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The Number One Mistake in Purchasing Microsoft Cloud

By Paul DeGroot
Pica Communications

Microsoft sales teams have an impressive record in talking customers into purchasing cloud subscriptions that they don’t need. A Microsoft account manager says they just want the best for the customer, everyone is going to the cloud, on-premises software is going away, and bingo, a big fat signature appears on the contract as the customer swallows the bait whole.

Almost every customer I have worked with makes a major mistake when purchasing cloud services: signing up before they are ready to use the product.

Customers can lose millions by falling for it.

Subscription vs Perpetual Licenses 

Buying a subscription for a cloud product before you are ready to use it is not the same as purchasing an on-premises product before deploying it.

An on-premises, perpetual license has a fixed contract price (ignoring Software Assurance, whose value is determined by other issues). While paying for perpetual licenses in advance of deployment is not optimal from a net-present-value perspective, the customer doesn’t lose much money by doing so, and a better contract discount may compensate for it. Eventually they pay for the license and own it.

It makes little difference whether they start using it the first day of a new contract or the 366th day. The price per unit is barely changed.

In contrast, signing a three-year contract for Office 365 and not using those seats until the 366th day wastes one year’s investment. It’s like renting an apartment and then leaving it empty for a year. Twelve monthly payments are gone and the value received for those payments is zero.

Doing the Math

A firm that signs up for 1,000 seats of Office 365 for three years but takes a year to deploy them has tossed away about $230,000 (at EA list prices) and their effective cost per seat has risen 50%.

In addition, few customers do the math on promotional discounts. Microsoft says “sign up now, and we’ll give you a 27% discount,” so the customer signs, but might not deploy the product for eight months, while they pilot it, test it, and determine how it fits into their operations. The customer’s effective discount is reduced to about 5%: they spent most of the “savings” on eight months of under-utilized services.

This can be big money. The most egregious case I encountered is a 20,000-employee firm that spent more than $12 million on Office 365 E3 and E4 over the previous three years. How had that worked out for them? Well, they hadn’t figured out the use case yet. But they were thinking of renewing it for another three years and they had 100 or 150 employees who were willing to test it.

I was speechless. Not only had they blithely blown $12 million and were planning to do it again, but they had lost important upgrade rights. Had they purchased SA on Office perpetual licenses (for less than half what Office 365 cost) they would have gained per petual rights to Office 2013. They got only temporary Office 2013 rights with the subscription (which required them to deploy Office 2013). Not renewing the subscription would mean reverting to their perpetual Office 2010 licenses or purchasing perpetual Office 2013 licenses separately.

A teeny bit of wisdom and foresight would have gone a long way here.

Doing It Right

If buying a subscription service like Office 365 from Microsoft makes any sense for a customer, they should keep the following advice in mind.

  1. Never purchase a subscription product until you have tried it out on a small set of users first, your users and technical teams are satisfied that it adds value or utility to your organisation, and you are ready to deploy it fully.

Customers do not have to buy Office 365 at the start of an agreement or renewal, but can buy it later and that strategy can pay off handsomely for most customers.

The latest (2014) language in an Enterprise Agreement Enrollment says customers can add Enterprise Online Services to an existing agreement “at any time” by contacting their account manager or reseller. Microsoft may require an order for at least 250 subscriptions (the contact language is ambiguous here), but purchasing 250 when you need them vs. 1,000 or 20,000 when you don’t need them is a small sacrifice.

Ideally, customers will tell their account manager at renewal time that if the account manager will fund a proof-of-concept for some employees, along with migration and other technical support, the customer will consider a subscription for later purchase. They will not purchase a subscription before its value is proven and they are ready to deploy it.

  1. True-down rights are available for Microsoft online services that are not purchased enterprise-wide. 

Even if they’re sure they can use Office 365, customers should consider leaving Office 365 out of their renewal at the start, when they may be required to purchase it enterprise-wide. By purchasing it later, they gain the right to true down to their original, mini mum purchase. For example, a customer might renew their agreement without Office 365 in October, order 250 Office 365 licenses in November, add another 1,000 in December, and drop back to the 250-subscription minimum in January.

Yes, they may be paying for 250 seats, or even for up to 10 months for 1,250 seats (payment minimums may be for the months remaining until the next agreement anniversary) but that’s much better than buying a three-year subscription for 1,250 seats that the customer needs for no more than one year.

 

Paul will be in London, delivering an intensive 3 day Microsoft Licensing & Negations Workshop, a fantastic opportunity for anyone looking to improve their Microsoft knowledge from 19th – 21st October. For more information and how to book, click here.

Interested in Microsoft Licensing? Attend one of our FREE upcoming one day Seminars in London or New York

About Paul DeGroot

Paul DeGroot is one of the world’s leading experts on Microsoft licensing principles, policies, and strategies. He led the licensing practice at Directions on Microsoft, and subsequently formed Pica Communications, LLC to deliver exceptional insight into Microsoft licensing for audiences and organizations worldwide. In his role as Senior Consultant at Software Licensing Advisors, he has led customers to more than $250 million in negotiated savings over the last three years.

2 Comments

  1. Carrol Titus says:

    Good points – testing is a critical component to software life cycle management and so often over looked. Pricing should be flexible to reflect customer usage patterns: desktop and user for on premise vs. resources used/metered for hosted model.

  2. Mario Kafadar says:

    One aspect is missing:
    You should rather combine perpetual licenses with AddOns instead of replacing them by Full USLs.
    This will leave the customer in better negotiation porsition at the next renewal and the complete set of on premise use rights remains.

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