Microsoft Licensing: Get Smart!

Surely there is some hidden meaning to Forrester Research releasing a new Microsoft licensing report the same day the movie "Get Smart" opens.

"Successfully Negotiating Microsoft Licensing Agreements" doesn't mention the movie, but it should. Because many Microsoft customers are either Maxwell Smart or Agent 99. The bungling Smart might get a good deal by accident, but it's Agent 99 who is all business and the shrewder operator.

Timing is important for another reason. It's the time of year when the most licensing agreements are up for renewal, through July 31, particularly.

Report authors Duncan Jones and Christopher Voce are clear that negotiating licensing with Microsoft can be arduous, in part because of the "unique terminology, complex pricing structure and rapidly changing product portfolio" that "can confuse unprepared negotiators." They emphasize that "preparation is key to success."

I won't review all, or even most of, the report's contents. Forrester charges clients for reports. It's not my place to give away all the contents for free. From Forrester's report and my own research, I want to provide four things enterprises must be aware of when negotiating Microsoft licensing renewals.

Microsoft negotiates aggressively, and not necessarily fairly. Fair is a subjective term. What seems fair to you might not seem fair to Microsoft. To Microsoft, fair starts with getting paid for every single license, and the company is quick to use noncompliance as a negotiating tactic.

Enterprises must make sure that every single license is accounted for before sitting down with Microsoft reps to negotiate new contracts. The report authors warn: "Companies that own up to noncompliance will see some flexibility, while those that try to hide it from Microsoft can lose some significant potential discounts or concessions."

True, maybe, but the better position is assured full compliance and ability to negotiate from strength. Because of an enterprise's potential legal liability, Microsoft can use noncompliance, even admitted, to gain concessions. Get smart. Be compliant.

Last-minute negotiations can weaken bargaining. Some businesses are disorganized or simply waiting, hoping to pressure Microsoft into cutting a better deal. But time is two-edged. The report authors explain: "Some reps may even try to use your deadlines against you, forcing you to sign suboptimal deals because you can't afford to let [Software Assurance] lapse or delay a major project."

Get smart. Plan ahead, but don't be hostile. The report authors warn: "Buyers should not let the negotiation become overly adversarial by assuming that Microsoft is out to mislead or bamboozle them with artificial complexity." Let Microsoft make the mistakes, not you.

Microsoft wants you to buy as much as it needs. Most enterprises upgrade, at best, on three-to-five year cycles. But long upgrade cycles aren't good for Microsoft's bottom line. The company wants recurring revenue from annuity contracts—and that means Software Assurance added onto Open or Select agreements or paying for Enterprise Agreement.

Bottom line: Software Assurance requires an extra-cost commitment, annually, 29 percent of the desktop software cost and 25 percent for server products, typically for three years. The break-even point is three-and-a-half years. After that, it's cheaper paying full price. Microsoft provides incentives, like support and training, to attract annuity contract sales, which won't suit enterprises only interested in discounted software.

That said, Microsoft has aligned product cycles with annuity contracts. Some enterprises may want a product's interim version, or what Microsoft calls "R2." Software Assurance customers get the software for free. Everybody else pays.

Get smart. Only buy as much software upgrade protection as needed.

Microsoft wants to help you buy more of its stuff. Both sides benefit when the enterprise thinks in terms of the big picture. From the Forrester report:

Successful Microsoft contract negotiations go beyond the line item costs and consider the additional consulting and support services available. For example, if a sourcing team's organization is embarking on a Vista migration, Microsoft might be willing to throw in discounted planning services and training—items that could have a material impact on the overall IT budget.

Get smart. Identify products you need that Microsoft really wants to sell. Vista's not doing well, so it's a good starting point for deals that ease deployment costs or acquisition of supporting software. Enterprises can expect Microsoft dealmaking for SharePoint Server 2007, Windows Server 2008 and Hyper-V. Any company even considering virtualization deployments should negotiate hard for planning, deployment and training services.