M365 Downshifting Strategy: Moving Users to Lower-Cost Plans

Downshifting Microsoft 365 Licenses When Roles Change

Organizations can significantly reduce IT costs by downshifting Microsoft 365 licenses when an employee’s role changes to one with fewer IT needs.

This practice ensures that each user has the right-sized license, avoiding unnecessary and expensive features while maintaining productivity and compliance.

The key is to proactively realign license tiers to actual user needs, which can yield substantial savings without disrupting business operations.

Read Eliminating Inactive or Duplicate Microsoft 365 Accounts.

Aligning Licenses with User Roles

Matching license tiers to user roles is crucial for effectively controlling costs. Not every employee requires a top-tier M365 E5 license – many can be equally productive with a mid-level or basic plan.

For example, frontline or support staff who primarily use email and Teams may only require an Office 365 E1 or Microsoft 365 F3 plan, rather than an E3 or E5 plan.

By developing clear license profiles for each role or department, CIOs can avoid a one-size-fits-all approach:

• Power users (e.g., data analysts, security officers) get advanced plans (E5) only if needed for analytics or security features.
• Standard knowledge workers utilize mid-tier plans (E3) for productivity and collaboration, opting for a streamlined approach that avoids unnecessary add-ons.
• Frontline and occasional users typically use basic plans (E1/F3) if they only need email or light use of Office applications.

This role-based tiering often reveals opportunities to downgrade high-cost licenses to lower-cost plans for a significant portion of users.

Many enterprises find they can downshift a large number of E5 users to E3 (or E3 to E1) without impacting productivity, resulting in immediate cost savings.

Identifying Candidates for License Downgrade

Effective downshifting starts with visibility into license usage. IT leaders should regularly audit Microsoft 365 usage data to spot users who are oversubscribed.

Key indicators that a user is a candidate for a lower-cost license include:

• Inactive or underutilized services: Users with E5 who never leverage E5-only features (e.g., Power BI Pro, Phone System, advanced security) are prime candidates for E3.
• Role changes or department moves: When an employee transitions to a new role (e.g., moving from a data-intensive role to an operational role), review their license needs promptly. Often, a demotion or lateral move can reduce IT needs.
• Low usage of premium apps: If audit logs indicate that a user rarely uses desktop Office apps or advanced compliance tools, consider a basic web-only license or a lower-tier license.
• Frontline conversion: Employees shifting from corporate office roles to frontline positions (or vice versa) may need a different license type (e.g., swapping an Enterprise license for a Frontline license for on-site workers).

Integrate this assessment with HR processes: for example, when HR records a role change, IT should automatically reevaluate that user’s license.

Some organizations establish license governance committees or implement automated workflows to regularly review and approve license downgrades, ensuring that no oversights occur.

Read Microsoft 365 E5 Value: Using Included Features Over Third-Party Add-Ons.

Process for Downshifting a License

Once you identify a candidate, downshifting (or downgrading) their license is a straightforward technical process, but it requires planning to avoid disruption.

Below is a typical step-by-step process:

1. Assess Requirements: Confirm the user’s new role and IT requirements. List which Microsoft 365 services they truly need versus the ones they can drop.
2. Select the New Plan: Choose a lower-tier plan that meets those needs. For instance, moving from M365 E5 to M365 E3, or from E3 to Office 365 E1. Ensure the new plan includes all critical applications the user needs (e.g., email, Office applications, Microsoft Teams).
3. Check for Dependencies: Before changing, verify if the user relies on any E5-exclusive features. If yes, plan alternatives (e.g., if they used Power BI Pro via E5, consider a standalone Power BI license after downgrade). Ensure that no compliance or security policies will be broken by removing advanced features.
4. Communicate Change: Inform the user (and their manager) about the license change and any visible differences (for example, they may lose the ability to download desktop Office if switching to a web-only plan, or certain analytics tools may be discontinued). This manages expectations and reduces helpdesk calls later.
5. Reassign License in Admin Center: Use the Microsoft 365 Admin Center (or your license management tool) to unassign the higher license and assign the new lower-cost license to the user. Microsoft allows license mixing in a tenant, so the user will seamlessly transition to the new subscription.
6. Monitor Post-Change: After downshifting, monitor the user’s access and productivity. Ensure they can do their job with the new license. If any necessary capability is lost, address it (perhaps by adding an add-on license or reverting if necessary).

From a financial perspective, if you’re on a flexible licensing program, you should also reduce the quantity of the expensive licenses you are paying for.

On a month-to-month subscription (e.g., via Cloud Solution Provider), you can typically decrease the E5 license count and add an E3 license immediately, resulting in a lower cost on the next invoice.

In an Enterprise Agreement (annual commitment), you might reassign that freed E5 to another user who truly needs it, and officially adjust (true-down) the counts at the next anniversary.

It’s crucial to follow through so that the cost savings materialize and you’re not still paying for unused high-tier seats.

Cost Impact and Savings Example

Downshifting licenses can yield substantial cost savings, especially at scale.

Microsoft’s enterprise plans have significant price differences that add up when multiplied across hundreds or thousands of users.

Below is a comparison of typical per-user monthly prices for common plans (USD):

Pricing note: These are approximate figures for annual commitment pricing, excluding add-ons. Actual enterprise pricing may vary depending on volume discounts or regional considerations.

Savings Example: If a user is downgraded from M365 E5 to E3, the organization saves approximately $20–$25 per user per month (~$240-$300 per year for that user).

At scale, this is significant – for instance, reassigning 100 users from E5 to E3 could result in annual savings of around $250,000.

Similarly, moving an E3 user to an E1 could save about $25 per month (E3 ~$34 vs E1 ~$8), though you’d typically do this only for users with very minimal needs.

One global firm, after a thorough audit, found 20% of their Office 365 licenses were unused or oversized and saved over $1 million in their next renewal by right-sizing those licenses.

These examples illustrate how proactive license management has a direct impact on the budget.

Contract and License Agreement Considerations

CIOs and CTOs must align their license downshifting strategy with their Microsoft contract terms to fully realize savings.

Key considerations include:

• Enterprise Agreement (EA) True-Downs: In an EA, you commit to a certain number of each license type for the year. You generally cannot reduce that number mid-term (only add via a true-up). However, at each anniversary, you have a true-down opportunity – a window to decrease license counts or switch users to lower SKUs for the next term. Mark this date and be prepared with updated counts. For example, reduce 200 E5 licenses to E3 at renewal to lock in the lower spend in the future. If you miss the window, you may be required to pay for unused high-tier licenses until the next year.
• Subscription (CSP or NCE) Flexibility: If your organization uses a Cloud Solution Provider (CSP) or Microsoft’s New Commerce Experience (NCE) subscriptions, note the commitment terms. Month-to-month subscriptions allow quick downsizing (with a slightly higher unit cost), whereas 1-year or 3-year subscriptions often lock you in — you can upgrade or add licenses, but not remove them mid-term without a penalty. One strategy is to place uncertain or flexible users on monthly plans, allowing for the downshifting or removal of licenses on short notice, while keeping stable users on annual plans for cost efficiency. Many enterprises use a mix: a core committed volume and a flex pool for fluctuating needs.
• Contract Negotiation for Flexibility: When negotiating your Microsoft agreement or renewal, seek clauses or programs that increase flexibility. Options include bridge licenses or temporary downgrade rights, or leveraging software assurance benefits. While Microsoft’s standard terms favor fixed commitments, enterprise customers can sometimes negotiate limited downgrade rights or shorter-term licensing for certain segments. Emphasize your need to adjust licenses when roles change or during reorganizations – sometimes Microsoft or a reseller can offer solutions (like promo SKUs, or via a Microsoft 365 E5 Security add-on on top of E3 instead of full E5 for some users).
• Compliance and Record-Keeping: Ensure that any license changes are well-documented. Update your internal license inventory and inform your Microsoft account team or licensing partner as needed. This avoids any compliance confusion in case of an audit or a true-up/true-down reconciliation. Always stay compliant: if you downgrade a user’s license but continue to use an E5-only feature for them without the proper license, that constitutes under-licensing risk. Therefore, ensure that the technical change in licensing is reflected in the usage rights.

By anticipating these contract nuances, you can execute license downgrades smoothly and capture the intended savings in your IT budget.

Mitigating Risks When Downgrading

While downshifting licenses is financially savvy, it should be done carefully to avoid operational hiccups. Here are potential risks and how to mitigate them:

• Loss of Critical Features: Downgrading means the user loses any advanced features of the higher license. Mitigation: Before changing, double-check if the user (or their team) relies on those features. If so, provide alternative solutions – e.g., if an executive no longer has an E5 with Teams Phone, consider assigning them a separate Phone System add-on with their E3, or ensure that another team member covers that functionality. Perform a pilot downgrade on a non-critical account to see if any functionality breaks unexpectedly.
• User Pushback or Productivity Impact: Users might notice the loss of desktop apps or advanced tools and raise concerns. Mitigation: Communicate with users about the reason for the change (“license optimization to reduce costs”) and emphasize that it shouldn’t impact their core work. Provide training or tips if their workflow changes (e.g., switching from desktop Outlook to web Outlook when transitioning to a web-only license). Often, if the user truly doesn’t need the feature, the impact is minimal once explained.
• Data or Storage Limits: Different licenses have different storage entitlements (mailbox size, OneDrive capacity) and data retention features. Mitigation: Ensure that downgrading won’t cause a user to exceed any new limits. For instance, Office 365 E3/E5 includes archive mailboxes and larger storage, whereas E1 is more limited in these areas. If a user’s mailbox exceeds E1’s limits, consider archiving or exporting old mail, or consider keeping it on E3 if necessary. Also, verify that compliance archives or litigation holds aren’t compromised; if they have Advanced eDiscovery on E5, ensure that any ongoing cases are handed over or completed.
• Security Considerations: An E5 license often includes advanced security (Microsoft Defender, etc.). Removing it could open a gap if you don’t have alternative protections. Mitigation: Coordinate with your cybersecurity team. If you downgrade someone who requires specific security features, ensure that you compensate by providing alternative tools or reassigning those security responsibilities. For example, if E5 threat protection is removed, the security team should verify that your standard E3 security, plus any third-party tools, are sufficient for that user’s risk profile.
• License Reassignment Management: In some cases, you’ll have leftover high-tier licenses (if you already paid for them through the term). Mitigation: Always reassign expensive licenses to other users who can benefit from them. This way, even if you can’t reduce the count immediately (due to contract), you’re getting value. Plan to eliminate the surplus at the next opportunity. Use a license management tool or script to keep track of unassigned or unused licenses, so none slip through the cracks.

By addressing these areas, enterprises can confidently downshift licenses, maintaining operational continuity while trimming unnecessary expenses.

Recommendations

Practical steps for CIOs and CTOs to implement effective license downshifting:

• Audit Licenses Regularly: Conduct quarterly reviews of Microsoft 365 license usage to identify users not utilizing their full license features. Use Microsoft’s admin reports or third-party tools to spot unused or underused licenses.
• Align License to Role Changes: Integrate license review into your employee lifecycle. Whenever an employee changes roles, departments, or status (e.g., from full-time to part-time), immediately evaluate whether their current Microsoft 365 (M365) license remains the best fit.
• Mix and Match License Plans: Don’t stick to a single license level for all users. Leverage Microsoft’s allowance for mixing E5, E3, E1, etc., within your environment. Tailor the license allocation so each user gets the cheapest plan that meets their needs – no more, no less.
• Leverage Flexible Licensing Models: Utilize CSP or subscription licenses for portions of your workforce where headcount or roles fluctuate. Keep a buffer of month-to-month licenses for new hires, temporary staff, or uncertain needs, which you can downshift or remove without waiting for an annual true-up.
• Plan for Renewal Adjustments: Proactively prepare for your EA true-down at each anniversary. Mark those dates and set internal deadlines to decide on license reductions or downgrades beforehand. This ensures you realize the savings from any rightsizing done during the year.
• Train IT and Managers: Educate IT support and department managers about license optimization policies. They should flag when an employee is unlikely to need an E5 or E3. Create a simple approval process for downgrades to avoid it being perceived as a bureaucratic hassle.
• Use Tools for Automation: Implement license management or software asset management (SAM) tools that can automatically detect inactive accounts or suggest optimal licenses for users based on usage patterns. Automation can also remove licenses from departed users instantly and notify if someone might be over-licensed.
• Negotiate for Flexibility: When discussing licensing with Microsoft or your reseller, emphasize the importance of flexibility in your negotiations. Aim to include terms that allow swapping or downsizing licenses at least annually without penalties. If direct downsizing isn’t possible in the short term, consider negotiating for shorter-term lengths or pooling licenses to avoid overpaying.
• Monitor and Communicate Impact: After any wave of license downshifts, report the cost savings and impact to leadership. This builds support for ongoing optimization efforts. Also, communicate to users organization-wide that IT is proactively managing licenses to avoid waste – this transparency can encourage cooperation and even self-reporting of unused services.

FAQ

Q1: Can we downgrade a Microsoft 365 license for a user at any time, or must we wait until our contract renewal?
A: You can technically change the license assignment for a user at any time in the admin portal (for example, switch a user from an E5 license to an E3 license). The user’s access will immediately adjust to the new plan. However, whether this immediately saves you money depends on your subscription model. If you’re on a monthly flexible subscription (like CSP month-to-month), you can reduce the E5 license count right away for a lower bill next cycle. Suppose you’re on an annual commitment (like an Enterprise Agreement or NCE annual plan). In that case, you’ll still be on the hook for the E5 license cost until the end of that term – you can reassign that E5 to someone else in the meantime, and then officially reduce the count (and cost) at the next renewal or true-up date.

Q2: How do we identify which users are over-licensed and good candidates for downshifting?
A: Start by reviewing usage reports in the Microsoft 365 Admin Center or your monitoring tools. Look for users assigned high-tier licenses (E5/E3) who have low activity or who don’t use the premium features of those licenses. For example, if an E5 user never logs into Power BI, never schedules Teams Voice meetings, and only uses email and SharePoint, they may be downgraded to E3. Additionally, work with HR and department heads: when roles change or during performance reviews, ask if the user’s IT needs have changed. Some organizations conduct periodic internal surveys or utilize automated scripts to identify accounts that haven’t used specific services (such as an E5 security feature) for 90 days or more.

Q3: Will users lose any data or emails if we move them from a higher plan to a lower plan?
A: Generally, no data is deleted during a license downgrade, but access to some data or features might change. When you remove a license that has certain features, the data associated with those features is usually retained for a period (or indefinitely) but becomes read-only or inaccessible to the end user. For example, if you downgrade from E5 to E3, any documents or emails remain intact. However, if the user was using a feature like Advanced eDiscovery or a 100 GB mailbox archive (available in E3/E5) and you drop them to a plan without it, they may lose access to that archived content or go over quota (though the content isn’t deleted immediately; you’d need to export or reduce mailbox size). Always backup critical data and inform the user of any functional limitations after the switch. In practice, core data (emails, files, chats) will remain as long as the new license still covers those services – it’s the extra capabilities that vanish.

Q4: What’s the typical cost difference between an E5 and E3 license, and is it worth the hassle to downgrade for, say, 50 users?
A: The cost difference is significant. An M365 E5 license is approximately $55 per user per month, whereas an M365 E3 license is around $32–$34 per user per month (rough figures). That’s about a $20+ difference per month for one user (nearly $250 per year each). For 50 users, that’s on the order of $12,000+ saved annually by moving them from E5 to E3 – certainly not trivial. If those 50 users truly don’t need E5 features, that money can be better spent elsewhere. Even downgrading from E3 ($34) to E1 ($8) saves around $26 per user per month, although E1 is quite limited, so this is usually only viable for specific users. The savings multiply with scale; plus, it’s not just about cost, it’s also about not paying for unused capabilities (which is a waste). Most CIOs find that after an initial effort to optimize licenses, the ongoing maintenance (keeping licenses right-sized) is not too burdensome and yields continuous cost avoidance.

Q5: How can we make license optimization (like downshifting) an ongoing practice rather than a one-time project?
A: To make it sustainable, embed it into your IT operations and policies. Set up a license management policy that outlines when to review licenses (e.g., monthly reports, quarterly deep-dives, and during any role change or offboarding event). Use automation wherever possible – for instance, some companies integrate their identity management or IT service management systems with Microsoft 365, so that when HR flags a role change, a workflow suggests the appropriate license changes for IT to approve. Regularly report on license usage and costs to stakeholders to keep them informed and updated. You can also establish accountability by assigning a team or manager to own license optimization. Finally, keep communication open – let employees know that IT will adjust software access according to needs, and encourage managers to request downgrades if they realize a team member has more than they require. When optimization is built into your processes (like asset management and budgeting), it becomes a continuous improvement activity rather than a one-off sweep.

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