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Microsoft's Cloud Focus Giving On-Premises Customers Pause

Microsoft's "cloud first" mantra is prompting some business decision makers to step back and pause before making licensing commitments.

Faced with Microsoft's promise that cloud applications will get priority in functional improvements, is there growing motivation for customers committed to on-premises deployments to take a wait-and-see approach to software licensing?

In response to my recent post, "Microsoft Takes New Tack in Pushing Partners to Cloud," Paul DeGroot, a licensing expert and senior consultant at Software Licensing Advisors, commented that he was not seeing wide cloud adoption from his clients.

"The push to the cloud is actually causing most of my enterprise customers to back away from Software Assurance (SA, which is 90% to 99% of what customers pay when they renew a volume agreement)," wrote DeGroot in response to the post. "The reason -- they don't need or want the cloud now, but they're concerned that further investments in on-premises software will not be worthwhile, since MS is 'cloud first' and will not focus on upgrading on-premises products."

An intriguing observation, so I followed up with DeGroot to dig deeper into the subject.

"We do a lot of work in the space of 1,000-2,000 PCs, as well as larger enterprise clients," DeGroot said. "These folks are just not interested in the cloud. I hear all the buzz, but I have only had one customer move seriously to the cloud -- and it made a lot of sense for them."

Most of the clients that DeGroot works with hold Enterprise Agreements (EA), the go-to licensing vehicle for organizations with 250 desktops or more. With payment amortized over three years, the decision to renew comes under review in the third year. EA customers are encouraged (to put it mildly) to renew by strongly incented Microsoft field sales personnel.  

According to DeGroot, Microsoft's cloud-first focus creates uncertainty in the minds of customers with on-premises deployments. Microsoft has clearly stated that it is focused on building software functionality in the cloud. If on-premises applications are not going to receive attention, where is the incentive to upgrade?

In addition, the highly competitive cloud services landscape -- and the associated price wars -- certainly doesn't motivate companies to make long-term commitments.

With so much in flux, is a three-year commitment still a reasonable expectation?  

Since even the most optimistic estimates from Microsoft suggest that 25 percent of enterprise customers are actually using Office 365, there is still a large segment of the business community with their operations still firmly planted on-premises. There are many valid and continuing reasons that customers are not ready to make the move to the cloud, from industry regulations to control over upgrades.

"For a lot of our customers, they have decided not to renew their SA. They will wait for two or three years and see what happens," DeGroot said. "Many have just moved to Office 2010 and will be on it until 2018. They will do just fine with it and then take a look at the environment. They can afford to wait as they amortize their current investment."

The transition to the cloud is clearly a driving force in our industry, but it's still not for everyone. To remain relevant, Microsoft's software development and licensing strategy has to meet customer's current needs, not just the expected future state. Over the coming year, business customers will surely let Microsoft know how they are doing as the decisions to renew license agreements are made.

Are your customers pausing on their license purchases or SA renewals? Add a comment below or send me an e-mail and let's share your story.

Posted by Barb Levisay on August 21, 2014