Changes to Microsoft Licensing - A paradigm shift begins

By Paul Saer

How customers buy Microsoft licensing has changed. The changes that took effect from March 1st are driven by two factors, the New Commerce Experience, and a general price increase in Microsoft licensing. 

These two factors are the biggest changes to happen since the introduction of subscription licensing, which saw cost increases on perpetual or annual licenses versus the advent of the monthly subscription license. The rationale for the cost differential drove reduced costs in return for the subscription models reduction in the potential for customers finding themselves in long-term non-compliant licensing positions, and cashflow issues for the vendor driven by often significant deltas between declared upfront commitment versus actual license use, captured in retrospective annual true ups. 

Microsoft licensing is a complex field. To be proficient in helping customers navigate this subject, our specialists must be part Business Analyst, and part Economic Modeler. 

The Enterprise Agreement model 

Many customers who qualify for Enterprise Agreements (EA) have been buying their licenses using this model, but the big License Solution Providers (LSPs) who are the only eligible providers for Microsoft EAs, have been complaining for the last two years that the price differential is not enough to keep these agreements competitive. Add to that the increased cost for an LSP to ensure this type of agreement is managed properly, it's easy to see why many customers give poor feedback for their overall experience using this type of agreement.  

Until now, the main advantage of an Enterprise Agreement was the ability for a customer to have budget certainty, to a degree, by being able to fix the cost of their key licenses for a three-year period. This helped protect the organisation against annual inflation on licenses, plus any out of band license price rises.  

However, this has always come at a cost, including: 

  • Cost #1 - The customer must buy the committed licenses up front, which means large organisations with lots of users and lots of services, face a significant one-time cost for their committed licenses. This places a huge burden on the customer’s budget, and some governance headaches for many classes of highly regulated customers.  
  • Cost #2 is a risk-based element, the unknown True Up cost, where the number of licenses consumed each year is audited annually and any differential is settled. Any new products added to the license agreement will be charged to the customer as an additional fee.  

If you happen to have consumed less licenses than you committed to, in theory there is an option to True Down and reduce your committed level of licenses and reduce your costs for the rest of the term. In practice, this rarely happens as the process is complex to navigate.  

As a result, customers tend to be very conservative in the initial commitment, which is good practice to reduce the initial upfront cost of the EA, however what this does in turn is drive the potential of, and increases the monetary impact for, a true up. 

  • Cost #3 can be avoided if both the customer and the LSP are managing the agreement effectively (highly challenging for most customers of any size and complexity), which is the compliance cost. This comes into play if any quantity of licenses is missed during license reviews but are picked up during an audit. If a customer is found to have a quantity of any licenses that have not been effectively managed or included in the Enterprise Agreement, the true up for these licenses is completed at the full license fee.  

This can have profound financial impacts for customers on top of a compliant true up position, and it happens more often than you might think. Unless the customer or the LSP is running a Software Asset Management solution, (which could be considered a hidden must-have cost for an EA), a compliance audit can turn up easily missed categories of licenses. This can include external users consuming share, internally hosted services, or a legacy server farm that was abandoned, but never decommissioned. 

Changes to Microsoft Licensing 

This is not a doom and gloom blog post, because the good news is that the recent changes to Cloud Solution Provider (CSP) licensing further reduce the void between EA and CSP, and present CSP as a much more credible option for many customers.  

So, what has changed?  

  • Three-year fixed pricing is now available on CSP licenses, so customers can have the same budget certainty they get with an EA, but with one huge advantage – no upfront payment. Customers can set a minimum commitment, which should be sized appropriately as a realistic minimum forecast of consumption per month. All licenses consumed during each active month are charged at the fixed subscription rate, even if the customer consumes more licenses than their commitment.  
  • Should a customer consume less licenses during a month, as long as they do not go below their minimum commitment, they will only pay for the licenses they consumed, enabling the elusive True Down in real time. Monthly invoices will reflect the reduced consumption with no review delays, and no huge administrative burden. 
  • It is much more difficult to enter a non-compliant position. The nature of CSP is that it is a monthly subscription model. This means the service is switched off for all cloud-based services should the subscription payment not be made. CSP agreements also enable the purchase of on-premise licenses which still need a level of care and management, but customers consuming CSP are mitigating a considerable proportion of their risk of a non-compliance charge. 
 

Core is a Tier 1 CSP with a long history of providing licenses and license management services to a wide range of customers across the Private and Public Sectors.  

As a result of these changes, we are launching a new campaign called ‘Take the CSP Challenge’, where we will work with our customers (and any interested prospects) to model what the real value of migrating to CSP licensing from an EA would look like for the organisation. It is a simple, non-disruptive desktop audit, during which we provide a price matrix and cashflow model to forecast new licensing costs. The customer can then input their costs from the current EA agreement and calculate the real savings.  

There is no obligation or commitment to the service. Any organisation with a renewal event happening this year should consider this, even if it only acts as a justification to renew your EA.  

If you want to take the CSP challenge with Core, email hello@core.co.uk and we’ll assign you a specialist to help guide you through the process.  

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