Don't Sign a Microsoft Enterprise Agreement Before Trying These Lucrative Negotiating Tactics

30 May 2013 ID:G00246534
Analyst(s): Dolores Ianni, Roberto Sacco

VIEW SUMMARY

Microsoft will make concessions within an Enterprise Agreement when you apply every leverage point available. IT procurement professionals should use these best practice negotiation techniques to initiate more favorable costs, terms and conditions for their organizations.

Overview

Key Challenges

  • IT procurement professionals are challenged to negotiate an effective contract with entrenched suppliers like Microsoft, where there is high dependency and lock-in, to better align the contracts with IT and business goals.
  • IT procurement professionals struggle to identify real leverage points that they can use to improve their Enterprise Agreement (EA) renewal pricing and terms.

Recommendations

IT procurement professionals must:

  • Use perpetual license entitlements as leverage to walk away from Microsoft Software Assurance (SA).
  • Profile users' application requirements to rightsize license fees.
  • Introduce competition, where appropriate, to improve their position.
  • Take advantage of investments in newer technologies that are strategic to Microsoft.
  • Fully utilize global pricing differentials.

Table of Contents

Introduction

Negotiations with Microsoft, like those with other large and entrenched software vendors, are challenging due to the strategic nature of their products, (such as the high switching costs, lack of competitive alternatives and the tight integration between products, which in itself creates a high degree of lock-in). With Microsoft, this situation is particularly pertinent, making it much more important for IT procurement professionals to identify the leverage points that have worked well with Microsoft, and tailoring those to achieve the best possible outcomes.

IT procurement professionals need to ensure the best possible pricing in each enrollment, as well as securing favorable terms that allow them to license in a manner that best fits business goals. Since both Microsoft and its business partners have an incentive to upsell and cross-sell more products, thereby increasing licensing footprints; it is important to try to maintain control during the procurement process and identify all appropriate leverage points to secure the best deal. The cost of renewing current agreements have increased substantially in the server area due to recent price increases on several products, in addition to licensing changes for SQL 2012, System Center 2012 and Windows Server 2012, leaving customers challenged to keep their Microsoft spending flat, if unable to decrease it.1

Our experience in talking to IT procurement professionals evaluating Microsoft Enterprise Agreement proposals and renewals shows that the points outlined here can be leveraged to achieve a stronger negotiating position.2

Analysis

Use Perpetual Licenses as Leverage to Walk Away From Microsoft's Software Assurance

Microsoft customers report that one of the primary benefits of Microsoft's SA — within a Microsoft Enterprise Agreement (EA) — is the right to the latest version release of the product while it is enrolled in SA (see Note 1 to access the full program outline). The license right to this version, when tied to a perpetual license (not a subscription agreement), extends indefinitely.3 As a result, this version can be deployed even if SA is not renewed and even after SA has expired. The ability to walk away from SA and continue running the product using perpetual licenses is a strong negotiating advantage and can be the best leverage point when entering into negotiations.

Microsoft has become increasingly reliant on its annuity maintenance revenue stream, because of its predictability and profitability to satisfy investors. SA is priced at 29% of the license price (annually) for desktop products such as Office, Windows Client OS and 25% on the servers and Client Access Licenses (CALs). This means that if you do not plan to purchase a future release within three-and-a-half to four years, it may be more cost-effective to stop paying for SA on some or all SA licenses. If you refresh more often, and will need a new version within three years, then it is cheaper to maintain SA on your products.

For example, Office 2013 (typically a large percentage of desktop EA contract value) became available to volume licensing customers in October 2012, and many customers will decide to skip this version and wait for a future version in three or four years. Therefore removing SA on Office with a plan to procure new licenses in the future will be a viable alternative for many enterprises. Future capital expenses must be budgeted and factored in when the next version is required. However, Microsoft would not want to see this scenario realized as it represents a substantial loss in its predictable revenue stream.

To determine your requirements for SA benefits, you should perform a careful cost-benefit analysis across all product areas and over several refresh periods. SA benefits on the desktop operating systems such as Windows Virtual Desktop Access and Roaming Use Rights will impact your requirements. (See "How to Quantify the Changing Value of Software Assurance for Windows Client, 2013 Update" and "Toolkit: How to Quantify the Value of Microsoft Office Software Assurance.") Consider benefits on servers such as License Mobility that could affect your ability to reassign licenses within a server farm and Cold Disaster Recovery (DR) rights.

SA is not an "all or nothing" decision in an EA. If only some users require SA benefits, then instead of licensing the entire enterprise, you can opt to license only specific users or devices with SA in Select Plus or Open License and have a component EA for the enterprise product that requires SA across your base. For further details on this hybrid option refer to "Research Spotlight: A Hybrid Approach to Microsoft's Volume Licensing Agreements Could Reduce Costs and Compliance Risks."

Recommended action: IT procurement professionals should seek alternative cost proposals from their business partners (including license only), that reflect several scenarios such as removing SA benefits for all, or a portion of your licenses. Ensure the analysis is done over a period of five years or longer — not three years. Prepare multiple options to reduce your overall spend and have an exit strategy if you are unable to achieve the desired outcome in your Enterprise Agreement.

Profile Users' Application Requirements to Rightsize License Fees

Within an EA, there is a general ordering requirement that stipulates when choosing any one or all of the three enterprise desktop components — Office Suite, Client Operating System or Client Access License Suite — you must include an "enterprisewide selection." Profiling involves segmenting your users/devices and placing them into a specific configuration by job role/task(for example, knowledge worker, task worker) and licensing only the entitlement to the technology or access they require (such as only the desktop OS and a CAL suite) rather than licensing everything across all users/devices. Outside of the "Industry Device" exception, customized profiles in an EA are not a standard offering but are a negotiated concession, which we regularly see for customers who request it. Ordering, or posturing to order, products from Select Plus or Open Agreements also gives IT procurement professionals the same option — and doesn't need Microsoft approval, albeit possibly foregoing additional discounts achievable in an EA. Depending on the number of devices you do not need covered, this can wind up being less expensive and may result in Microsoft reconsidering its pricing to keep you in the EA.

Software asset management processes need to be in place to track and manage multiple profiles. For more on the definitions of user categories and considerations before adopting this technique see "Profiling Users Can Reduce Costs in Your Microsoft Enterprise Agreement."

Recommended action: IT procurement should work with a software asset manager to be certain about the operational cost of maintaining multiple profiles, and to determine how many configurations you can manage efficiently and cost-effectively. Then work with your Microsoft representative to negotiate for only those licenses that fit your organization's profile of users/devices. Get an amendment to the EA to define what constitutes each particular device you are required to count.

Introduce Competition Where Appropriate to Improve Your Position

In recent years, we have seen IT procurement take a more aggressive stance and evaluate competitors, especially when contemplating new functionality, but also increasingly for installed products. This has resulted in improvements to their proposals from Microsoft. While Microsoft does have a privileged position as a leader in a number of its offerings, there are alternatives, such as Open Source, Google Apps, Oracle's Siebel, salesforce.com and VMware; that are viable competitors to Microsoft products. Alternate choices in communication, collaboration and content offerings should be evaluated as potential leverage. (See Note 2 on relevant Gartner research types.) Consumerization and bring your own device (BYOD), along with the growth in Mac OS and Android systems, has meant that Microsoft is losing its hold on the market. To understand some of these market threats, see "Microsoft Is Striving to Overcome the Hurdles in the Nexus of Forces."

There is a high barrier that impedes switching, for example in terms of costs by moving to another vendor, additionally the deep integration within the Microsoft stack relating to the dependencies of its technologies makes switching more challenging. It is imperative to work with software asset managers and enterprise architects to know what those issues are, and to understand the longer-term cost analysis. In our experience, you must be serious in your evaluation of a competitor, such as having completed a proof of concept and pilot, or Microsoft will know it is not a credible threat. If Microsoft considers it a viable option, you will find your deal receives more executive attention with added flexibility, relating to discounts to close out competitive threats.

Recommended action: Where possible, consider alternatives as part of a transition plan and cost evaluation. Enter into these discussions with the intent to negotiate better price points or migrate to the competing product over a period of time.

Take Advantage of Investments in Newer Technologies Strategic to Microsoft

If you are buying any of Microsoft's newer offerings, be sure to understand how strategically important those products or services are to them, as there may be additional discounts and promotions on offer. Microsoft is trying to demonstrate to investors that it is still innovative and needs good references in those areas where it has invested billions of dollars — like its strategic commitment to cloud computing — for example, Office 365 and Azure. For some of these newer strategic products, Microsoft will offer incentives for its salespeople and partners to sell, which can translate into additional discounts or other incentives for customers who adopt them and can be used as references.

As an example, Microsoft customers evaluating Exchange Online or one of the Office 365 offerings have particular leverage, because Microsoft needs an increase in customer numbers as it attempts to grow its cloud business. Despite the increased media attention, we do not believe that customer migration to Office 365 has been that significant. We believe email in the cloud is the primary driver for Office 365, but we estimate that cloud email will only constitute 10% of the email market by the end of 2014.4 Additionally, of that 10%, we estimate that 75% of those are organizations with less than 750 desktops. We predict it will grow to 65% — but not until the end of the decade, meaning larger customers moving to Office 365 now will have the best leverage as early adopters. Office 365 has been available in the EA since 2011. Since September 2012, we have seen Office 365 promotions that encourage customers to license Office 365 in addition to on-premises licenses in an EA, at little to no cost, as a means to get customers to migrate to the cloud within their three-year EA (instead of the one-year Microsoft Online Subscription Portal option). Another example is the recent price war between Amazon and Azure, with both lowering prices over the last several months to attract buyers.5

If you are displacing a competing product, such as replacing IBM's Lotus Notes with the Exchange email platform, or replacing Cisco Unified Communications with Lync; these are seen as very high-leverage areas that can bring great incentives. For any new investments, request Business Investment Funds (BIFs) from the Microsoft marketing team, which can be lump sum discounts or business partner dollars (see Note 3 on Microsoft Business Investment Funds).

Recommended action: Leverage any investments you are making in newer technologies on-premises or in the cloud by asking for Business Investment Funds and substantial pricing incentives.

Leverage Global Pricing Differentials

If you are a multi-national company, investigate list price differences between countries. Some of the price uplifts are significant, between 10% and 50% in some geographies.6 Microsoft generally sets the price for specific customers in the country in which the contract will be signed and managed. However, a customer having a legal affiliate (from 50% ownership) in a different country can choose where to sign its Microsoft Enrollment, rather than the country where its headquarters is based. It is key to understand differing local tax accounting rules and support policies within each region, as these can influence the decision to move the contract to another region. Also there is the potential of a loss of support and discounting. Using the knowledge of lower U.S.-based prices may provide leverage for better in-country pricing. For more details on this, see "Microsoft Price Harmonization in EMEA Strikes a Discordant Note With Resellers."

Recommended action: Multinational organizations should buy in the most optimal location globally, taking into account potentially complex tax and management issues. Investigate the ability to move the contract to a lower-priced region, and if viable, discuss this option with the local Microsoft account team.

Evidence

1 Refer to SoftwareOne website on Microsoft Price Changes for examples of price increases on Microsoft's products as of 1 December 2012.

2 Gartner's IT asset management and procurement analysts fielded 3,370 inquiries from clients related to Microsoft licensing in the 24-month period ending March 2013.

3 Microsoft Product Use Rights and Product List, Software Assurance Benefits, 1 April 2012. New Version Rights:

"With Software Assurance, customers are eligible to upgrade to new versions of licensed software made available during their term of Software Assurance coverage. New Version Rights means, for any underlying licensed product for which Software Assurance coverage is ordered, the right to upgrade to, and run in place of the underlying licensed product, the latest version of that product that we make available during the covered period. For example, if a new version of Microsoft Office is made available during the term of your coverage, your licenses will automatically be upgraded to the new version. Customers that acquire perpetual licenses through Software Assurance can deploy the upgrades after their coverage has expired."

4 According to Gartner's "Hype Cycle for Cloud Computing, 2012" in regards to Cloud Email:

"Email in the cloud continues to be a hot topic for IT professionals. Drawn by the lure of rock-bottom pricing and the misperception that cloud email is wildly popular, some organizations are aggressively investigating the new provisioning model. In early 2008 we predicted that by year-end 2012, 20% of enterprise email users would be employing a cloud-based email service. We were wrong; the uptake of cloud email services has been happening at a slower pace than previously expected. We now think that the percentage of corporate mailboxes using cloud services will be 10% by year-end 2014 — up from 5% to 6% at the end of 2011."

5 See B. Rigby and A. Barr, "Microsoft Targets Amazon With Price Cuts on "Cloud" Services," Thomson Reuters, 16 April 2013.

6 See S. Sharwood, "Microsoft, Adobe, Wilt During Australian Price Gouge Grilling: Local Leaders Struggle With 'Price What the Market Bears' Charge," The Register, 22 March 2013.

Note 1
Microsoft Software Assurance:

For details about the Microsoft Software Assurance program refer to its Volume Licensing Software Assurance website.

Note 2
Relevant Gartner Research Types:

For details on the competition in each product category, Gartner has published Magic Quadrants, MarketScopes and Vendor Ratings as a comprehensive resource for evaluation across products and services:

Note 3
Microsoft Business Investment Funds:

Each Microsoft product area has a set of discretionary Business Investment Funds (BIFs), which are allocated to incentivize deals and are generally reserved for new and hot product rollouts. These funds are not guaranteed, and are exclusive to each Microsoft account, but you can inquire — through your Microsoft representative — for more details on these incentives.