In any dynamic organization, license consumption, new products, new releases, cloud solutions and IT infrastructure rapidly changes. In the “old days” (more than 5 years ago), Microsoft did not have many true (Credible Threats) to applications like Windows, Outlook and Office; to name a few. Without any real competition, Microsoft considered their customers, “Captive” and thus had little incentive to negotiate.
Fast Forward. In the last 5 years there has been an explosion of cloud based platforms from big and small software providers. Never before has the number of licensing and vendor options changed so dramatically. For the first time, there are now real credible options (Threats) to almost Microsoft’s entire product line for almost every size company.
In order make sure their customer’s stay captive in the face of such threats, Microsoft wants to make themselves irreplaceable. The more interwoven they are into the very fabric of a company’s DNA, the more disruptive a vendor or technology change would be. This creates control. Example: Say you’re a CIO of global enterprise with 20,000 employees all running Outlook, Office and Windows, CRM, Server, MySQL, Azure and other key business apps. 6 months before your renewal, Microsoft raises their pricing by 40%. What do you do? You pay it. At this point, you have no other choice. You don’t have to be a mega company either. Smaller companies find themselves in the same conundrum; albeit on a different scale. In short, the more Microsoft products you embed into your business, the less likely they are to negotiate the best prices and terms.
To add to the challenges of negotiating the best pricing with Microsoft is their constantly changing products from their licensing bundles and revising usage terms. The fact is, few companies are perfectly aligned with Microsoft’s release cycles; it’s well-known that most tend to lag a cycle or two behind. Microsoft’s pricing structures can be complex and opaque. Some list prices (Microsoft calls them “ERP” – Estimated Retail Price) are published. It’s possible to get competitive reseller quotes for volume licensing programs such as Open and Select Plus, but Microsoft does not publish pricing for the direct-with-Microsoft agreements such as Enterprise License Agreements (ELA). Unless you work with a company that regularly evaluates Enterprise agreements and custom pricing, it is unlikely you would know whether you’re getting the best terms.
It seems perfectly logical to think that if you put all your eggs with Microsoft that you will get a bigger discount and a better per unit price. In negotiating with Microsoft total spend is important, but control can be as important. We have negotiated Microsoft license agreements with a large number of companies ranging from Global Fortune 500 companies to companies with only $50-$100M in revenues. Because we see it all, we have a unique perspective on real market pricing and how things really work. Although contrary to popular belief, companies who are less reliant on Microsoft products tend to pay less per unit than those who are most heavily invested in the Microsoft technology stack. One way to improve your negotiating position is to diversify some of your software platforms. Having all your eggs in the Microsoft technology stack, means you’re likely to pay more per unit in the long run. Provided the solutions fit your needs, it is generally better to have 3-4 more easily replaceable vendors than 1 vendor who already has all your business and knows you’re not going anywhere. In this scenario, the negotiating advantage moves from Vendor to Customer.
Microsoft is notorious for including everything AND the kitchen sink into their deals. The number of SKUs found in an agreement can be overwhelming. Does everyone really need every application? Why pay for every application for every employee if they only use Outlook, Excel and Word. Understanding the needs of the business is important in negotiating deal. We recommend negotiating the best price for all the services and bundles and get detailed cost per SKU figures. Having a good software asset management system prior to negotiations can offer you the detail you need to right size your next ELA. Once established, remove the SKUs you do not need and create additional savings. These license agreement are complex. If you don’t know how all this works, get outside help from a company that does.
If you are going to start negotiations with Microsoft or a VAR, you need be prepared. To start off, Microsoft has a huge chip on their shoulder. They still have the mentality that all of their customers are captive and thus are not inclined to do anything off book. The most important fundamental strategy in negotiating with Microsoft is to change their perception that you are captive. You need to do your homework first. You should know and be ready to discuss who their key competitors are, pricing models, how the competition is better, faster, cheaper. You should know, how long it would take to transition to a competitor and a high level transition plan. Without violating any Non-Disclosure Agreements, you should have detailed comparative cost models, showing how much vendor A, B & C will save your company and offer a better solution. The more detailed the better. These data points and models are invaluable in negotiations. The fear of lost business is the most powerful way to negotiate special discounts not offered to other companies. More so than with most companies, Microsoft needs to be convinced that they are replaceable. Once established, you will find that Microsoft will be more accommodating in providing special custom pricing.
After negotiating over $116M in Microsoft ELAs, and saving clients over $54M, we feel comfortable saying that we are experts on this topic. There is no simple formula to negotiating the best price and the best agreements. Each company has different needs, levels of Microsoft integration and other variables that all need to be analyzed to create a winning strategy. Although I will not go into the more technical aspects of all the different Microsoft licensing options in this blog post, I hope you gained some insight.
We highly recommend getting outside expertise from a company that has done this repeatedly and can help your company avoid the landmines and structure the most advantageous and cost-effective agreements.
If you would like to discuss renewal strategies, or find out if you’re paying too much to Microsoft or any other software, hardware, telecom or mobile services vendors,
After negotiating hundreds of contracts, from dozens of carriers, for clients ranging from global 50 to $50M/year in revenue, I feel I have a unique perspective on this topic. In my experience, I have found that revenue commitments, are to a large extent, arbitrary. Although contrary to popular belief, I regularly find that companies who spend $1M/year will get better rates than companies who spends $10M/year with that same vendor. (I will explain why and how to avoid this phenomenon in another post).
Vendors would prefer that you commit 100% of your spend… forever. Typically, vendors will come up with a commitment figure that is 80% of your annual spend. We usually recommend that clients commit no more than 60% of their projected spend over the term, not per year. I will demonstrate below why term based commitments are superior and why you would want to stay away from monthly and annual commitments. For an example, I will use a customer that spends $100k/month or $1.2M/year on a 20 site voice and data network.
These are the most commonly offered terms. Even if a customer spends 10x the sum of all three years commitment, in the first year, the customer will still be liable for the annual commitment in years two and three. These types of commitments are the most restrictive and, if possible, should be enthusiastically avoided. Some of the terms associated with these types of commitments includes:
The table below demonstrates the one of the most negative aspects of an annual commitment.
|Year 1||Year 2||Year 3||Totals|
|% Of Annual Commitment||60%||60%||60%|
|Annual Committed Spend||$720,000||$720,000||$720,000||$2,160,000|
|Number Of Spend Months Required Each Year To Satisfy Commitment||8||8||8|
|Number Of Months Remaining Before Auto-Renewal At The End Of The Term||2-3|
In this case, the customer has already spent more than the aggregate committed dollar amount by month 21. Since the customer still has the 3rd year commit to satisfy, the customer is stuck for the duration. During year 3, the customer will still have to give the carrier an additional $720K to satisfy the 3rd year annual commitment. In effect, the real commitment ends up being $3.12M. ($2.4M for years 1 and 2 + $720k for year 3) Unfortunately, most of the agreements we see before renegotiating have a 30-60 day auto-renewal clause. By the time your company has satisfied the commitment, there is only 2-3 months left to do anything about it. Since the incumbent knows it can take 4-6 months to move a large data network to another carrier, the customer no longer has any leverage in the form of a credible alternative. Advantage: (Vendor)
If interval agreements represent (the stick), attainment agreements represent (the carrot). Attainment agreements create the feeling that you’re not being forced to spend money with the vendor. This is true. However, if not structured correctly, they can be equally restrictive when it comes time to renew an agreement. If the discount tiers and the requirements to reach them are not carefully negotiated, drops in spend or movement of business elsewhere can reduce the discounts enough, on the remaining spend, to be cost prohibitive. ATT and Verizon use both the carrot and the stick. If you sign a revenue commitment with carriers like this, they will be happy to give you huge (60-90%) discounts off their standard tariff prices. Only when the carrier has delayed the renewal proposal long enough to leave you with no other options, you realize that if you do not renew the agreement, your costs will go back up by that same 60-90%. Advantage: (Vendor)
This category of revenue commitment takes into account your total projected spend during the entire contract period. Some of the terms associated with these includes:
Note: Vendors do NOT like to agree to these. In most cases, the carrier will deny that they have ever offered them. Having the right negotiating strategy is critical. As long as you have someone on your team that has either negotiated these types of commitments before and/or has evidence that the carrier has offered these terms to other companies, you will have a better chance of success.
In this example, the 60% revenue commitments remains the same however, we have removed the annual minimum requirement.
|Year 1||Year 2||Year 3||Totals|
|Total Committed Spend Over 3 years (60%)||$2,160,000|
|Number Of Spend Months Required To Satisfy Entire Commitment||22|
|Number of Months Before Renewal With No Revenue Commitment||14|
By taking this approach, the customer satisfies the total $2.1M commitment in month 22 of 36. This means that the customer no longer has any obligation to the carrier, but the carrier is obligated to keep the current rates and terms in place for the next 14 months. The customer is in complete control at this point. Figuratively speaking, the Sword of Damocles is transferred from over the head of the customer to that of the carrier. Negotiating from a position of complete control enables our clients to get better SLAs, terms and pricing than companies with a less favorable negotiating position. Advantage: (Customer)