Updated: Feb 23
Executive Briefing originally aired on December 5th, 2018. Click Here to watch the recording.
In November, Bloomberg named Microsoft the world’s most valuable publicly-traded company. They achieved this in large part because of their CEO Satya Nadella’s “all in on cloud” strategy, which created a packed pipeline of recurring revenue from subscription-based software licenses. O365 accounts for a large part of this revenue, and although Azure is still running in second place to AWS, the two cloud providers enjoy the lion’s share of this behemoth market.
Microsoft is also simplifying its offerings as they move customers to the cloud. The new user-based SKUs have made it easier to track and count licenses, as have their bundles, which provide more user rights than before. These are being pitched as attractive benefits, intended to entice the stragglers to get on board. All of this means that customers must shift how they do business with Microsoft — those perpetual rights are not the negotiating lever they once were.
The Carrot and the Stick
For many years, Microsoft used steep discounts to lure customers to O365 and Azure, but they’ve recently moved on to more arbitrary tactics. In 2017 the company reorganized their entire sales organization to drive cloud consumption:
They devised a new sales compensation model: half of their pay is now based on cloud deployment.
They hiked prices by about 10% for on-premise products in October, including many of the products bundled into O365 such as Office Pro Plus, CALs Suites and some server offerings such as Windows Standard, SharePoint and Exchange. These increases are designed to drive the last holdouts to the cloud.
They consolidated their license solution providers (LSP) and introduced a new designation program called Cloud Solution Provider (CSP), who can deploy cloud products and support customer already running O365 with a new type of licensing agreement.
They announced a transition from Premier Support licenses to the Unified Support offering. This is being pitched as a simplified model based on a percentage of net spend. Generally, this results in a 50% price increase for customers, but we know that this percentage is negotiable. It is thought that the company will discontinue Premier in summer 2019.
The New Sales Playbook
You may have noticed a lot of the experienced sales people were promoted to management or moved on from Microsoft after last year’s reorganization. There are many new faces servicing accounts, and they’re following the T Minus 36 strategy: as soon as you sign your current deal, Microsoft starts looking 36 months ahead, planning for when you have to renew. During that time, they monitor your cloud deployment, try to seed new products into your organization and figure out your IT plans – especially as they relate to Azure. Two or three months before a renewal, they’ll send over some scenarios (usually based on numbers from your year-two true-up). They’ll usually include an “as is” option and an M365 option (the cloud-based SKU for a bundle of Office 365, EMS Security Suite and Windows OS). This is just a fishing-for-information expedition and rarely includes discounts.
We advise clients to push back when this happens and insist upon dictating the timing and products you want. This works most effectively when you’ve prepared a cloud roadmap that defines what and when different aspects of the business can be migrated. This information also enables you to ask Microsoft for deployment and migration funds at the end of the negotiation.
Microsoft’s goal is to sell everyone in your organization the biggest product suite, which is like selling someone a Cadillac when all they need is a golf cart. So, it’s imperative to have a firm grasp on your users’ needs, the components in the suites, and the use rights. Some SKUs can be purchased as standalone vs. a bundle, which is especially important in industries such as healthcare, retail and manufacturing where many of these users are deskless and don’t need all the functionality of the Office suites.
Mitch Macro is an Analyst II at ClearEdge Partners, Inc.