As Head of IT and Digitalization in Herlev Kommune, Kim Ladegaard moved all on-premises servers to the cloud. To assure a smooth start they used Kostner who specializes in cloud cost management.

When Kim Ladegaard, Head of IT and Digitalization at Herlev Municipality started in 2018, it was with the prospect of a room of servers, where the capacity of the servers was already utilized to its maximum. The municipality had decided to move from its present location to a new city hall on two different addresses no later than the end of 2023. Hence in 2018, the newly hired Head of IT stood with a decision to either upgrade the server room – aware that it soon after had to be moved to a new address. Or come up with an entirely new strategy – based on cloud.

With his IT and Digitalization team he worked out a solution to present to the management to move all on-premises servers to the cloud. “It didn’t make sense to me to first upgrade our on-premises servers and then later have them moved to a new address. The municipality had plans to relocate the city hall’s physical address. It would be too complicated and very expensive. Based on this, the management decided to move all servers to the cloud” says Kim Laadegard.

The need for flexibility

In the fourth quarter of 2021, all servers were in the cloud – except for one system. The key for the IT department is “flexibility” where data and systems are moved from physical servers in the basement to the virtual servers in the cloud on the Microsoft Azure platform. Moreover, throughout the last three months, more than 2.000 new entities – laptops and smartphones – have been set in use and give all employees access to exactly the systems they need.

“We’ve created a digital ecosystem, to eliminate the number of errors in the future. Hence, it is important both hardware and software are integrated. On top of the cloud transition, the employees need access to the Microsoft 365 platform and all existing computers and tablets need to be changed to Microsoft Surfaces… Our whole set-up is built on an ecosystem with Microsoft hardware and software. This means that all employees use the same Microsoft devices and have access to software and applications from Microsoft Azure and Microsoft 365” says Kim Ladegaard.

Pilot attempts before going full cloud

The municipality completed three pilot attempts before moving all servers to the cloud.

The first pilot attempt was the “Jobcenter”, with their systems being moved to the cloud.

After that, to test the devices with the new setup, the digitalization department completed a wide pilot in the organization with 45 employees from different departments – administrative personnel, sosu-assistants, physiotherapists, project leaders and nursing staff. As a management tool Herlev Municipality uses e.g. Microsoft’s Intune, which gives the option to customize the applications that the employees need.

Herlev Municipality has made an internal subscription scheme, where the departments pay for the equipment that their employees use.

“It becomes very clear for the different departments, what they get and what they pay for. There is complete transparency on the matter. On top of that we get all our devices registered and have better control over them in the future” says Kim Ladegaard.

Cloud Cost Management

In the municipality’s journey towards the cloud, Kim Ladegaard has used Kostner. He decided to bring Kostner along for the journey right from the beginning to use their FinOps service. Kostner analyze the economy in the municipality’s cloud journey and give recommendations based on this on how to keep costs down.

“As Head of IT, you risk losing the economic overview, when you give out more than 2.000 new devices to employees, who have customized access to Microsoft’s many different products, and at the same time move servers to Azure. It’s easy enough to create new servers, licenses, and services, but if you don’t manage it tightly, you risk that the economy runs wild. We have made a deal with Kostner to analyze the economy of our cloud environment once a quarter. Here they give recommendations on how we can keep our costs down.”

 Head of IT and Digitalization, Kim Ladegaard.

Already at the first analysis, Kostner saved Herlev Municipality 140.000 kr. – and that was only based on the small part which they ran in the cloud at the time. “That saving came before we started using Microsoft 365 for several thousand employees” Kim Ladegaard adds.

Kostner has collected a lot of data on license agreements and costs for services in an algorithm and then crosses and compares these with the municipality’s actual usage. That way, the algorithm can find changes that can affect the costs for the municipality.

Big potential

There is a big potential in taking advantage of the options in the cloud, as it gives the option for working in new ways.

“Some ask me if it isn’t more expensive to have all servers in the cloud instead of on-premises. But I think you need to consider the whole setup and solution. Not only focus on the price of the servers. You must look at all costs and what the organization gets out of using the whole palette. In the new set-up, we are removing ourselves from the idea that one’s work must be physically tied to one place. Instead, we will look at it as an activity that can be done from anywhere. In this regard, flexibility is one of the keywords in our digital transformation” says Kim Ladegaard.

This article was first published in KITA in Danish and has been translated to English by Kostner.

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

cost-efficient cloud Spend management

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:

  1. Understand untapped optimization potential
  2. Define your maximum commitments in main categories
  3. Negotiate the best possible deal
  4. 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.

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.