How to Optimize Microsoft 365 Licensing for Cost and Usage
Introduction: Microsoft 365 (M365) is a cornerstone of enterprise IT, but it can also become a budget drain if licenses are not optimized. Many organizations overspend on M365 by paying for subscriptions that users don’t fully utilize.
Analysts estimate companies can trim roughly 20–30% of their M365 spend by eliminating underused, duplicate, or oversized licenses.
This article, part of the “CIO-Level Playbook: Evaluating Microsoft Renewal Proposals (EA, MCA, CSP)”, offers strategic guidance for CIOs and SAM professionals on trimming M365 licensing waste while still providing users the tools they need.
Identify and Eliminate License “Shelfware”
The first step is visibility. Conduct a thorough audit of your M365 environment to spot:
- Inactive or Orphaned Licenses: accounts belonging to former employees or test/deprecated accounts that no longer log in. Cancel or reassign these licenses immediately to stop pure waste.
- Underused Premium Licenses: users on expensive plans (e.g., E5 or E3) who only use basic services (email, Office apps) and don’t leverage the premium features. These users are prime downgrade candidates – moving them to cheaper plans won’t hurt productivity.
- Over-allocation: cases where you’ve purchased more licenses than needed “just in case.” For instance, if you bought 1000 E3 licenses but only 900 are assigned, 100 licenses (10%) are paid for but sitting idle.
One company’s internal audit revealed that nearly 50% of its E5 licenses were not being fully utilized, translating to millions in unnecessary spending. By removing or reallocating such “shelfware,” organizations can save substantially. Make license audits a routine (e.g., quarterly) practice so unused licenses are continually purged.
Right-Size User Plans Instead of One-Size-Fits-All
Ensure each user has an appropriate M365 plan – no more, no less:
- Align to User Roles: Define user profiles (e.g., Frontline Worker, Standard Office User, Power User) and assign the lowest-cost license that meets each profile’s needs. Frontline or light-use staff might only need an Office 365 F3/E1 plan (email and web Office apps), which is far cheaper than E3. Standard knowledge workers often do fine with E3 or Microsoft 365 Business plans. Reserve E5 (or add-ons like Power BI, Phone System, etc.) for the subset of users who truly require those advanced features.
- Mix and Match Licenses: Avoid giving everyone the same high-end license just for simplicity – that convenience comes at a high price. It’s often optimal to maintain a mix of licenses. For example, a mid-market firm moved 30% of its employees from E3 down to E1 after discovering that many only used email and Teams. It also reserved E5 only for 10% of staff needing those capabilities. This targeted approach cut their M365 costs by 20% without impacting productivity.
- Review New Feature Usage: When Microsoft rolls out new high-value features (like advanced security or Power Platform tools), they often require premium licenses. Monitor who uses these features. If only a small subset of users benefit, not everyone should be upgraded to a higher SKU—consider per-user add-ons for those who need them rather than enterprise-wide E5.
Read Managing Azure Spend and Commitments in EA, MCA, and CSP Agreements.
Enforce Strict Offboarding and License Reuse
A disciplined joiner/mover/leaver process prevents licenses from lingering unused:
- Reclaim Departed Users’ Licenses: Implement a process (ideally automated via your identity management system) to remove or reassign an M365 license as soon as an employee leaves. Many companies pay for dozens of former employees’ accounts simply because deprovisioning didn’t happen. Plugging this hole provides immediate savings.
- Reallocate for Role Changes: Review their license needs when individuals change roles or projects end. If a power user with E5 moves to a role that doesn’t need those features, downgrade them at the next opportunity. If a contractor or temporary project user leaves, reuse that license for the next hire instead of buying new. M365 makes it easy to reassign licenses — use that flexibility to avoid license creep.
Having a clear owner for license management and regular checks tied into HR offboarding ensures you only pay for active, needed users.
Leverage Tools and Analytics for Ongoing Optimization
Managing licenses at scale is challenging without tooling. Leverage available analytics:
- Microsoft 365 Admin Center Reports: Regularly review usage dashboards (active users per service, last activity date). These quickly highlight overspend areas — for instance, a set of users with E5 who haven’t used any E5-exclusive feature in six months is low-hanging fruit for optimization.
- Specialized Asset Management Tools: Consider third-party tools (e.g., CoreView, Quest, AdminDroid) that automate license monitoring and provide optimization recommendations. These can flag scenarios like “15% of your E3 users have usage patterns suited to E1” or identify duplicate and unassigned licenses. Some even enable automatic deprovisioning of licenses for inactive accounts, saving IT time.
- Transparency and Chargeback: In larger organizations, show business unit leaders the cost of their team’s licenses. This transparency often motivates them to ensure only the necessary licenses are assigned. When department managers see, for example, that they’re spending $50,000/year on M365 licenses, they’ll be more inclined to help identify unused accounts or approve downgrades for low-usage employees.
Continuous monitoring means optimization isn’t a one-time project — it becomes a way of life in managing your cloud assets. And as your Microsoft renewal approaches, you’ll have current data ready to inform your negotiations.
Use Independent Licensing Experts to Maximize Savings
Microsoft’s sales teams are incentivized to upsell, so it’s wise to get an unbiased second opinion on big renewals. Engaging an independent Microsoft licensing consultant can pay for itself by uncovering hidden savings and securing better terms.
These experts audit your usage for inefficiencies, benchmark your deal against industry standards, and help counter vendor proposals with data-driven alternatives. By leveraging such independent advisors during negotiations, many organizations achieve 15–30% cost reductions in their Microsoft agreements.
Recommendations for CIOs and SAM Leaders
- Base Decisions on Usage Data: Analyze actual usage metrics before any Microsoft renewal or true-up. Let data reveal which licenses you need more and which you can drop. This prevents overbuying and gives you evidence from which to negotiate.
- Establish License Governance: Create internal policies for license assignment (e.g., default to E3 or lower unless there is a business case for E5) and a process for regular license review. Managers should know these policies so everyone understands that licenses aren’t “free” resources.
- Start Renewal Prep Early: Don’t wait until the last minute. Begin planning for an EA or Microsoft 365 renewal 6–12 months ahead. Use that time to optimize your current usage and decide your ideal future state (perhaps fewer E5s, or shifting certain workloads to CSP/MCA for flexibility). Early groundwork often translates into a smoother, more favorable negotiation.
- Leverage Independent Advisors: Consider hiring an independent licensing consultant to support your negotiation team, especially for large or complex contracts. They bring specialized insight and can often secure concessions or identify cost-saving options that would be missed if you rely only on Microsoft’s guidance.
Conclusion:
Optimizing M365 licensing is one of those rare IT initiatives that can reduce costs while maintaining (or even improving) user service. By eliminating wasted licenses and aligning each user with the right subscription level, organizations typically find substantial savings that drop straight to the bottom line.
Equally important, this discipline controls IT leaders’ Microsoft spending. When it comes time to evaluate a Microsoft renewal proposal—an EA, MCA, or CSP deal—you’ll enter negotiations with hard data on what you need and a firm resolve against unnecessary upsells.
In short, a proactive license optimization strategy, coupled with independent expert advice when needed, ensures you get maximum value from Microsoft at the lowest possible cost.
Read more about our Microsoft Negotiation Service.
