I recently conducted a meeting with a CIO to discuss his company’s options going into its Microsoft renewal negotiation, and he acknowledged that he, like most of my clients, was largely in the dark about the costs and benefits of Software Assurance (often referred to as “SA”). He was surprised to see that annual Software Assurance fees were proportionally higher than he was used to seeing with other vendors’ (e.g. Oracle, SAP) maintenance and upgrade fees, which range from 18-22%. Software Assurance has an annual cost of 29% of the license price for desktop products (e.g. Windows, Office) and 25% for server products. Additionally, Software Assurance is not as robust of a technical support offering.
Is Foregoing Software Assurance a Viable Option for Your Company?
Before you decide whether the value is worthy of the price tag, you should determine whether opting out of Software Assurance is even a viable option. For instance, under an Enterprise Agreement (EA), you may be required to maintain Software Assurance on certain products, whereas Software Assurance is optional under a Select Plus or Microsoft Products and Services Agreement (MPSA) structure. Additionally, Software Assurance coverage is mandatory for some specific products (e.g. Client Access Licenses).
Next, you will need to find out which Software Assurance benefits are being utilized, and determine whether your company is capable of ceasing to use those benefits. Microsoft provides helpful self-audit tools and reports to quantify and assess Software Assurance benefit utilization, but you may need to engage your IT department to ensure that you are not utilizing some of these rights (e.g. virtualization) before proceeding.
Is Foregoing of Software Assurance the Right Option for Your Company?
If you have determined your company is capable of opting out of Software Assurance, the next step would be to evaluate whether the benefits justify the cost. While guiding our clients through their Software Assurance cost benefit analysis, we often discover they do not know the full scope of benefits which are included, and very few customers make any significant use of most of the included benefits. Unfortunately for those customers, the benefits cannot be purchased a la cart depending on which ones will be used, and there are no refunds for unused benefits.
If your company is not utilizing most of the benefits, then the only value proposition for Software Assurance is the new version rights. This is akin to pre-paying for future versions of the software, but at a slight discount. By paying Software Assurance fees equal to 29% of the licenses fees each year, your company will pay an amount equal to 87% of the license fees over the 3-year team in the hope that a new product version will be released during that time. This is a substantial risk considering your company would be investing in product versions that have not yet been seen, and which you cannot be sure will be released during the Software Assurance term because Microsoft does not provide a committed roadmap with release dates.
Assuming you are not or will not be substantially using most benefits, let’s take look at the scenarios that can occur if you purchase Software Assurance:
- Scenario 1 – A new version is released during the term (i.e. 3 years) that your company will deploy: We have a winner!!! You essentially receive an updated product version and only pay 87% of the license fees—a 13% savings. You have the right to deploy this new version at any time during the term or beyond.
- Scenario 2 – No new version is released prior to your Software Assurance expiring: You pay 87% of the license fees over 3 years and receive no real value in return. The possibility of the 13% discount identified above doesn’t seem so appealing in comparison to this potentially huge downside. Given that Microsoft tends to average 3-4 years between releases, this is a real possibility.
- Scenario 3 – A new version is released during the term that your company is never going to deploy: You paid in advance almost the entire price for a product that you will not deploy. This is the worst case scenario for purchasers of Software Assurance, and a scenario that is not unprecedented (ahem… Windows 8).
On the other hand, here are the scenarios that can unfold if you do not purchase Software Assurance:
- Scenario 1 – A new version is released that your company wants to deploy: It is unlikely that a new product version will be released that requires immediate adoption, but it is possible that a version will be released that your company will want to deploy within a couple years. In this scenario, you will have to re-purchase the product licenses at the full cost. (Note: you may have the option to avoid the large capital expenditure by moving to a subscription model going forward)
- Scenario 2 – No new version is released during the next 3 years: You avoided spending 87% of the initial license fees over 3 years while receiving no new versions of the product.
- Scenario 3 – A new version is released that your company is never going to deploy: Again, you avoided paying a significant expense that would yield no real value.
Weighing Your Options:
As illustrated above, the best case scenario in purchasing Software Assurance is that your company can save 13% off the license price for the new product version. On the other hand, you risk potentially spending a significant amount of money in anticipation of a new version that may not be released in time or that you may not want to deploy. Take Windows Vista for example: customers waited 5 years for Vista to be released, all the while paying Software Assurance fees each year. Then once Vista was released, a majority of customers never even deployed it, instead opting to either stick with XP or wait for Windows 7 to be released (3 years later—meaning they paid 8 years of Software Assurance before upgrading!).
On the contrary, by foregoing Software Assurance you risk potentially having to repurchase your licenses at full price, rather than receive a 13% discount through Software Assurance. However, if your gamble pays off and a new version is not released (or is released but not desired by your company), you will have achieved savings equal to 87% of the license fees. In the event you are forced to repurchase the licenses, you may not be in such bad shape either, as Microsoft has previously offered promotional discounts of up to 15-20% for product upgrades.
If your company is not seriously utilizing any Software Assurance benefits other than new version rights, then we recommend you assess whether it is a worthwhile investment. After working with UpperEdge and conducting additional internal due diligence, many of our clients have decided that the ease and simplicity of Software Assurance is worth the potential sunk costs. The ability to forego Software Assurance is undoubtedly a point of leverage during your negotiations—we have worked with our clients to use past Software Assurance underutilization as a lever to achieve improved go-forward discounting.
There is obviously a significant amount of due diligence that goes into a decision like this, and we recommend that companies start thinking about this at least 6 months prior to their upcoming purchase or renewal date. If you would like to talk more about how to appropriately prepare to make this decision, please feel free to reach out to me at [email protected].