By now, most Managed Service Providers are aware that Microsoft has rolled out a new licensing model for the most common Office 365 and MS 365 products. Their New Commerce Experience (NCE) model introduces term-based licensing with firm commitments. New licenses can be purchased as 12-month or 36-month (not yet available) term agreement with early termination fees applying should the client cancel the agreement prior to the end of the term. The termination fees are equal to all fees that would have been paid if the agreement had not been canceled. Microsoft is also offering a month-to-month NCE option. However, that subscription comes at a 20% premium. This is a significant departure from legacy licensing program which allowed termination without penalty.

In addition, Microsoft is increasing prices on several Office/MS 365 products by as much as 25% on March 1st.

Increases include:

 *These prices apply to NCE 12-month and 36-month agreements. Month-to-month agreements are 20% more.

**No Change to Microsoft 365 E5 or Microsoft Business Standard.

The pricing for the upcoming 36-month agreement will be the same as the 12-month agreement. So why would a customer make a three year commitment for the same price as a one year? Because the 36-month commitment comes with a price locking mechanism. This is a pretty good indicator that Microsoft is planning on some price increases in the next three years.

For those CSPs that have been selling Office 365 licensing as month-to-month, they will have to convert those customers to NCE 12 or 36 month term licensing or face as much as 50% increase in cost if they choose the NCE month-to-month option.

Microsoft has gotten a fair amount of pushback from the MSP community in the public forums on the new programs. However, it is not surprising that Microsoft is making these moves. After all, as MSPs we all understand the importance of monthly recurring revenue. And the contractual commitment by the customer to pay the bill every month has a direct correlation to the value of our practice. Microsoft is simply applying that principle to their business and increasing shareholder value. As far as price increases go, Microsoft has not increased their prices for their cloud offerings in years. Again, an understandable move.

Accepting that Microsoft is justified in making these moves, they will still have an impact on any MSP that is a Microsoft Cloud Service Provider (CSP). These changes will affect every part of the MSP relationship with the client.  Beyond the increased cost of the licenses, this impacts how the MPS provisions the licenses, how the customer budgets for licenses, how the MSP monitors and manages the licenses, and what happens if the client terminates their MSP agreement with the provider.

As the CSP, the MSP is on the hook to Microsoft for the cost of the licenses for the length of the term. Regardless of whether the client continues to pay the CSP, the CSP must continue to pay Microsoft. In the extreme case of the client going out of business (simply declaring bankruptcy), the CSP can be left holding the bag.

In the NCE program there is no facility to transfer licenses from one CSP to another CSP mid-term. In the case of the client choosing to move to another MSP/CSP at the end of their Managed Services Agreement, the client would need to continue to pay the original MSP through the end of the term at which point the new CSP can take over the licenses. However, this can only be done within a three day window at the end of the term. CSPs need to monitor and manage renewal dates closely to avoid unintended auto-renewals.

The NCE licenses are applied to the client Microsoft tenant through the new NCE SKUs. The client can purchase 12-month NCE licenses and apply that to the tenant. They can also purchase 36-month (not available yet) or month-to-month licenses and apply them to the tenant as well. Additional licenses can be added to the tenant at any time during the term. For example, the customer can purchase 50 Licenses of Office 365 E3 12-month NCE in January. In March they might add another 10 O365 E3 12-month licenses. Those 10 additional license are added to the original 50 licenses of the same SKU and will co-terminate with the original 50. Customers can mix and match any combination of 12-month, 36-month, month-month SKUs within the same tenant. With the term SKUs, licenses can be added to the tenant at any time during the term, however licenses cannot be removed until the end of the term is reached and a new agreement started.   

Therefore, customers will likely need some flexibility in how they purchase NCE licensing. It probably makes sense to have most of the organization on a long term agreement. However, for those organizations that expect some ebb and flow in their workforce, it may make sense to have a certain percentage on the month-to-month plan. For instance a company may opt to put 90% of its workforce on a term agreement and leave 10% on month-month. The 20% premium paid for month-month licensing would be offset by not paying for unused licenses in the event of a workforce reduction.

All of these changes are not happening overnight. There are several milestones to keep in mind:

January 10, 2022 - NCE 12-month and Month-Month SKUs became available. SKUs purchases between January 10 and March 1st will lock in current pricing for 12 months. Month-to-Month NCE licenses can be purchased at the current 12-month rate through June 2021. There are also some timed pricing incentives available. Check with your distributor for details.

March 1, 2022: All NCE SKUs increase in price based on the table above.

March 10, 2022: All new subscriptions will be NCE. New legacy subscriptions will no longer be available.

July 1, 2022: All month-to-month NCE agreement incur 20% increase. Renewals of legacy subscriptions can only be done with NCE licensing.

December 2022: CSP Incentives on legacy subscriptions

July 2023: All remaining legacy subscriptions must be converted to NCE

So what are the key takeaways for MSPs?:

• Work with you customers now to get them on the right NCE program. Time is running out to beat the price increases in March, but there is still time.

• Discuss the impact of the term agreements with your clients. Make sure they understand the early termination fees for the 12 and 36 month options.

• Review your Master Services Agreement and consider adding language that makes it clear that MS 365 licensing cannot be moved mid-term in the event of a cancellation of your MSP agreement.

• Prepare your PSA for change. Add the proper SKUs and understand the process of order new NCE subscriptions and converting legacy subscriptions.

• Review your license management processes. Most subscriptions will be set to auto-renew and there is only a 3 day window at renewal time to adjust the number of seats in each SKU. As a function of your client Quarterly Business Review, audit the number of licenses for each SKU and note the renewal dates for each SKU. Adjust license counts accordingly.

In some ways these changes have made Microsoft licensing more complex. In other ways they have simplified things. It is important that MSPs understand the program and take steps to mitigate the risks and reap the benefits.