With Microsoft moving from being a classical perpetual software provider to an “as-a-service” provider with Microsoft 365 subscriptions and Azure as the pivot of their growth strategies you need to adapt to a drastically new reality when negotiating your next deal.
If you are in doubt … just think of the announced increase in price from 32$ to 36$ per user per month for M365 E3 with around 20% on top if you want it as a monthly subscription and not a pre-paid annual subscription. In effect this is a 35% increase in price.
In this blogpost we will examine Microsoft’s strategies and why getting the largest discount possible might be very expensive. Our goal is that whether you are from procurement or IT, by the end of this post you will see the next renegotiation in a new perspective …
What can you expect from Microsoft?
Microsoft is very transparent about their strategies:
- They want you to move to a bigger M365 bundle, so if you are currently on E3 they want you to move to E5.
- They want you to move as much infrastructure to Azure as possible – with a monetary commitment.
So far nothing surprising.
However, you will experience a significantly toughened climate for negotiating discounts.
For example, you should expect quite small discounts on Azure – and even if you increase your commitments, you can only expect marginally improved volume discounts. Microsoft has some valid arguments for that, particularly that other discount options provide significant savings.
Before we move on let us quickly examine what successful cost management looks like in Microsoft’s “as-a-service” universe.
How do I save the most? Welcome to FinOps
The fundamental equation that is governing IT service cost management aka. FinOps is
When you negotiate a discount this obviously affects “Price”, but almost always also put some constraints on “Quantity” through some sort of commitment – or even on “Total Cost” when you make a monetary commit. And this is where you should exercise caution.
In Azure, we see an optimization potential by leveraging reservations, licensing options, and other price discounts, typically reducing costs with 15-25%. Another 10-30% comes from shutting down services (ie. reducing quantity). Hence an optimized Azure environment is 50% cheaper to run than a non-optimized environment.
We tend to see that early in the Azure journey the focus is on moving new areas into Azure and only later the focus shifts to a FinOps responsibility applied consistently. You need to know how much untapped savings potential there is to not overcommit in total spend.
FinOps for Microsoft 365
Similarly in your Microsoft 365 environment there will most likely be significant cost reduction opportunities you need to factor in. One example is inactive users. Undoubtedly, your IT department has full control over employees joining and leaving the company, but what about external consultants and temps? In the companies we work with typically 10-15% of the total licenses assigned are to inactive users.
This comes as a big surprise to all our customers!
The other area in Microsoft 365 you need to understand is if you can do with cheaper licensing options than today, ie. by having some employees work with smaller bundles or downgrading churned employees.
This takes longer to implement but makes it even more important to not commit to E3 or E5 bundles for all employees if there is a major potential here. The last few percentages in discount can be very expensive.
The main take away here is that in the future you will save more money on your ongoing cost optimization than what discounts you can negotiate.
So, in light of this what is the framework for renegotiation?
How do I negotiate the best deal for my company?
In a world where you will save more money on the ongoing cost management than what you can get at the negotiation table … how does the best possible deal look like?
The key here is to understand what you can commit to, and where you need flexibility.
How much can you save on Azure? Make sure not to commit more than your current spending minus savings and protect your right to the annual true-up. We have seen too many examples where a three-year monetary commitment was not used – because IT-projects do tend to take longer than planned!
Similarly, you need to be able to answer how many inactive users you have, and if there are options to serve some user groups with cheaper bundles.
With this in mind, your four steps to the perfect deal are:
- Understand untapped optimization potential
- Define your maximum commitments in main categories
- Negotiate the best possible deal
- Work professionally with FinOps driving down total costs – getting the benefits of the flexibility you negotiated
Having worked with the largest private companies and public organisations, and all types of organisations the one question that is the hardest to get a firm answer to is “What is our untapped optimization potential?” – particularly in a project which is demanding in itself and with short deadlines.
So how do you do that?
The secret sauce to the perfect deal…
If you want to understand where to find future cost savings, you can equip yourself with an army of consultants with Excel and a thorough knowledge of Microsoft prices, discounts and terms & conditions.
Or you can look for a standardized solution.
When you think of it: Your problem is identical to many other companies, and all data to solve your problem is available in standard format in your portal (Azure, M365).
So, you should be able to find a solution that:
- Takes no time to implement
- Is reasonably priced
- Will provide you with the information you need to understand your commitments and need for flexibility
So, everybody is doing this, right …?
The elephant in the room
Having worked with all types of large organisations and analyzed billions of IT spend we see that only the most advanced organisations are understanding the new rules of the game – before, during, and after the enterprise agreement (EA) renegotiation.
Too many organisations measure procurement on negotiated discounts. No wonder, this leads procurement towards maximum commitments and discounts, despite this will be costly in the three-year period.
Very few organizations have a professional FinOps approach nor measurements of price optimization or a process to avoid waste.
Working with the new way to manage IT service costs is a team effort and everyone needs to be on the same page. While IT and procurement try their best, the leadership teams must also embrace this way to manage IT services costs – just as they have already taken the consumption of IT services as Azure and M365 fully on board.
Once, FinOps is implemented it makes perfect sense. Just as we are getting speed and agility into developing new services, we are getting speed and agility into managing costs as well.
If you only remember one thing, this should be this…
In the future you will save more in the ongoing cost management than in your Microsoft renegotiation! Make sure you do not over-commit to Microsoft and maintain the flexibility you need in your FinOps team.