identified the following five factors:
Microsoft is on a mission to move its enterprise customer base away from traditional on–premise software to its subscription–based cloud services. Revenues for its commercial cloud offerings are experiencing substantial growth, while traditional software revenues decline and the mixture strains Microsoft’s ability to support a multi–faceted business. Microsoft’s success is being judged on how well it achieves this mission, and customers will find themselves under greater pressure to move to the cloud or pay the price via more contractual and pricing complexity for on–premise solutions. The good news is the deal window is still open for those customers willing to make the leap.
Microsoft has a very structured hierarchy for approving deviations from standard pricing, terms and licensing. Sales reps and account managers have little influence in the matter, and decisions are ultimately made at the licensing desk where customer relationships and requirements have little bearing. Microsoft aims to further standardize these practices, most obviously noted when the vendor released its Online Service Terms – a single, standard set of terms that replaces its multiple Product Use Rights documents for online services. While Microsoft touts the benefits of a more centralized and simplified approach to contractual documentation, the reality is that these measures are making it more difficult for customers to receive concessions from Microsoft based on their unique user environment.
Microsoft is putting unprecedented pressure on its sales teams and channel partners to improve revenue forecasting and enforce on–time renewals. In fact, sales commissions and fees paid to resellers are negatively impacted when EAs are not renewed on time.
As a public company, Microsoft is tasked with accurately predicting revenues. To do so, the company must have clear visibility into their selling pipeline and be able to close purchases and renewals faster and earlier in quarterly sales cycle. There are a limited number of legal and licensing desk resources available to process these transactions, and it’s nearly impossible to process paperwork less than two weeks prior to a calendar year, fiscal year or quarter end. Handling these peaks in deal volume is a challenge for Microsoft’s enterprise business and delays in this pipeline can have a domino effect on quarterly and annual revenues, stock price and overall market perception.
Customers need to leverage the vendor’s desire to prevent spillover and leverage purchases and renewal timing accordingly. Contrary to common wisdom, Microsoft may be more flexible in negotiations outside of their peak sourcing times.
Across NPI’s client base, more than 40 percent of EA renewals occur in Q4 of Microsoft’s fiscal year (i.e., April/May/June). This is in contrast to Q1, which typically accounts for less than 20 percent of EA renewals. This creates lumpy demand for licensing and legal resources, lumpy forecasting risk and lumpy cash flow. One of the objectives of moving to subscription–based licensing is to smooth this pattern.
While the vendor’s cloud-based offerings may be the future of its enterprise business, most Microsoft customers are still operationally and contractually locked into on–premise deployments.
NEGOTIATION MISTAKES TO AVOID
The factors previously discussed have introduced new dynamics to the Microsoft EA negotiation. They’ve also exposed new pitfalls that can lead to higher costs and less contract flexibility. Potential mistakes to be avoided include:
In the past, Microsoft customers have gained negotiation leverage by waiting until the very end of their EA term to renew, especially if this timing coincided with Microsoft’s quarter or fiscal year–end. This is no longer the case – especially for fiscal year (June), calendar year and quarter end purchases and renewals, when volume chokes the system. Microsoft is going to great lengths to get customers to renew much earlier in the quarter, including offering better pricing and discounts or allowing clients to adjust contract dates. Customers need to know how they can leverage deal timing to get more favorable concessions and greater flexibility.
Having visibility into what constitutes a fair price for Microsoft’s offerings is the first step in reducing EA costs. But it’s only half the battle. To effectively lower costs, customers have to understand how their unique business requirements align with standardized terms (especially for cloud offerings), the dozens of licensing permutations for on–premise products and the options available to them. With more options available across Microsoft’s traditional software and cloud business, it’s important for customers to understand which licensing and subscription programs best support their technology, business and cost management requirements; and the compliance and cost details surrounding migration from current states to future states.
Most companies view the Microsoft EA renewal as a single event. They deploy their brightest IT and sourcing resources to handle the EA, but once it’s signed, these resources are effectively “off the case.” This is a mistake. Before the ink is dry on a renewal, Microsoft’s account team is working on the next one. Informally referred to as “T minus 36” (a three–year countdown until customer renews again), Microsoft follows a cyclical and successful methodology for ensuring each customer expands their Microsoft estate and spend at the next renewal event. For example, once the EA is purchased/renewed, companies must be prepared for the next event—the true–up. Following the true–up is auditing, which has become very common for Microsoft customers. Customers that haven’t recently been through an audit should expect to undergo one in the near term. In most cases, this will drive another round of negotiations which will require skillful interpretation of licensing programs, terms and conditions.
Microsoft customers have gained leverage in the past by waiting until the very end of their EA term to renew. this is no longer the best tactic.
5 TIPS FOR NEGOTIATING A MICROSOFT EA
Don’t wait until end of term to renew. Microsoft is highly motivated to wrap up EA renewals early. This can be seen in the promotional pricing and discounts they’re currently offering to customers.
Be prepared for an audit – it will happen. The best way to handle an audit is to prepare for one, and not to rely on Microsoft’s Software Asset Management (SAM) tools, which invariably lead to higher customer costs. Enterprises should utilize their own methods and tools to determine license counts, and scrutinize whether certain users truly require all products – before they are contacted by Microsoft’s SAM teams. It’s also important that customers proactively manage/monitor license counts and compliance throughout the term of their Microsoft agreements. Being caught off guard is the surest path to costly penalties.
Deploy the same negotiation “bench strength” for true–ups and audits as for new purchases and renewals. The Microsoft EA negotiation is a process
comprising multiple steps, each representing an opportunity to overspend or save. Rigor, licensing expertise and experience are required at each step.
Be careful what and how much information your team shares with Microsoft’s sales and account reps. Do you have contractors accessing Microsoft’s solutions? How many? Where are they located? What versions of product are you running? These questions are all slippery slopes – be careful how and when you share this information as it can be used against you. Similarly, divulging too much information about which competitive products are being evaluated can have a negative impact on price negotiations. For example, your Microsoft sales team knows a switch to Oracle is too difficult for some organizations. Counterintuitive as it may be, saying that Oracle is in the running for your business may motivate Microsoft to become less flexible on price and terms during the negotiation.
Validate the reseller (LAR/LSP) or account rep’s opinion on licensing. There are a variety of ways to license Microsoft products. A particular enterprise’s Licensing Solutions Provider or account rep may not be well versed in all of the options available. However, they are well trained (and motivated by incentive) to take customers down a path to higher licensing costs. Be sure to question Microsoft’s licensing specialists on how to better structure licensing for lower spend, and consider getting unbiased expertise to assist the sourcing team with vetting the recommendations.
Consider your long–term mobility and cloud strategy before every Microsoft renewal or purchase. Microsoft’s offerings are quickly evolving to support a new era of mobility and cloud dependency. The pressure is on to migrate customers to these solutions, and the deal window is open for customers who can effectively align their long–term mobility and cloud strategies with Microsoft’s direction.