Understanding the rules of Microsoft negotiations

Author: Gareth Redshaw, Director for SME, Cloud & Strategic Partners at Livingstone Group

At Livingstone Group, our team has decades of experience with a wide range of organisations on a multitude of software licensing programmes, yet there are common questions that always crop up: am I getting good value from my investment? do I have enough confidence in my current and future requirements to make such a large spend? Is my reseller offering a good balance between price, quality and service? These are particularly true when organisations are entering negotiations with mega-vendors, one of which is Microsoft.

In this blog, I will share some useful insights which could help answer these key questions as well as some best practices you can implement when you enter into negotiations with Microsoft.

An update on Microsoft’s market strategies

Firstly, it’s important to understand what political or commercial drivers are at play at an organisational and salesperson level. When it comes to Microsoft, they have seen tremendous growth in cloud revenue recently as it moves its IaaS market share up to 15.5%, something which makes up 25% of its overall business. For Microsoft, this simply isn’t enough and we are seeing a much more aggressive approach to cloud sales compared to the traditional on-premise product stack. Sales teams are being incentivised to push cloud-based products and being aware of this is a crucial part of getting the most out of a contract negotiation so that both parties can get what each wants to achieve.

Indeed, if you’re heading into negotiations and know that you’ll be looking to move or increase your cloud capabilities – particularly with Azure – having the knowledge that cloud is currently a priority for Microsoft will make a big impact on your negotiations. For this reason, you MUST develop a future forecast beyond a weak estimation. We tend to find an overly conservative approach is the default but with much bigger losses than risk mitigated during negotiation.

Licensing rules have also changed with adjustments being made for bring-your-own-licenses and Azure Hybrid Use Benefit, which is likely to see the market share begin to shift away from AWS and move directly into Microsoft. While this won’t happen immediately, we are already seeing some movement with the choice of platform for new projects and anticipate that this will gather momentum over the next 12-24 months.

From a growth point of view, Microsoft has the added benefit of attaching its Azure spending to the rest of its well-established offerings, such as Microsoft 356 or Dynamics 365, allowing Microsoft to merge all of these aspects into one negotiation, particularly for first generation clients. Second generation clients be warned however, as you’re unlikely to get the same offers the second time around as when you first came on board. In fact, without committing to increased revenue for “E5” offerings, expect a shift in dynamics from the sales team from ‘keen to close early’ to delay tactics with minimum negotiation offered.

For more mature Microsoft spending customers, we are actually seeing revenues and commitment grow. Contracts are getting siloed and negotiated separately to reduce the potential leverage and the negotiation power shifting to the client. In a very recent example, we actually witnessed the vendor negotiating two multi-million-pound contracts at the exact same time with two separate teams and adjusting the negotiation schedule to isolate the spends.

Getting down to business

Contract negotiations are notoriously complex to navigate and we often see customers entering negotiations with mega-vendors without 100% confidence. Vendors like Microsoft don’t tend to consider the nuances of an organisation, focusing instead on making that sale. Most contracts tend to be steered towards a one-size-fits-all persona and rolled out across the full estate. Interestingly, most clients have been sold this vision by Microsoft and resellers are also starting to get onboard.

But we don’t believe there is only one option, so here are a few pointers to help you overcome some of those Microsoft hurdles and get the deal that best suits your requirements:

Effective and robust planning

Entering negotiations with Microsoft can certainly seem daunting, and if you’re not completely confident in what’s happening, you may find yourself yielding on certain elements. For example, conceding on paying a higher price in exchange for favourable contract amendments like the absence of an audit. You should and can avoid this, and by planning ahead and looking at good, useable data, you can find yourself with a leaner contract and more power during negotiations.

Forward-looking contracts

A sticking point with the typical three-year contract is that it’s based on current usage and a short-term strategy. It rarely takes into consideration what your future use-cases will be, often leading to problems down the line when it comes to renegotiations. There’s also very likely to be limited flexibility in the contract, so you should look to structure any contract with Microsoft around the future condition of your software estate and consider what new technology might be adopted and how user requirements may evolve. While none of us can be certain of what the future holds, reviewing the features of the next tier up and the incremental upgrades will help. In short, ensure you are maximising investment before stepping up (and don’t forget to read the small print for any hidden amendments!).

Know your leverage:

Knowing where you have and don’t have influence over the negotiations is the key to being effective. When it comes to cloud for example, Microsoft will currently be favouring customers looking to move towards or upgrade their cloud suite of products (Azure, Dynamics 365, Cloud E5 Suites, Cloud Telecom), and whereas three years ago, just having cloud technology within your BOM was enough to offer contract adjustments, today is a different story as your leverage will lie in consumption, growth, spend commitment and new technology.

Be market-aware

As mentioned above, knowing vendor priorities is key. It’s also important to realise that the way vendors like Microsoft negotiate has changed drastically in recent years. It’s no longer focused on planning and traditional sales-led offerings, but instead, confident sales teams will often delay sales, engage organisations at multiple levels and offer discounts and concessions based on commitment-to-consume. So be aware when negotiations kick-off.

Don’t forget the resellers

Properly navigating vendor negotiations is essential, but you must also spare a thought for the resellers. One of our biggest observations over the past 12 months has been a real shift in how advice is provided by resellers. For example, we’ve seen one-off payments being positioned as annual, and NDA commitments being overlooked. Whilst this behaviour is in no-way reflective of every reseller, we have seen these approaches being used – in all likelihood to increase profitability and help achieve a profit-based sales target – leaving customer contracts poorly aligned. So, keep those eyes peeled for any unusual reseller practices.

Getting the best deal out of your contract with Microsoft isn’t a one-size-fits-all scenario – you must be aware of what’s happening on the vendor’s side and understand how your organisation deploys and consumes technology across the varied user base. Plan ahead and be prepared.

To hear more from Gareth on this subject, you can watch his webinar ‘Microsoft Cost Optimisation – negotiating the best renewal’ here.

About the Author

Gareth Redshaw, Director for SME, Cloud & Strategic Partners at Livingstone Group

Gareth joined our team through the acquisition of Cloud Optics, who are now a company in the Livingstone Group. With over 15 years’ experience in software licencing Gareth has helped clients optimise spend, develop their future strategy and taken control of high-profile vendor negotiations; this includes one of the largest UK Government contracts. Having successfully managed UK wide government EWA contracts from 2009-2011, more recently Gareth developed a proven methodology for cost optimisation. He has implemented this across EMEA wide clients and delivered substantial savings.

Gareth developed and grew the largest LSP’s practice for Microsoft government SME consulting and Cloud Commercial Optimisation. In addition to this he was responsible for this same LSP’s Licence Consulting UK, Ireland & Nordics.