Microsoft License Optimization & EA Right-Sizing

Microsoft License Optimization & EA Right-Sizing

Introduction – Why Microsoft License Optimization Matters

Microsoft Enterprise Agreement (EA) renewals are among the largest IT spend events for organizations. Without Microsoft license optimization, enterprises often overpay for “shelfware” – licenses and premium features that aren’t being used.

Microsoft’s sales teams will push premium bundles (like E5 for everyone) in the name of security or productivity, but this can lead to costly over-licensing if not all those features are needed.

Right-sizing your EA means aligning licenses and cloud commitments to actual usage, ensuring you only pay for what delivers value.

The benefits of EA right-sizing are twofold: cost reduction and leverage.

By eliminating waste and optimizing license levels, companies typically reduce Microsoft licensing costs by 15–30% (recovering budget that was previously being drained by unused services).

Just as importantly, trimming the fat from your Microsoft 365 and Azure spend puts you in a stronger position at the negotiation table.

You can approach Microsoft with hard data to secure a better deal, rather than accepting a bloated renewal on Microsoft’s terms.

In short, proactive optimization turns a routine renewal into an opportunity to reduce Microsoft EA spend and lock in a more favorable agreement.

Understanding the Microsoft EA Structure

A Microsoft Enterprise Agreement is a 3-year contract that covers licensing for products like Microsoft 365 (Office, Windows, EMS), and often Azure cloud services.

EA pricing is typically per user (for Microsoft 365 plans) or per consumption (for Azure), and you true-up annually for any added usage.

However, you generally cannot true-down mid-term – once you commit to a certain number of licenses or a cloud spend, you’re stuck with that commitment until the EA renewal.

This structure makes it easy to over-commit and over-license if you’re not careful.

Common EA Over-Licensing Pitfalls:

• Oversized license tiers: Assigning too many users the expensive Microsoft 365 E5 license when a lower-tier (like E3) would suffice. E5 can cost ~60% more than E3, so blanket upgrading everyone to E5 “just in case” causes significant overspend.
• Cloud overcommitments: Committing to more Azure cloud spend than the organization actually consumes. For example, paying for a $1M/year Azure commitment but only using $800k means 20% of that spend is wasted.
• Inactive or duplicate accounts: Paying for inactive user licenses – e.g., accounts of former employees or users who never log in. These idle licenses provide zero value but continue to incur costs until reclaimed.

Over a 3-year term, these issues compound and can turn an EA into a budget trap.

Microsoft’s recent pricing changes have also removed automatic volume discounts for large customers, meaning that without negotiation, you could be paying full list price even at high volumes.

The good news is that each of these waste areas is avoidable. By understanding your current usage and needs, you can systematically identify where you’re overspending and set the stage for the optimization steps that follow.

Step 1: Conducting a Microsoft 365 License Audit

The first step in EA right-sizing is a thorough Microsoft 365 license audit. You need a clear picture of what you have versus what you actually use.

This internal audit will uncover inactive licenses, misallocated license tiers, and underutilized services:

• Gather usage data: Pull detailed usage reports from the Microsoft 365 Admin Center and Azure Active Directory. Identify which users are active and which services they use (Exchange, Teams, SharePoint, Power BI, etc.).
• Spot inactive and duplicate accounts: Cross-check assigned licenses against active users. Often, you’ll find accounts for employees who have left or duplicates/test accounts – all still consuming licenses. Each of these is low-hanging fruit to eliminate or reassign.
• Analyze feature adoption: For users on premium licenses like E5, check the usage of E5-only features (advanced security, compliance tools, Teams Phone, Power BI Pro, etc.). If a user with E5 isn’t using any of those advanced features, that license is a prime downgrade candidate. Similarly, find any expensive add-ons or products (Power BI, Visio, Dynamics modules) with very low adoption rates across the user base.
• Review Azure consumption: If your EA includes Azure, document how much of your Azure monetary commitment you’re actually consuming. Compare cloud usage against what you’re paying for – this will be important when optimizing Azure in a later step.

Ideally, perform this audit 6–12 months before your EA renewal, so you have time to act on the findings. By the end of the audit, you should have a list of users who can be downgraded to cheaper licenses (or removed entirely) and a sense of any cloud overcommitment. This data is the foundation for all upcoming optimization efforts.

Checklist – Audit Readiness:

• ✓ Pull the latest usage and adoption reports from the M365 Admin Center (users, activity by service).
• ✓ Reconcile license assignments against active employee lists; flag any assigned licenses for users who are inactive or duplicated.
• ✓ Identify workloads or features with <20% adoption (e.g., advanced security, analytics) to pinpoint potential E5 downgrades or removable add-ons.
• ✓ Document Azure usage vs. Azure credits/commitments in the EA to see if you are over- or under-consuming your cloud spend.

Step 2: Right-Sizing Microsoft 365 Licenses

With audit data in hand, the next step is to right-size your Microsoft 365 licensing.

This means aligning each user’s license tier with their actual needs.

Many organizations find they have been paying for far more capability than required, especially with Microsoft 365 E5 suites.

Key tactics to optimize your Microsoft 365 license allocation include:

• Downgrade E5 users to E3 where appropriate: Not everyone needs the top-tier E5. Identify users who aren’t utilizing E5’s advanced features and switch them to Microsoft 365 E3. E3 provides the core productivity tools most employees need at a much lower cost. This single change can save around 30-40% per user.
• Use add-ons instead of full E5: For the smaller subset of users that do need one or two advanced features (e.g., advanced security or compliance), consider keeping them on E3 and purchasing specific add-on licenses for those features. Microsoft offers standalone add-ons (for example, an E5 Security package or Power BI Pro) that cost a fraction of an entire E5 suite. This à la carte approach avoids paying for the full E5 bundle when only a couple of extras are needed.
• Leverage Frontline (F1/F3) licenses for light-use employees: Many part-time, frontline, or deskless workers don’t require the full Office desktop apps or 50 GB email mailboxes. Microsoft 365 F3 (and F1 for very basic needs) are significantly cheaper plans tailored for these scenarios (web/mobile-only apps, smaller mailbox, Teams communication). Shifting a portion of your workforce from E3 to F3 licenses can cut costs by 50% or more for those users, with minimal impact on their day-to-day work.

By implementing these adjustments, organizations can often eliminate a significant portion of unnecessary expenses. You’re essentially removing or downgrading the over-licensed seats.

The following table illustrates a few right-sizing scenarios and their potential savings:

License right-sizing examples: In this example, downgrading a light-use sales employee from an E5 to an E3 (with a targeted security add-on) can save roughly a third of that license cost.

Moving a frontline staffer from E3 to an F3 license can cut the cost in half. And of course, reclaiming licenses from departed users yields a 100% saving on those units. Multiplied across hundreds or thousands of seats, these optimizations translate into millions saved over the EA term.

Crucially, right-sizing doesn’t mean taking away tools that employees truly need – it means avoiding overpaying for features people don’t use.

By tailoring license levels, you still empower users with the software they require, while trimming off the excess.

And if a specific user or role does genuinely need an advanced feature (say, Power BI or phone system capabilities), you can provide it via an add-on without giving that user a blank-check E5 license. This targeted approach maximizes value and minimizes waste.

Step 3: Optimizing Azure & Cloud Spend

Microsoft EAs often include Azure cloud commitments, which can be another area of overspend if not optimized.

Just as with licenses, you’ll want to right-size your Azure consumption commitments to avoid paying for capacity you don’t use:

• Align Azure commitments with actual usage: Compare your Azure committed spend (the amount you agreed to pay annually or over 3 years) with real consumption. If you consistently consume much less than your commitment, you’re essentially prepaying for unused cloud services. In that case, plan to reduce your Azure commitment at renewal to a realistic level. Conversely, if you often exceed your commitment and pay extra at higher rates, negotiate a larger commitment (with discounts) to cover your true usage at a lower unit cost. The goal is to eliminate overpayment, whether from over-committing or under-committing.
• Negotiate flexibility for cloud workloads: Seek terms that allow some reallocation or adjustment of Azure resources as needs change. Microsoft offers programs like Azure Reserved Instances and Savings Plans that provide 20–60% discounts for committing to specific resources (VMs, databases) over 1-3 years. Use these for steady workloads to save money. Also, negotiate the ability to exchange or modify reservations if your requirements shift (Microsoft does allow exchanges/cancellations for reservations in some cases). Flexibility can also mean structuring part of your Azure spend through more flexible channels – for example, using a Cloud Solution Provider (CSP) for certain projects or excess needs. CSP is month-to-month, so it can handle variable or experimental workloads without locking you into a 3-year commitment. By mixing EA and CSP, you ensure you’re not stuck paying for unused Azure capacity during lulls.
• Benchmark Azure discounts and terms: Come into the renewal discussions informed about market benchmarks. Microsoft has room to negotiate on Azure pricing and credits, especially if they know you’re comparing options (or considering shifting workloads to AWS/Google). Ensure any Azure commitment in your EA is coupled with a competitive discount or incentive. For example, if similar enterprises are getting, say, a 5-10% Azure consumption discount or some free credits, use that data to push for a better deal. Additionally, try to negotiate rollover of unused Azure credits if possible (so you don’t forfeit the budget you’ve paid for). Even if Microsoft can’t directly roll over cloud spend, simply reducing the commitment in the future to match actual usage will prevent future waste.

Optimizing your cloud spend goes hand-in-hand with license optimization. Every dollar of Azure not wasted is a dollar you don’t have to give to Microsoft in your EA.

By tightening up cloud usage and commitments now, you not only save on the cloud bill, but you also set a more efficient baseline for your next EA term.

Step 4: Negotiating EA Right-Sizing Terms

After cleaning up your license allocations and cloud commitments, the final step is to negotiate your EA renewal with these optimizations in mind.

Use your audit findings and right-sizing plan as leverage in the negotiation – you have data to justify a leaner, more cost-effective agreement.

When entering talks with Microsoft (typically well before the EA expiration), focus on securing terms that lock in your savings and give you flexibility.

Key negotiation levers and strategies include:

• Leverage your usage data: Present Microsoft with the facts from your audit. Clearly communicate: “We have X number of users who don’t need E5, Y number of unused licenses to cut, and Z amount of Azure spend we won’t renew.” This data-driven approach makes it difficult for Microsoft to argue for the status quo or push unnecessary additions. It flips the conversation – instead of you defending a reduction, Microsoft has to justify any license they want you to keep or add beyond your demonstrated needs.
• Push for true-down rights: A standard EA locks you into a set quantity for 3 years (you can add licenses mid-term, but not remove them). However, you can negotiate true-down provisions, allowing you to reduce certain license counts during the term or at least at the anniversary. For example, if your company undergoes layoffs or divests a business unit, a true-down clause would let you decrease those licenses instead of paying for unused seats until the contract end. Even a one-time reduction or the right to drop a percentage of licenses can protect you from unforeseen downturns. Microsoft may not advertise this, but savvy customers with leverage have added such flexibility in their agreements.
• Cap future price increases and add-ons: Insist on price protections so later changes don’t wipe out your savings. This includes locking in pricing for the entire EA term or capping any year-over-year price uplift. Make sure any additional licenses you might add mid-term will honor the same discounts/rates. Also, be wary of Microsoft trying to bundle in new pricey add-ons at renewal (for example, new AI features or security products) – negotiate those separately and only if you truly need them, rather than letting them inflate the whole agreement cost.
• Embed license flexibility clauses: Negotiate the ability to swap or adjust license types as your needs evolve. For instance, you might want the option to convert a certain number of E5 licenses to E3 mid-term if usage patterns change, or to substitute one product for another of equivalent value. Similarly, seek an early termination or step-down option for specific products that could become redundant. (Imagine you licensed a standalone product that later gets replaced by new Microsoft functionality or a third-party solution – you don’t want to pay for it for years after it’s obsolete.) The more flexibility you can bake into the EA terms, the less risk of overspend down the road.
• Maintain competitive leverage: Throughout negotiations, subtly remind Microsoft that you have options. Microsoft will fight to retain your full spend – especially knowing their account teams are incentivized to grow your renewal value – but you can leverage timing and alternatives. Engage in talks 9+ months before renewal and align with Microsoft’s fiscal year-end if possible, when they’re eager to close deals. And if Microsoft isn’t accommodating, be prepared to shift some deployments to other licensing channels (like CSP or even rival platforms) to achieve the needed cost control. Demonstrating that you’re willing to walk away from unnecessary products or costs is often the strongest bargaining chip to get concessions on price and terms.

By approaching the renewal as a buyer with a clear plan (rather than simply accepting Microsoft’s quote), you can negotiate an EA that reflects your right-sized environment.

All your optimization work – removing shelfware, downgrading licenses, trimming Azure commit – now pays off in the form of a leaner contract.

The result should be an agreement with only the licenses you need, at the best possible price, with safeguards against future overpaying.

Step 5: Continuous License Optimization Practices

Right-sizing isn’t a one-time project – it should become an ongoing practice.

Enterprise needs and usage patterns change constantly, so continuous license optimization is essential to avoid creeping overspend between renewals.

Here are some practices to bake into your IT asset management and governance processes:

Regularly review usage vs. entitlements (e.g., quarterly or biannually). Don’t wait until the EA is almost up – run usage reports for Microsoft 365 and Azure periodically to catch any new shelfware.

For instance, if you deployed a new product (say, a Power Platform tool or Viva module) and adoption is low after a few months, that’s a signal to scale back licenses or not renew that component. Similarly, monitor Azure spend trends monthly against forecasts so you can respond if consumption drops or spikes unexpectedly.

Make license adjustments part of routine operations. When an employee leaves or a project ends, ensure their licenses are promptly reclaimed or reallocated.

When roles change, adjust their Microsoft 365 license tier accordingly (e.g., if a power user moves to a less data-intensive role, consider downgrading from E5 to E3).

By reassigning or downgrading underutilized licenses proactively, you prevent waste from accumulating. Some organizations establish an internal license manager or use automation tools to flag inactivity and enforce these optimizations continuously.

Finally, maintain executive visibility into licensing costs and usage. Incorporate license and cloud spend metrics into IT finance reviews. This keeps cost optimization on the radar year-round and builds a culture of accountability for software usage.

When it’s time for the next renewal, you’ll be in great shape – with clean, right-sized usage data and a history of optimization – rather than scrambling to identify savings at the last minute.

Continuous oversight ensures that Microsoft license optimization is not just a project before renewal, but a sustained effort that maximizes value from your IT investments.

Checklist – Microsoft EA Right-Sizing Actions:

• ✓ Audit current license usage vs. purchased quantities to identify excess (ongoing and before each renewal).
• ✓ Downgrade or remove unused Microsoft 365 E5 licenses (eliminate paying for premium features no one uses).
• ✓ Shift frontline and part-time staff to M365 F3/F1 licenses if they don’t require full desktop apps.
• ✓ Optimize Azure commitments to match actual consumption and eliminate overpaying for unused cloud resources.
• ✓ Negotiate flexibility into your EA – e.g., true-down rights, price locks, and the ability to swap or drop licenses as needed.
• ✓ Establish a continuous monitoring process (quarterly checks on license and cloud usage) so you maintain an optimized licensing footprint throughout the EA term.

Related articles

• Eliminating Shelfware: How to Cut Unused Microsoft Licenses Before Your Renewal
• Eliminating Redundant Microsoft Software: Stop Paying Twice for the Same Functionality
• E5 vs E3: Right-Sizing Your Microsoft 365 Licensing to Cut Costs
• Optimizing Microsoft 365 Subscriptions: Beyond E5 vs E3 – Getting the Right Mix
• Auditing Your Microsoft License Usage: A Step-by-Step Guide to Find Savings

FAQ – Microsoft License Optimization & EA Right-Sizing

Q: How much can right-sizing actually save?
A: It depends on how over-licensed you are, but enterprises often save on the order of 15–30% of their Microsoft costs. This comes from downgrading unused E5 licenses, eliminating idle accounts, and trimming excess cloud spend – savings that can amount to millions over a 3-year EA.

Q: Can we reduce (true-down) our license counts mid-term in an EA?
A: Under a standard EA, you generally cannot decrease license counts until the next renewal (you can only add via true-up). However, you can negotiate exceptions. Some customers arrange limited true-down rights or opt for an Enterprise Subscription Agreement, which allows a one-time reduction at an anniversary. Alternatively, you could shift certain users to month-to-month CSP licensing for flexibility. The key is to negotiate any flexibility up front in the EA if you anticipate possible downsizing.

Q: Should we just move everyone to Microsoft 365 E5 for the advanced features?
A: No. It’s usually not cost-effective to give every user an E5. E5 is packed with premium features that only certain roles (e.g., security analysts, data scientists, executives needing advanced analytics) will fully use. Most employees can thrive with E3 plus occasional add-ons. A targeted E5 approach – only for those who truly benefit – avoids paying 60% more per user for features that would go unused by others.

Q: How do we handle an Azure overcommitment in our EA?
A: If you’re locked into an Azure commitment that you’re not fully using, you have a couple of options to discuss with Microsoft. One is to negotiate a rollover or credit of unused funds into the next term or other services (this can be challenging, but it is worth asking). More practically, at renewal time, reduce the commitment to match reality, so you’re not overpaying going forward. In the meantime, maximize usage of what you’re paying for – consider shifting additional workloads onto those prepaid Azure credits to get value, or use flexible CSP arrangements for any new projects until your EA commitment is right-sized.

Q: Is it worth using a third-party tool or consultant for a license audit?
A: It can be. Third-party software asset management (SAM) tools or Microsoft licensing specialists can provide deep insights, identify hidden usage patterns, and validate the data. They often strengthen your hand by uncovering things you might miss and by benchmarking your usage against industry norms. However, even with a tool, your internal analysis is crucial – you know your environment best. Think of external tools as a way to augment and verify your own audit. Many organizations do an internal audit first, then use a third-party report to double-check and present credible evidence during negotiations with Microsoft. In any case, the cost of an audit tool or service is usually small compared to the potential savings in an optimized EA renewal.

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