Microsoft 365 prices are increasing with 10-15% in 2022. Whether you are preparing next year’s budget, planning the annual true-up for your EA, or even facing a renegotiation of your EA, then you are faced with the challenge of how to maintain your current cost base in 2022 – and onwards.

This article will lay out a simple, yet powerful framework for managing cloud costs. Whether you are a leader in IT, finance, or procurement, this article will help you get an overview of how to effectively manage your costs.

How to keep your current cost base on M365

The fundamental equation in managing your M365 cost is

cost-efficient cloud Spend management

With general price increases the levers you need to use are:

  1. Remove licenses provisioned to inactive users
  2. Downgrade users to a smaller bundle if they do not use all services
  3. Remove double licensing

Surely, you already have automations in place to ensure that when an employee leaves the company the user is blocked, and the licenses automatically removed from the user.

Also, you have a policy for which users get what Microsoft bundle depending on their needs.

If you are working with M365 license management, you probably share our experience that not all external consultants are removed when they no longer need the license. And you might have the suspicion that some of your users might be covered with a cheaper bundle.

The issue is that you and your team do not have the time to avoid this kind of waste. However, there is a solution to this – and we will share a framework for managing cloud costs further down, but first the question we get the most …

Can’t we just negotiate better prices on M365?

The short answer is no!

There has always been a switching cost, but the ability to stay on the current version of Microsoft Office for several years provided you with a substitute product. Now that Microsoft has moved to a subscription model for the cloud versions of all products this is no longer an option – and this has reduced your bargaining power substantially.

We have written a separate blog post on negotiating your Microsoft EA where you can dive into more detail.

For now, we just want to leave you with one very important piece of advice on your MS365 negotiations: Make sure you do not commit to anything you are not using today, and never commit to anything without an annual true-down option. Otherwise, you lose the ability to pull the price and quantity levers that will save you much more than a slightly higher discount on your EA.

It may sound discouraging, but there is a new opportunity for managing IT costs that not only works well with Microsoft 365, but with any kind of IT services … Welcome to FinOps

FinOps - A new paradigm for managing cloud costs

In the on-prem, perpetual license days, cost management was one annual true-up and a negotiation with significant discounts every three to four years.

The new paradigm will require you to do quarterly tune-ups where you ensure that you are not paying for provisioned services you do not use, and that you leverage the optimal price/service options available.

While this may sound like a daunting task … technology is here to help.

When managing your Microsoft 365 environment you can start using AI and BI – and not spend more than 15 minutes getting ready for action.

This is doable because you have access to structured (but not necessarily easy-to-read) format. Furthermore, your cost management task is almost identical to other companies. This provides great opportunity for getting reasonably priced AI tools and consulting to assist you.

Leveraging this kind of tools will give a completely new optimization process and dialogue with business users. In the future we will not be discussing how people are working in some departments based on intuition or manager belief. Now we will be discussing policies based on facts and structured knowledge.

Not only will it save you money. It takes your role to the next level.

The framework for managing cloud costs

To summarize the framework

  1. Analyze usage
  2. Prioritize changes
  3. Implement

… and repeat this process every quarter.

This framework works for M365 but is identical for any service-based offering. We will dive into each of the steps below.

Manage cloud costs

Step 1: Analyze M365 usage with AI

The data you need are available from your M365 portal. You need usage data per user and assigned licenses per user.

The next step is to have your data analyzed by an AI-tool for optimization potential. You may look for SaaS tools or use your cost management partners tools.

Your optimization potential typically falls into three bullets:

  • Inactive and blocked users. This is typically where the biggest potential lies – often in the range of 10+% of total cost. You will have external consultants, test users, long time furlough and sick leaves in this bucket. Not all of them can or should be removed, but it provides great insight to understand what you are paying for where you do not get any value.
  • Downgradeable users. Companies tend to assign licenses on easy-to-manage policies – for good reasons. However, understanding actual usage on a user level will give you valuable insights on your policies. We see the largest potential when there are large communities of different users, ie. frontline personnel.
  • You need a quick overview of how many licenses are not assigned to any users right now. You need some level of shelfware, but if your user base varies a lot during the year, you might look at how to minimize this, ie. by leveraging monthly subscriptions.

Make sure that the AI-tool you will be using gives you an overview of your financial optimization potential … you need this to prioritize your actions.

Step 2: Prioritize where to start

With step 1 completed you have all necessary data available to prioritize where to get the most value of your efforts.

We believe there are two secrets to your prioritization

  1. Have only one prioritization meeting every 90 days
  2. Do not (always) start with the biggest issue

It is very important that you have the right decision makers at the prioritization meetings where you go through the findings of the analysis phase. From experience we know just how hard it is to get all key stakeholders to attend the prioritization meeting. By sticking to once a quarter we see a much higher attendance rate. And if your external partner attends the prioritization meeting these further increases participation.

When prioritizing there is a tendency to focus on the biggest issue. This is very intuitive – but the biggest issue often goes hand in hand with the biggest effort to solve it. Hence, we propose that you always make sure to focus on initiatives that will provide you with “instant value”, ie. actions that take very little effort compared to the value it generates.

Don’t get us wrong here. You should still start with the largest optimization opportunities and review these – just make sure that you are not missing out on “easy money” that you can implement straight away …

Step 3: Implement changes

The implementation is where the rubber meets the road.

Most of the prioritization meetings we attend have a bias towards “Implementation = Automation”. This is indeed true in many cases, but your toolbox should supplement automated license management with at least:

  • Update your policies
  • Make use of manual license management
  • Have FAST reassignment of licenses in place
  • Use chargeback and allocate your costs on actual consumption – not an average per user price

We will not go into a lot of detail here since this is very specific, but having manual processes is a great way to get benefits fast. You can always automate later when your scarce resources can set aside time for this.

Fast reassignment of licenses is important for you to get approval of policy changes and avoid user complaints. Efficient license management requires that you remove licenses from users – licenses they may need at a later point in time. If the reassignment process is smooth, it will be accepted from the business as a prudent initiative.

Chargeback will be the new black. This will ensure that business owners will engage in the dialogue about policy changes since this will impact their budgets and bottom line directly.

Want to keep up to date with FinOps Trends on Public Cloud and Microsoft 365?

These are exciting times. We are digitizing at an unprecedented pace and you need to seize the day!

While IT costs are not the main focus the cloud-based services like M365 allows for cost management with a much more data driven approach and use of AI – without the need for time consuming and expensive projects.

If you want to learn more about this new, agile way of engaging with your business leaders on cost management we suggest you sign up for FinOps Trends to get monthly updates on FinOps, cloud cost management, Microsoft 365 cost management and special access to our live webinars and courses.

At Kostner, we have done countless cloud cost management workshops, and it is beyond doubt that those companies who understand and embrace the differences between managing a cloud budget and an on-prem budget are most successful.

We have taken all that experience and boiled it down to four actionable tips to help you succeed with your cloud budget.

Tip #1: Budget for growth

Cloud costs are only going one way in all the companies we are working with – up!!

Many trends are driving increased costs:

  • New digitalization initiatives on how to serve and interact with customers
  • New projects to automate existing routines and drive down employee costs
  • Price increases

Particularly the latter is a powerful trend, ie. Microsoft just announced that Office 365 will be 20-25% more expensive in 2022 for most bundles.

With these powerful forces a new approach to budgeting is required, so you avoid getting the blame for the growth in costs and any later budget overruns.

Tip #2: Get the framework right

As one of our client’s CIO mentioned in a workshop:

It is more about getting the right framework than getting the right number.

 What he refers to is that you need to understand who can take what responsibilities in a new mode of cost management often referred to as FinOps.

In the cloud world referring to the fundamental equation is often useful:

cost-efficient cloud Spend management

The equation highlights the framework for managing cloud costs

  • Buy at the right price, ie.
    • Optimize means buying the services as cheaply as possible leveraging all pricing and discount options available
    • Architect means that you build with the services that gives you the lowest price. 
  • The business should be accountable for managing quantity – but needs support to do so, ie.
    • Inform them about the costs they are consuming through chargeback or showback

Manage the costs, ie. with a quarterly review of all main cost items.

Make sure that you are not assuming an accountability you cannot control. However, make sure that you can explain the main principles for who should be accountable for what and how to get there.

Tip #3: Price optimization is your “license-to-play”

Keeping the budgets used to be my “license-to-play” in the on-premises world.

In cloud, getting price optimization right – and being able to document it – is the new “license-to-play”.

Torben Kjær, Group CIO, Aller

Centralizing price optimization is about buying what you already buy as cheaply as possible. This could be using reserved instances and AHB licensing options in Azure or ensuring that your employees have the right M365/O365 license to what they use.

Centralizing price optimization is the first and most important thing to get right for several reasons:

  • There is a lot to save
  • You can centralize it because you can make changes without affecting the business
  • You can document cost-efficiency and benchmark yourself

Understanding price optimization allows you to build a new measure of your contribution to cost management – not only focus on budget.

As another client’s CIO mentioned as a great benefit of documenting cost-efficiency is that “it changes the discussion from how much we are spending to what we should use our budget for”.

Tip #4: Chargeback – the business needs an incentive to manage costs

With business driving more and more IT costs between budgeting cycles – how do you deal with that?

We see all larger organizations moving towards chargeback so that the unit driving the costs are also charged the costs. They should see increased efficiency elsewhere in their own cost base, or improved results ultimately driving top line growth.

Implementing chargeback gives the business owner a clear incentive to cut down costs and engage in managing quantity – as described in the framework above.

However, be aware that chargeback will drive some extra tasks in your organization. You will need a process for tagging cost items to organizational units, frequent reporting to create transparency, and support to help the business owner make necessary decisions.

Getting chargeback right requires the participation of IT and Finance as a minimum – or a dedicated FinOps person or team.

Want more information for successfully budgeting your cloud costs?

Now that you have gotten these tips and are ready to budget your cloud costs it would be interesting to see how other companies are saving on cloud. Kostner Quarterly Insights is a report that provides you with benchmark data on public cloud (Azure, AWS) usage. Get your benchmark for Q3 2021 here.

Download Kostner Quarterly Insights for Q4

Download the report to get data on public cloud (Azure, AWS) usage: 

… and our comments on “How to use the data”.

Kostner Quarterly Insights Q4