Best Practices for IT Sourcing During Merger & Acquisition Initiatives

​The key to properly negotiating with Salesforce is understanding how the organization works. Salesforce has a brilliantly designed sales system that is set up to maximize revenue from every account. ​​​Many of the tactics used in its sales process and organization design are borrowed from other big players such as Microsoft, Oracle, SAP, etc. Our goal with this article is to give you a strong understanding of the Salesforce machine so that you can prepare accordingly.

Understanding how your sales rep fits into the machine ​

Maybe you like your rep, maybe you don’t. We see clients all across the spectrum in terms of the relationship they have with their rep. Regardless of what your relationship is, it’s important that you understand how your rep fits into the actual Salesforce machine. The first thing you must understand is that your rep is at the bottom of the totem pole in Salesforce. They are the “in-the-weeds Salesperson” who is put out to handle tactical sales and execution .By design, your rep is given limited information. They actually are never fully educated on what the rates should be or what discounts they can even provide. Let me repeat that: Your rep does not even know what rates other companies of your size are getting other than those within their own portfolio. Salesforce limits the amount of discretionary information it shares with its sales organization intentionally. The company does this many reasons, one of which is so that your rep can sell to you in a genuine and authentic way. If your rep knew that other companies were paying 30% less than you, they might feel guilty for charging you 30% more and/or fight harder for you to get a lower rate in the interest of closing the deal. Think about this; if your rep doesn’t know that you are paying 30% above the most competitive rates, and instead actually believes you are getting a great deal, then they are going to explain this to you in an authentic way. They may tell you something like: “This is the best rate I have ever given a customer of your size.” This may very well be the truth, but that doesn’t mean it's the best rate that Salesforce can provide for a company of your size, etc.Instead of thinking about your rep as the opponent in this negotiation, it’s important to understand how they fit into the organization.Our goal in our 4-step negotiation process is to coach your rep in a way that organically sends the most effective messages up the totem pole (aka the "business desk") at Salesforce to ensure you get the best deal.

Understanding the “business desk"

‍In order to drive the largest positive impact in any negotiation with Salesforce, we need to work with the “business desk." The “business desk” is a somewhat secretive sales management team inside of the company that is intended to purely support your sales rep. Remember, sales reps are given very little decision-making authority. All official decisions that have any material impact on a client's rates are developed and approved by the business desk. The concept of a business desk is not new nor unique in highly complex/profitable sales organizations. It was originally developed by companies like McKinsey and originally tested, validated, and further refined in firms like Microsoft. At its most basic and original function it was intended to as act as a quality/price control organization before the concept of Software as a Service (SaaS) was even conceptualized. Fast forward many years and it has developed into an elusive organization that ultimately acts as the "bad guy." In other words, it holds the rights to any decision making but will never officially interface directly with the customer leaving your sales rep to pass messages back and forth.As a result, your goal in a negotiation is to train your sales rep on how to best communicate and send messages to his business desk that are going to help you achieve more out of the negotiation.Yes, you heard that right. Your job in this negotiation will be to indirectly train your sales rep on how to work with their own organization to get you the best possible deal. That is, of course, assuming they actually want you to get a good deal…Our goal is to empower you to send the right messages, at the right time, to the business desk in order to meet and/or exceed your desired objectives.

Your sales rep’s emotions

‍Sometimes your rep may get somewhat heated during the negotiation and say something like “I am doing everything I can to get this deal through for you but I just can’t go any lower.”When your rep says something like this to you it’s important you keep a facts based demeanor and keep any emotional response in check. The company’s goal here is to humanize the sales organization and make you feel empathetic during the negotiation. Their emotional response will naturally distract you from the actual facts of the deal.Please remember your rep may actually be a very honest person. Subsequently, their emotional response to any negativity within the negotiation is designed as part of the sales system. In other words, when your rep gets emotional about fighting for your discounts, that is Salesforce winning…a clear indication of the sales system producing the exact desired result.This is why we call it the Salesforce machine. The dynamic between the client, sales rep, and business desk is brilliantly designed. The key here is to understand and identify these dynamics.

​​Divide and Conquer Tactics

‍Whenever we describe this tactic to our customers, we almost always hear; “Yep, that is exactly what they did.” Divide and conquer is a brilliant, yet traditional, sales tactic that Salesforce has perfected over the years. The larger the client organization the more important and effective these tactics become for Salesforce.The concept is simple: Build as many stakeholder relationships as possible at various levels inside the client organization with the overall objective of obtaining as much information as possible. Use this information to extract conflicting stories of the organization’s wants and needs so that the client may potentially buy more than they need.If you are a smaller account under $300k per year, you may not see this happen. But as your annual spend reaches $500k or $1M+, these tactics will most certainly be used as a way to grow your account.

Understanding Divide and Conquer Tactics

‍Let’s explore a simple example of how this routinely plays out in a client organization… Imagine you are in IT Procurement and hold the responsibility of negotiating your company’s Salesforce contract renewal. As your renewal starts to get closer, you may suddenly experience that Salesforce has, without your direct knowledge;

• Invited your C-Suite to a basketball game with courtside tickets;
• Reached out to IT Department heads to discuss their 1-3 year growth objectives;
• Initiated a direct connection with your VP of Sales;
• Identify and reach out to your top Sales Representatives to explore how they could further use the tool;
• Invite your colleagues to a “wine and dine” evening for relationship building purposes, etc.

Best of all is that those taking the above actions may not actually be your direct sales rep but rather their superiors who have the sole purpose of gathering as much intelligence about your organization as possible. With this momentum, Salesforce will commonly know more about the needs and wants of its client organization more than their client contact (aka you!). They will use this information to their advantage and create organized chaos and confusion in your organization. Further expanding upon our original example, let’s explore the output of these tactics:

‍CEO - Your CEO is taken out to a basketball game where the higher ups at Salesforce paint a picture of what your organization could look like with added functionality and full adoption of Salesforce. They gain his buy-in and suddenly your organization has pressure coming down from the top to roll out Salesforce to the entire organization.CFO - With this new pressure coming down, your CFO is left scrambling to figure out how to create budget for these additional Salesforce expenses which were not in the original budget. Your CFO talks directly with Salesforce and they start getting creative on cash flow. They offer to move your renewal to January, instead of September, to utilize multiple fiscal year budgets.CIO - Your CIO is furious because the CFO is now going to pull funds from his operational budget. Your CIO had planned to use these funds for other business critical initiatives that need to be completed this year. Subsequently, he’s also upset that Salesforce is talking with his colleagues and keeping him in the dark. This creates and emotional response and your CIO reaches out directly to Salesforce. Salesforce then begins meeting with your CIO directly and discusses their overall IT roadmap.

‍VP of Sales - When your VP of Sales speaks to Salesforce, he shares his ideal vision and requests more functionality and training for his team to increase adoption.

‍Sales Reps – When a few of your top performing Sales Reps are contacted by Salesforce, they further explain how it would be great if they received deeper support, had additional customizations, and more functionality.

‍Salesforce Admin - Your Salesforce Admin is the primary business stakeholder providing requirements to IT Procurement and also responsible for the outcome of the negotiation. They now have conflicting messages coming from every stakeholder in the organization…

• The CEO wants to implement the full vision;
• The CFO doesn’t have the budget;
• The CIO is pissed off because his IT budget is getting pulled and Salesforce still doesn’t integrate properly with their ERP;
• Your VP of Sales wants more functionality and training;
• Your Sales reps wants more customization and new functionality.

What does your Salesforce Admin do in this situation? They ask Salesforce: What do you think I should do? As a result, Salesforce is now running the negotiation. They are telling you what to buy and when to buy it. At this point, you have lost control of the negotiation and Salesforce has essentially “won the game.”If you let Salesforce divide and conquer without the proper planning and communication strategies, you will lose significant value creation opportunity.

​An Aligned Organization is a Rarity

The situation we just described to you is extremely common in both large and small organizations. Most organizations suffer from what many of us know as “initiative overload” and simply do not commit the time or resources to align on forward looking business (not just IT) plans for leveraging strategic platforms such as Salesforce.Salesforce knows this and leverages this lack of alignment to create growth opportunities.It is exceptionally rare to find an organization that is: 1) actually aligned; 2) has a plan for how they will use Salesforce over the next three to five years (aligned to its business objectives).As part of negotiation preparation, we drive clients to curate this planning and alignment so that you know what you need before even starting the negotiation.Our proprietary tool for doing this is something we call the Salesforce Roadmap (catchy right!? ?). At a high level, this is simply a detailed list of “what you need” and “when you need it.” Again, you need to be clear on the “what” and the “when.”If you don’t create your own Salesforce Roadmap, then Saleforce’s Divide and Conquer techniques previously discussed will likely create an over-inflated roadmap for you. Subsequently, if Salesforce creates the roadmap for you, then you are left on your heels saying “Wait a second….is this what we actually need or is this just what they are telling us that we need?”

​​The Salesforce Fiscal Year

‍Another very important thing to understand about Salesforce is that their Fiscal year ends on January 31st. Now at first you may say, “That’s kind of odd…why would anyone make their fiscal year end January 31st?”Once again, this is done by brilliant design.Salesforce is an expert at working with Corporate America. It knows that most companies operate on a standard calendar fiscal year (January-December). Subsequently, most budgets are solidified sometime between October – January which opens up a new (potentially larger) budget.By moving your renewal to January, Salesforce is now able to…

• Influence your fiscal year budgeting conversations through proposals;
• Be flexible with payment terms enabling the ability for clients to use two fiscal budgets for a single subscription year; and,
• Have increased control over its own fiscal year budgeting, forward looking market statements, and investor relations.

Think about this…by placing their fiscal year end at January 31st, Salesforce now has a great excuse to say “Let’s renew early because we will be able to provide the greatest discount right before our fiscal year ends.” In most cases, Salesforce will naturally incentivize you to renew early with a January effective date. While this may seem like a no-brainer, we regularly advise all our clients to take advantage of this offer only when you forecast significant growth/decline in your account.

​The Difference Between a New and an Existing Salesforce Customer

‍It’s very important to understand that Salesforce treats new and existing customers very differently. Unsurprisingly, sales performance incentives are very different for both segments.New CustomersWhen you are negotiating your first purchase with Salesforce your rep is incentivized to sell you as much as possible. While this may seem like common sense it’s important to know that this particular incentive is extremely high. Since selling a new customer is always harder than a renewal, Salesforce designs its compensation structure so that reps see a significantly higher sales commission from new customer accounts.

• Watch out: Initial Footprint -Naturally, the larger initial footprint a software supplier has in your organization the harder it is for you (the client) to leave. No matter whether you hire an external advisor or conduct the negotiation by yourself please be cognizant of the fact there is a natural tendency to overbuy in the 1st year in the interest of capturing the “greatest discount.”
• Note: Based on customer demand, we will be writing a separate article specifically focusing on New Agreement Customers titled “Top 5 Tips When Negotiating a New Salesforce Agreement.”

​Existing Customers

‍The Salesforce machine has been developed in a way that promotes and incentivizes year-over-year growth in your account. This may be common sense to some, however, what you may not expect or realize is that prior to any renewal discussions from even occurring, Salesforce has already booked (planned for) a 10% increase in your account.

• What this Means - While you may be going into the negotiation wanting to keep the same rates or even reduce them, Salesforce has established a negotiation baseline that is 10% above your current budget. As we will discuss further in future articles, this increase may come in many different forms…some obvious and others not.‍
• Note: Based on customer demand, we will be writing a separate article specifically focusing on New Agreement Customers titled “Top 5 Tips When Negotiating a Salesforce Renewal Agreement.”

This is how Salesforce operates and is a standard expectation across all of its business lines. In other words, if Salesforce were to maintain the status quo on current rates and license counts (aka 0% increase), then your sales rep’s performance metrics would be negatively impacted.Subsequently, one of the worst scenarios for Salesforce is if your contract is reduced in anyway at renewal…even by one dollar. (Yes, we actually have a funny client story about this…)Even if you’re dropping a service like Pardot or Premier Support, Salesforce will automatically fight to get those funds reallocated to other licenses or add-ons (“lift and shift”). Salesforce incentivizes its sales reps to identify and execute these budget “lift and shift” opportunities at renewal time in underutilized accounts with nearly as much intensity as net new revenue.

​Understanding Salesforce’s Products and Services

‍Forgive our play on words here but what you must understand about Salesforce’s different products and services is that they are hard to understand. Many of our customers who have now been with Salesforce for 3, 5, 10+ years often complain “It seems like they keep changing the license tiers or product names. It’s just confusing and I don’t really understand why I am paying more for what seems like the same thing.”Once again, this is by design and taken right out of the Microsoft playbook.Think about it like this…Imagine your renewal comes up and you have been purchasing X product or service for the past 3 years. Your rep now conveniently informs you that “We have actually discontinued that specific product and it has now been rolled into product Y. You will maintain the capabilities of our legacy product X but with enhancements that will help you get more from the platform. As a result of these new enhancements your license cost has increased, the new price is Z.” Sound familiar?You were just thrown a curveball and suddenly are unable to compare apple-to-apples. Instead of focusing on the price of that new product, you are focused on what it is, and if this is a right fit. This is revenue generating distraction impacts both large and small customers.  Salesforce sales incentives vary by product and serviceIt’s important to understand that sales incentives vary across Salesforce’s different products and services. This is done for a variety of reasons but the most common example being new product/service introductions are typically incentivized with higher commissions. As a result, it is natural for sales reps to push new products to renewal customers.In addition to new products, high commissions are paid for “land grab” product/service lines. When we say “land grab” we mean a product or service that breaks Salesforce into a new department inside of your organization. A few common examples are:

• Pardot is a land grab into your marketing department; and
• Service desk is a land grab into your customer service department.

Salesforce fights hard to make these land grabs for a few key reasons:

1. It makes them stickier within your organization;
2. It gives them more contacts which creates further opportunities for their divide and conquer approach; and,
3. It gives them an entirely new department where they can land and expand organically.

Whenever you are considering offering up a “land grab” to Salesforce (expanding into different product lines, departments, etc.) please know you have a great negotiation opportunity. This leverage can be used to lower your overall total cost of ownership if navigated correctly.The Bottom Line
​The “Salesforce machine” is a brilliantly designed sales system. The first step to understanding how you can reduce your rates is to know what you are up against. A few key takeaways:

• Your reps do not know the true rates for comparable companies;
• The “Business Desk” is the only decision-making authority;
• The “Divide and Conquer” approach is the most commonly used, and most successful, sales tactic by Salesforce to drive sales growth;
• The Salesforce fiscal year ends January 31st. This enables the use of multiple fiscal year client budgets to fund growth;
• New and existing (renewal) customers are treated very differently and should use a completely different negotiation approach;
• Sales incentives vary by product and service. “Land Grab” products often carry a higher incentive as it expands their footprint in your organization.

Our goal with this article has been to educate you on the key points of how the Salesforce machine operates. Based on significant current and prospective customer requests, we will be writing additional articles that do a deep dive into the many facets of successfully negotiating with Salesforce.

Most companies are paying 20-50% more than they should be on their Microsoft contracts. In this article, we are going to walk through what you need to know about negotiating with Microsoft, as well as specific tactical levers you can use to reduce your Microsoft contract by up to 50%.

​8 Important things to note when it comes to negotiating your Microsoft contracts:

1. Your sales rep has two key drivers: to get your company to adopt Azure and to sell you an E5 license.
2. The Business Desk makes all of the final decisions regarding price, etc.
3. The Divide and Conquer approach is still the most common tactic to drive sales.
4. Microsoft’s fiscal year strategically ends on June 30th so they can capture multi-year budgets from their enterprise clients.
5. Putting a price cap on a specific product does nothing to ensure your company’s rates because Microsoft changes product SKUs so regularly that your price cap will be null and void the next time you go to negotiate.
6. Make sure that you have the appropriate affiliate language to ensure your entire company can use the products the right way.
7. Consider whether your company would benefit from a Microsoft Products and Services Agreement (MPSA)
8. If you’re switching from a Perpetual Agreement to an Office 365 contract, you have the opportunity to capture the lowest price you’ll ever receive from Microsoft.​

Is this article we'll cover all those points in depth so you can understand Microsoft's negotiation strategy.

What you need to know when negotiating with Microsoft

Microsoft has a footprint in nearly every established company in the world. The Microsoft Office Suite revolutionized the way we work since nearly the beginning of the internet. ​​​While the company has experienced both successes and challenges in its history, Microsoft has profited as a result of two primary factors: 1) a good product, and (equally as important) 2) a great enterprise sales team.​​We’ll spare you a history lesson about Microsoft here but it’s important to recognize and respect the strength of their first mover advantage and subsequent (now legacy) footprint. This history has allowed Microsoft to be a fast follower with adjacent technologies within the marketplace. In other words, Microsoft monitors new concepts and technologies in the marketplace prior to investing their own resources. This strategy has largely worked over the last two decades as Microsoft will simply build or buy a proven technology stack that has proven successful and plug and play into their existing customer base. Fast forward to present day, Microsoft Enterprise continues to be a fast follower within the marketplace. Their legacy footprint has allowed for continuous introductions of new technologies to their existing client base. Software as a Service (SaaS) solutions has significantly lowered the barrier to entry for new technologies to be introduced to their client base. This has created a new dynamic for Microsoft as it now employs tactics to eliminate competing technologies within its legacy client base. We will discuss these tactics in further detail within this article.

How Microsoft's pricing model has evolved

Up until 2011, Microsoft’s primary revenue stream originated from 1) net new technology sales and 2) maintenance fees. The new technology sales were largely on-premise meaning the software would be installed within a customer’s server environment. For those existing customers, Microsoft earned an 18% maintenance fee (calculated from the original purchase price) simply by pushing technology upgrades to the customer. This maintenance fee was largely recession proof as companies largely paid for upgrades thinking they were required but rarely ever installing the actual upgrade. As the market evolved into a SaaS based consumption model, Microsoft introduced Office 365 to drive predictable monthly revenue from their customers. This new pricing model has transformed its business and propelled its revenue. This evolution has allowed them to push adjacent SaaS services to their clients such as cloud storage, security services, etc. Because they are now training their clients to purchase software on a subscription model, it’s easier for Microsoft sales representatives to upsell other products. Knowing how a sales rep is incentivized and how they think will allow you to make the best decisions for your company and negotiate effectively. Through our active Microsoft negotiations across a wide variety of companies, we have a constant pulse on which products Microsoft is currently incentivizing. This can help you gain significant leverage in your negotiation.​

What is your sales representative's role in a Microsoft Negotiation?

Your Microsoft sales representative’s primary job is to gather as much intelligence as possible from your organization’s stakeholders in the interest of finding new products and services to push into your organization. On the contrary, your goal is often to control and/or reduce expenditures for your company. This means your intentions are automatically at odds. Based on the new dynamic landscape within the marketplace, Microsoft Enterprise is now focused on eliminating any competing solutions from their customer’s technology stack. As discussed previously, Microsoft’s acquisition strategy has largely been focused on those technologies which have developed a large footprint within their customers. Your Microsoft sales representative is highly incentivized to eliminate competing software from your environment and will make the case that you are able to achieve cost savings by simply eliminating these competing solutions. At face value this sound nice but in practice it’s rarely ever true without proper negotiation support. While there are some benefits to centralizing your technology through a single source, rarely is cost-savings one of those benefits. The cost savings presentation sounds well and good, but it often doesn’t lead to any actual value-capture benefits for companies. Instead, Microsoft gains a larger share of your technology stack and, with it, more negotiating power. We’re seeing this increasingly with the promotion of Azure, their cloud solution, Power BI, their analytics tool, and anything machine learning and/or artificial intelligence related. These priorities will change as new products are developed but the principles are the same. Within the last 2 years,  Microsoft (like Google and their G-Drive) has started to build technologies that are reliant on the Azure platform to work properly. This forces companies that were not originally interested in Microsoft Azure to introduce the capability into their environment. Microsoft is hoping that your storage requirements grows both organically and inorganically. Based on polling, we find that 87% of Microsoft customers expand their utilization of Azure within 2 years after the technology is introduced into their organization. This is complemented by the fact Microsoft, Amazon, and Google have made purchasing storage so simple and commoditized that anyone with the organization can do it. This is literally the ideal situation for Microsoft. From an Office 365 perspective, your sales rep will want to push you toward an E5 license. This is their highest tier license for enterprise customers. Naturally, this is also their most expensive product which drives the greatest sales incentive for your sales representative. ​To summarize, your sales representative’s top 2 priorities are:

1. Get your company to adopt Azure.
2. Get your company to purchase an E5 license.

What is the Microsoft ‘Business Desk’?

​​While your sales rep (i.e. “Account Executive”) and their management (i.e. “Vice President of xyz”) will be your primary point of  contact, they have very little decision authority once it comes to rate adjustments.. That’s where the “business desk’ comes in. Microsoft has been testing, validating, and refining this concept for years and they’ve got it down to a science. The ‘business desk’ is the Bad Cop to your seemingly accommodating sales rep’s role of Good Cop. The sales rep portrays a helpful, eager personality but they can’t finalize any decisions that actually affect your rates.  The business desk contemplates their options, makes decisions, develops the basic communication plan, and informs the sales reps next actions with you, the client. If you want to get the best rates possible for your company, you need to train your sales rep on how to interact with and communicate with the business desk on your behalf. With the right combination of messages and timing you can meet or exceed your negotiation goals.​

​They Will Try to Divide and Conquer

​The Divide and Conquer tactic is widely known as one of the oldest plays in every enterprise sales playbook. The tactic has been used for years across all industries as it continually proves to be successful in driving more revenue. Your Microsoft sales team will build relationships at multiple levels of your organization to learn more about the potential software needs of your organization than you do. They will use this information to introduce products and services to different levels of the organization to create buy-in and acceptance prior to any negotiation officially starting. If you are a sizable account with Microsoft ($1M+ per year) you will also have some executive attention within Microsoft. This team will naturally want to engage with your (the customer) executive team to “gain alignment.” While executive relationships between your two organizations is not always a bad thing, it’s important expectations are carefully managed so that your executive team doesn’t agree to products or services you may not actually need. It’s best to create a negotiation plan that includes how and when your executives will communicate with Microsoft (if at all). We have found that the large majority of our executive clients have an interest in participating in the negotiation. It’s important you include them in your communication planning so that they too can be empowered to participate within the guidelines you establish for them.  As for the rest of the organization,  drive alignment across all your stakeholders within your organization early and often. Make sure everyone is on the same page about your needs, your budget, and your forward-looking initiatives and business plans. You need to get clear on what you need and when you need it. If Microsoft is successful in their Divide and Conquer technique, they’ll tell you the answers to these questions and their answers will be an over-inflated version of what you would develop internally.​

Microsoft Contract Language Risk Mitigation

What is Microsoft's Fiscal Year?

​Like Salesforce, Microsoft does not follow the typical calendar year in the interest of accessing two corporate budgets. Microsoft’s fiscal year ends on June 30th of each year. They do this in order to split their software expense across two corporate budget years to capture 1) end of year funds and 2) new budgets from their clients before they spend it.

Quick Win: How to properly negotiate Price Caps

​Often we find clients have negotiated a price cap on specific products rather than on the total spend of the contract. While price caps are well intended by the client, the problem is that Microsoft literally invented the concept of price caps in the early days of enterprise agreements to overcome buyer reservations. Microsoft subsequently defeats these protections by simply changing product names and SKU numbers on a frequent basis. In other words, if you put a price cap on a specific product during your negotiation, that product will almost certainly have changed at the time of your renewal in 1, 3, or 5 years which effectively negates any protection intended by the customer. Instead of placing a price cap directly on defined products, we recommend you establish protection based on the total spend of your contract.

Affiliate Language

​Ensure that you have proper affiliate language in your contract. This means that multiple different subsidiaries of a company can use the same license versus having to have their own separate contracts. We’ve seen this trap laid in a few different M&A situations, specifically.

License Floors

​In the world of business, it’s common for software companies to acquire or divest business units on a regular basis. Especially with our private equity clients, adding or removing thousands of employees each month is not uncommon. Frequently, the contract will state that a certain amount of licenses allows for specific price reductions. With companies changing size and needing different licenses so frequently, this can be a problem. It’s important to create the lowest floor possible so that you aren’t hit with any penalties and avoid renegotiation triggers. ​

​Areas of Opportunity

As with our Salesforce negotiations, we help our clients determine both the Right Size and Right Price approach for their specific needs. While companies like Gartner provide a wealth of information with tactics and general rate benchmarking, we recommend narrowing down the data to determine which companies are your closest peers in terms of industry, size, AND annual spend.

Obtain Net New Products at Very Reasonable (or Free) Prices

​Showing interest in the incentivized products we mentioned earlier can reap huge rewards for your company. Use these products to drive cost savings within your core product baseline costs as well as to add new digital capabilities for little to no cost.

Don’t Over-License

​In order to know what software license type you require, you need to have a clear understanding of how different stakeholders within your company are going to use your various Microsoft products. Develop no more than five personas for your organization based on how you’re going to use the platform. These personas will inform your license strategy. Within our Right Size process we start by isolating the core functionality utilized by each persona and then matching that to the capabilities available within the various products. Using the Microsoft Office 365 Suite as an example, your Microsoft sales team will almost always recommend purchasing the E5 license for your organization as it offers the greatest capability, protection, etc (blah, blah, blah). Rarely do our clients ever need the E5 license (only 5% to be exact). In fact, most organizations don’t even use the full capability offered within E3. This is why it’s so important to develop specific personas based on utilization within your organization. In a perfect world, you would be able to assign different license types based on the unique demands from each of your personas. In other words, it’s very common for the output of our Right Size assessment to suggest E3, E1, and K1 (yes, there is such a thing) within a client’s environment in the interest of driving the lowest total cost of ownership (TCO) with the greatest digital capability. The simple act of selecting a lower license than the E5 (if appropriate) can save your company 60% or more. Another example of successful Right Sizing is the isolation of shared computers.  Within the manufacturing and healthcare industries, there are often shared computers that are available and used by multiple employees. Microsoft’s standard approach is to license each individual person in the company with an individual license. If you have shared computers, instead of licensing each individual you simply need to license each shared device. You can purchase a restricted use license with a desktop version for Windows and Office.  For example, Instead of five employees being assigned five individual E5 licenses, you now have a single low priced license that meets their needs. Another restricted-use license includes having an “email only” license for those that don’t need a computer but just want access to work email from their own devices. In other cases,  we’ve helped some clients realize they don’t need Office 365 at all and they can simply stay with their perpetual license. License types truly depend on the client and their individual needs.

Get an MPSA

​During your renewal you should  take an inventory of your multiple agreements (servers, office products, etc.) and explore the benefits and risks of combining under one agreement called the Microsoft Products and Services Agreement (MPSA). The MPSA acts as a parent to the child agreements for your individual products and services and makes for an easier and more streamlined contracting experience down the road for all involved. Historically, your Office products are on an Enterprise Agreement while the infrastructure products are on a Server & Cloud Enrollment (SCE) Agreement. The more you can consolidate and co-term your agreements, the more leverage you’ll have. You’ll be able to negotiate the entire consolidated contract with the “business desk” versus two or more separate, and distinct contracts.

What you need to know about converting from a perpetual license to a subscription based license (Office 365)

​​​If you’re converting from a perpetual license to an Office 365 contract, you have a huge opportunity to capture the lowest price point you’re ever going to get from Microsoft. This conversion is its own license - it has its own SKU. The reason for this is that you’ve already paid for a part of that license through your original perpetual license purchase. If properly negotiated, the cost for this conversion license should only be the difference between the upgrade cost (current version to new) and your original cost. Most Microsoft customers don’t know about this opportunity and let this massive cost avoidance opportunity slip through the cracks never to be seen again. For context, the price difference is about 50% and it will be realized year-over-year.  If properly negotiated, you'll reap continuous benefits from this opportunity.

FAQ's

‍What is the difference between Microsoft E1, E3, E5 licenses?

The difference between a Microsoft E1, E3, E5, and K1 license is in capability. The primary differences are:

• The number of Microsoft apps you can access;
• ​If you have download rights; and,
• If you can download the application (desktop version) versus online only (web browser access).

Microsoft Office 365 E1 is your “lowest” level license for the Microsoft Office Suite via web browser access.

‍Microsoft 365 E3 is your basic mid-level license which includes additional applications and allows users to download desktop applications. This by far the most common license for all enterprises. Microsoft 365 E5 is your highest level license which includes your core apps, download rights, and specialized apps like Advanced Threat Protection (ATP), etc. There are several other core licenses (suck K1, F1, Desktop Only, etc.) which can, and should, be used to lower your Microsoft spend. For most organizations, an E1 or E3 license will satisfy most of your end-users requirements. Can I mix E1, E3, and E5 licenses within a Microsoft contract?

Microsoft 365 E5 is your highest level license which includes your core apps, download rights, and specialized apps like Advanced Threat Protection (ATP), etc. There are several other core licenses (suck K1, F1, Desktop Only, etc.) which can, and should, be used to lower your Microsoft spend. For most organizations, an E1 or E3 license will satisfy most of your end-users requirements.

Can I mix E1, E3, and E5 licenses within a Microsoft contract?

While most companies who are longtime Microsoft users understand that you can mix several different products and services within an Enterprise Agreement, many aren’t aware of the fact that you can mix and match different license types for your core licenses as well.

In a well negotiated (and proactively managed) Microsoft contract, it’s very common for different persona groups to leverage different core licenses in the interest of Right Sizing™ your environment.

For example, a persona group in your company may use an E1 license, and then a different persona group (such as your IT department) may use an E5 license, depending on their use case.

If you are not mixing licenses at the moment, then you are likely paying for capability you don’t need for a subset of users who do not need the fully upgraded licenses.

How do you know what Microsoft license you need?

The easiest way to figure out what you need from a Microsoft license perspective is to hire an outside advisor to help you with that analysis.

It is much faster to hire someone who looks at licenses all day and can match up your needed capabilities with the ideal license type.

If you are going to do this yourself, the best way is to dive deep into the spec sheets on the license pages for each license on Microsoft’s website.

It is also very important to conduct a persona analysis inside of your organization if you have not already done so. This is a simple process.

1. Identify 1-5 personas within your organization who use Microsoft products. These would be different individuals who use Microsoft in different ways.
2. Identify the specific needs and wants of each persona group as it relates to Microsoft.
3. Match each persona’s needs and wants to the best fitting license type for that persona group.
   

This is part of our Right Size™ secret sauce at The Negotiator Guru and how we help our clients reduce their spend with Microsoft.

What does the Microsoft contract structure look like?

The Microsoft contract structure is a constantly changing evolution. Historically, Microsoft has had Enterprise Agreements, Master Service Agreements, and supplemental terms and conditions that are unique to a specific product set. Historically, these have all acted as individual contracts. What Microsoft has done over the last 3-5 years is rolled all of their contracts into the Microsoft Products and Service Agreement (MPSA). It is a contractual container for these existing MSA’s, EA’s, and supplemental terms and conditions.​What you want to do is be very careful when Microsoft is asking you to sign brand new agreements. More often than not, you are actually in a better contractual position by using your existing MSA’s, EA’s, and Supplemental Terms and then attaching that to the MPSA.

This is especially important because Microsoft is trying to move users to accepting online terms and conditions. While that may seem like a convenient aspect to contract management, with almost all of these online terms and conditions, there is a clause that allows them to change those terms and conditions at their will.

If this is not actively managed, changes within online terms and conditions can lead to unknown legal and/or commercial risk. We have many clients that engage us after they discover (either voluntarily or involuntarily) that they are out of compliance with their contract. The result can come in the form of an unbudgeted expense, lawsuit, and/or customer loss. 

This is why it is extremely important to memorialize your specific contracts with Microsoft as much as possible...you can still do so within the new MPSA structure.  

As you can see, contracts with Microsoft can quickly become complex which is why it is helpful to hire an outside advisor like The Negotiator Guru. Contact us today to discuss your Microsoft agreement. 

What Microsoft products give me leverage in my negotiation?

There are certain Microsoft products that give you leverage in a negotiation with Microsoft. The short answer is that any product or service they have recently introduced to the marketplace  (generally within the last 6 months) will provide amazing leverage for you.

The Microsoft sales team is highly incentivized to sell new products into existing accounts at renewals. 

What is the typical term of a Microsoft contract?

A typical term of a Microsoft contract ranges anywhere from 3-7 years. The most common is 5 years with multinational enterprise customers. 

For companies ranging from $5B-$15B in annual revenue, Microsoft will often do a lot of 1-3 year agreements. 

For companies under $1B, Microsoft will often structure annual or month-to-month contracts.

Can you renegotiate a Microsoft contract early?

Yes. When you renegotiate early it is called an “early commit.” That being said, it’s important to note that not every early commit contract will provide value for the end customer. It’s very important that you hire an advisor like The Negotiator Guru to help you analyze the cost/benefit analysis of a new deal. 

What are key risks of a Microsoft contract? 

There are numerous risks that Microsoft customers can experience depending on what their environment looks like both in size, scope, and geographic footprint. One of the most common risks for all customers is the ability for Microsoft to audit customers. This is very similar to other software providers such as Oracle, SAP, Salesforce, etc. For a specific assessment of your contractual and/or technical architecture risk you’ll need to leverage an advisory firm like The Negotiator Guru. 

To be clear, The Negotiator Guru does not provide 3rd party maintenance services like that of a Rimini Street but rather senior expert negotiation services. The two capabilities are very different and distinct.

Understanding Microsoft Audit Rights

Microsoft Audit rights typically emerge when you have any sort of restricted use license or on-premise architectural limitations. Related to the restricted use license, this is generally a custom made license for your company to serve a specific internal use case. These are negotiated licenses with Microsoft and can drive significant cost savings if used, and managed, correctly. 

If you as the client don’t have a software asset management team, or the equivalent responsibilities assigned internally, then there is an increased risk that you’ll be audited and fined. 

This audit risk typically comes up 6-8 months before your contract renewal. This is done by design by Microsoft to gather leverage for the upcoming renewal negotiation. In general, Microsoft will sometimes let audit compliance fees slip in exchange for new products and/or services within the customer’s renewing contract. Remember, this is largely driven by your account team who are highly incentivized to drive new product/service additions to the existing customer base. 

Another typical resolution for compliance risk will be a required license upgrade which in turn satisfies your account team’s desire to increase their revenue of your account as well.

Are payment terms on a Microsoft contract negotiable?

Yes. Payment terms are negotiable. 

Several years ago, Microsoft made a partnership with the banking sector to provide bridge financing. This makes it quite easy for a client to leverage payment terms of 180 days instead of the standard 30 days via their value added reseller (VAR). 

You have the flexibility on payment terms. Simply ask Microsoft for the flexibility, and they will put you in touch with one of their payment partners like PNC Bank. The Negotiator Guru also has finance partners that allow our clients to extend their payment terms for any software contract including, but not limited to, Microsoft.

Can you change payment terms on a Microsoft contract from annual to quarterly?

Sometimes is the appropriate answer here. Depending on your specific situation, you may be able to change your payment terms from annual to quarterly or monthly. 

Who has decision making authority inside of Microsoft and why?

There are multiple levels of decision making authority inside of Microsoft. That is purely by design. The decision making largely depends on the annual contract value of your new and/or prospect contract with Microsoft. Subsequently, the decision making rights change depending on if you are a new customer or a renewal customer.

For the purposes of a renewal, the primary decision maker is the business desk. This is a specific group inside of Microsoft that is meant to handle your renewal from end-to-end. 

The business desk is incentivized to keep your revenue flat as their worst case scenario. Your account team is presented with a 10% revenue growth target for each of their accounts. If they are unable to satisfy this target, they will refocus their energy on those accounts where there is growth opportunity. At such time, they will hand off the deal to their renewal team at the “business desk.”

The business desk is essentially a sales enablement team in the background supporting your account team and driving the deal from behind the scenes.

To bypass this, you should aim to incorporate the business desk as part of your negotiation. This helps eliminate the extra step of the business desk being separate from your deals and improves the outcome of your negotiation.

The other thing you can do to improve your negotiation, and achieve better decision making authority, is to require a sales executive sponsor from Microsoft to join in on your negotiation. For example, if you spend $5M+ per year with Microsoft, you should require an SVP from the sales organization within Microsoft to be part of your negotiations. 

With that type of connection, you can pass through a lot of back and forth and get to the bottom line much quicker. 

When you have a high level sponsor involved in the deal, this enables you to exchange value in different ways with Microsoft such as collaborating on white papers, case studies, or structuring deals to work with Microsoft's innovation team, or test new products. Having a high level sponsor enables all of these additional leverage points to be brought into a negotiation.

​The Bottom Line

​Microsoft has a deliberately designed sales process and most companies are so entwined in their products that they readily accept new subscription charges and upgrades without digging deeper into their specific needs.

Our goal here is to help educate you on the best practices for negotiating with Microsoft. If you have additional questions or want to see more articles like this - whether for Microsoft or other SaaS companies - let us know so we know where to prioritize our focus for future articles.

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“She has been a tremendous asset to our organization over the past year, and we're confident that she'll continue to guide us to even greater success in this expanded role. TNG has become a worldwide niche consulting firm due to outstanding talent like her.”​​Although women currently account for around 47% of the overall workforce, they remain largely underrepresented in the technology field, making up only 26% of all job roles and less than 10% of tech leadership positions. “With its deep pool of talent and global client base, TNG is positioned for growth,” said Hudson. “I am excited for the opportunity to help guide the firm into the next stage of its strategic development.” Hudson brings over 17 years of leadership and business operations experience from both the public and private sectors. She will be responsible for developing new business relationships, promoting products and services, and overseeing the firm’s internal operations to ensure overall client satisfaction. Hudson holds a Bachelor of Arts degree from the University of Louisville and a Master of Arts degree from Concordia University.

About The Negotiator Guru ​The Negotiator Guru (TNG) is a global technology consulting firm that provides industry leading IT contract negotiation services to clients around the world. Founded in 2015, TNG is recognized as the world leader in Salesforce contract negotiation services. In 2020, The Negotiator Guru ranked No. 15 on the Inc. 5000: Midwest Series and was recognized as the 2nd fastest-growing private company in the state of Minnesota. TNG is also ranked as one of the largest IT consulting firms in the Twin Cities by the Minneapolis/St. Paul Business Journal. For more information, visit www.thenegotiator.guru.