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Leveraging the Cloud in Microsoft Contract Negotiations

• By Kurt Mackie
• 03/08/2016

Microsoft's fiscal year ends on June 30, offering a negotiating opportunity for organizations that license its software.

Negotiations conducted from now till that time can get organizations the best discounts and deals, according to an online presentation today by analyst and consulting firm Forrester Research. The talk specifically examined the tensions associated with Microsoft's cloud services sales push and how organizations can react to it. The talk's title, "Microsoft's Cloud -- Now, Later, or Never?," summed up a basic dilemma that many organizations may be facing, at least when it comes to contract renewal periods.

The Forrester analysts didn't take a position on whether using Microsoft's cloud services would be better for organizations than traditional premises-based software. However, they did note the urgency behind Microsoft's cloud push. Microsoft is pressing for the use of its cloud services since Windows client licensing just isn't having the same financial pull. Organizations need to understand this company shift, the analysts contended, which possibly can be leveraged to advantage in a jujitsu-like move during negotiations.

Microsoft's Cloud Agenda
Essentially, Microsoft is shifting its revenue model from harvesting infrastructure spending to harvesting business technology spending, although it is playing on both sides right now, explained Mark Bartrick, a principal analyst with Forrester Research. Microsoft is trying to move into the business technology side with its cloud and productivity suite offerings. It has taken a lot of money out of organizations' pockets on the IT side. Now Microsoft is moving into the business technology space as well, he said.

Microsoft wants to create a revenue stream based on subscriptions vs. traditional perpetual licenses. It also wants organizations to standardize on the Microsoft product stack, which increases revenue and locks out the competition. Microsoft has dominated the desktop over the years and now it's planning to dominate the "desktop in the cloud," Bartrick said.

Windows 10 hasn't taken the world by storm and PC sales are declining. Bartrick explained that this period represents a great time for organizations to look at cloud services since Microsoft has to make up for its lost Windows client revenues and has an incentive to make deals on those services. The negotiating position of organizations is "very strong," he claimed.

Microsoft is pushing its Enterprise Mobility Suite (EMS) and it's also bundling products with its Enterprise Cloud Suite (ECS) offerings. EMS might be relevant for organization, and they should negotiate a good price if that's so. However, Bartrick noted that Forrester hasn't been seeing client cases where EMS was relevant. The bundling of products through the ECS is part of Microsoft's attempt to sell more software to organizations to support sales commissions, he added.

Forrester is seeing Microsoft customers that have overbought Office 365 products and aren't using them. Microsoft recognizes this situation and wants its partners to ensure that customers use its products. If an organization has such "shelfware" from Microsoft and has had it for three years and hasn't rolled it out, then that detail should be noted in negotiations with Microsoft. Ask for compensation, Bartrick said.

In general, Microsoft is desperate to move organizations to the cloud and they should take advantage of that circumstance, Bartrick said. Organizations can optimize their relationships with Microsoft in terms of standardizing on Microsoft products. Moving to the cloud and subscription-based pricing is only one of many factors to consider. Organizations should keep their options in play when negotiating Microsoft contracts, he said.

Bartrick made similar points in a recent Forrester Research blog post. He noted in that post that Microsoft is expected to increase the price of Enterprise Agreements (EAs) by at least 10 percent at renewal time, which is a catch-up measure accounting for discounts over the past three years in an EA. He also noted that Microsoft tends to delay publishing its pricing information, which may be a tactic to foil customer negotiations.

Cloud Pros and Cons
Microsoft gives customers incentives to standardize on its products through its pricing, explained Duncan Jones, a vice president and principal analyst at Forrester Research. Microsoft's suites provide the products organizations need plus a few more. With Core CALs, organizations can buy a la carte, but it's cheaper to buy the suites. Since the organization bought the suite, it might as well implement the other products for free.

Happy customers content to expand using Microsoft's cloud products can get solutions that can replace point solutions from companies like AirWatch, Cisco, Symantec and VMware, and it's pretty much free, Jones said. On the other hand, some organizations may not be as keen on Microsoft. They can drop some products out of their EAs, particularly Office, Jones said. Software Assurance can be dropped from some of the licensing, but if that's done, an organization needs to have good software control processes in place because of the risk of getting audited by Microsoft. Organizations should protect themselves if going in that direction, Jones added.

EAs tend to revolve around where Microsoft is going with Office 365 services, Jones said. Alternatively, organizations can use the Office 365 Pro Plus productivity suite, which constitutes many of the same programs but they are deployed locally.

Organizations wanting to embrace Office 365 products in the next few years should try to get a very good price in their agreements, Jones said, and that's an opportunity because Microsoft is keen to sell them. More reticent organizations, perhaps because of security and privacy considerations, could put off purchasing them.

Microsoft knows that organizations are making these kinds of decisions. For instance, Software Assurance now has no value, Jones said. In response, Microsoft has program that if an organization buys Software Assurance, they'll get a lifetime discount. Alternatively, organizations could opt for a "Software Assurance vacation." In such cases, organizations still pay for CALs but will have significantly reduced the cost of an EA. At that point, organizations can opt to negotiate with Microsoft to subscribe to Software Assurance based on short-term vs. long-term cost savings estimates.

A Software Assurance vacation may be very relevant for hybrid licensees, Jones said, although going that route involves some risk. For instance, Software Assurance can be hard to reinstate it once it's dropped. There's the perpetual discount on the ECS to consider, as well as a platform discount within the current EA.

Jones briefly addressed the concern about vendor lock-in when using Microsoft's cloud services. He said he feels the danger of lock-in with Microsoft is not as great as with other vendors. He added that Microsoft hasn't used extortion on its pricing as Oracle and SAP have done. He recommended that organizations should start their negotiations early in order to have an exit plan.

The Walkaway Strategy
Microsoft has an all-in proposal that's driven by its interests to move its customers to the cloud, argued Joe Galuszka, a vice president and principal consultant at Forrester Research. It can represent a significant increase over an organization's base EA cost, he added.

Organizations can use their growth prospects to tilt back this sales push. They can offer a more minimum deal, but they may also need to have a walkaway strategy in place. An organization's investments in Microsoft's products matters in such negotiations, but investments in using other vendors' products matters for the walkaway strategy. Organizations should ask if they truly do have a walkaway strategy that can be implemented, rather than a bluff, before negotiating in that manner.

Bartrick claimed that Forrester can help its clients with 10 percent price improvements. The consulting firm offers advice on improving contract terms and conditions, and not just for Microsoft deals but also for contracts with other software companies, such as Oracle, SAP, Salesforce, Adobe and Google, among others.