Is Microsoft Playing Three-Cloud Monte?

Whether you love or hate Microsoft, the company has proven to be one of those providers that’s almost impossible to part with. Indeed, it has used the past ten years to fortify your dependency. 

When we look at how Microsoft is going to market with its cloud offerings, it’s hard not to think of the old Three-card Monte game based on the sleight-of-hand shell game where the queen of hearts is shuffled with two other cards and the target bets on which one is the queen. You might call Microsoft’s version the “Three-cloud Monte,” with Office 365 as the queen of hearts. When the cards get shuffled, it’s difficult to identify which of the three clouds to bet on – Microsoft Office 365, Azure or Dynamics?

Beginning (circa 2010) with its productivity software Office and then later its hosted online Office 365 solution, Microsoft has indisputably established the de facto standard for online user productivity. If you’re looking for commercial alternatives to the services available in Office 365, it’s like looking for the queen of hearts while playing Three-card Monte. It’s not there.

Today, Office 365 has completely overtaken the marketplace, and Microsoft is using that position to pull along with its second and third clouds, Azure and Dynamics respectively. While these are not new clouds for Microsoft, they are clearly benefitting from Office 365’s dominance in the marketplace. 

Sure, Azure and Dynamics compete with numerous commercial alternatives. AWS, GoogleCloud, SAP, Oracle, SalesForce and other infrastructure as a service (IaaS), customer relationship management (CRM) and enterprise resource planning (ERP) solutions are popular and, in many cases, preferred to the Microsoft alternative. Choice and competition are alive and well. But, at this moment in time, most businesses need the document productivity and collaboration services that are cornerstones of Office 365, and that means they need to buy them from Microsoft.

As Microsoft was transforming from traditional software publisher to a software-as-a-service (SaaS) provider, it incented many businesses to take a chance on Office 365 by offering attractive pricing – and that sealed its fate as the queen of hearts in our Three-cloud Monte hand.

Now in 2020, that ten-plus-year transformation journey is virtually complete. The Office 365 cloud is the queen of hearts, Azure is the jack of spades and Dynamics is the jack of clubs. Many Microsoft customers who moved to Office 365 in 2017 or earlier are playing their renewal hand and seeing how elusive the queen of hearts is as negotiation leverage. Instead, Microsoft customers are seeing only jacks and need to pay the dealer more to have the queen surface.

Retained service renewals – sometimes called “like for like” deals – are seeing price increases of up to 40 percent with the majority in the 25-30 percent range. These increases, when extended over the many users who are covered by these subscriptions, are catching clients completely unprepared. Three-million-dollar-a-year deals are suddenly jumping to five-million-dollar-a-year deals, and $27million a year is shooting to $36 million a year without incremental value added by the provider.

Microsoft is rescinding the incentive discounts it offered three years ago without regard for how enterprises establish their renewal budgets or resolve budget gaps. 

This is when Microsoft plays either the Azure card or the Dynamics card. And, if you go along with the game and pick one of these other two cloud options, the company will spare you the aggressive discount claw-back.

This lack of predictability is the single most corrosive element in customers’ relationship with Microsoft. To continuously improve and fortify a partnership, enterprises must insist on some degree of “Microsoft predictability.” As it is now, enterprise customers should take a skeptical stance since the company’s history shows the potential for a steep future price for a decision today.

Three points to take away:

1. While Microsoft would like customers to embrace its Modern Workplace initiative, be wary of accepting the risk of material future agreement cost increases absent any incremental value.
2. Protect discounts extended in your negotiation so they cannot be reduced or eliminated in a renewal term without material change in the value of the product or service
3. To confidently commit to Microsoft cloud services, demand a line of sight to future pricing for all services that have a potential to be added to your deal after the contract signing.

As much as enterprises would like to have other options available to them, the simple truth is almost everyone will continue to do business with Microsoft for the foreseeable future. This means taking into account the lack of pricing predictability when extending elective business with the company.

Whether Microsoft believes its services are priced fairly does not change the reality that enterprises should not accept a 40 percent price increase in one fell swoop. It is the enterprise’s responsibility to prepare for negotiations so that increases occur over the longer term. When playing an unpredictable card game, it is the enterprise that risks making the wrong bet.

ISG helps enterprises optimize their Microsoft licensing and negotiate predictable terms for Office 365, Azure and Dynamics. Tune in for an ISG Smartalks to leverage incremental service choices to drive cost out of your retained services or contact us to discuss how we can help you.

About the author

Louis joined the ISG team in early 2014 after nearly 20 years with Microsoft Corporation. Louis has compiled a track record of Enterprise client success underpinned by customer focus, strategic thinking, organizational agility, problem-solving acumen and impactful knowledge transfer which has established his reputation as a Microsoft licensing expert.