Microsoft Software Assurance has always been a gamble. Microsoft collects money in advance for future upgrades during a volume-licensing agreement and then keeps the money if it doesn't deliver, hammering IT budgets and leaving customers burned.
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Enterprises can hedge their bets, however, and reduce the risk by making payments equivalent to Software Assurance (SA) to themselves rather than to Microsoft.
Calculating the risk
Let's calculate the odds on the Microsoft Software Assurance gamble.
For desktop products -- mainly Windows and Office -- SA costs 29% of the license price each year. Multiply 29% by three years, the term of the usual volume-licensing agreement, and that's 87% of the license cost.
In other words, if Microsoft releases an upgrade that an IT shop wants before your SA terminates, the organization wins a discount of 13%. If no update is released or an enterprise doesn't install the update, it loses 87% of the license cost. (Note that if money costs you 7% or more annually, the discount for a win evaporates and the loss rises to 100% or more of the license price.)
Servers have slightly better odds. Since SA is only 25% on servers, you could get a 25% discount or lose 75% of your money in a three-year agreement.
Pay yourself SA
Microsoft Software Assurance gets customers to pay in advance for products about which they often know little, including whether they'll want to use it, which is a remarkable feat of salesmanship. The only comparable transaction is playing the lottery. The odds are that you'll win something (a few free lottery tickets, for example) over the course of three years, but in the end, the house always wins.
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Some people call Microsoft Software Assurance a form of insurance, but SA "premiums" don't consider the risk of loss while insurance premiums do.
By paying themselves what they would pay Microsoft for SA, customers can win the bet in two ways.
First, if Microsoft does not deliver an upgrade that customers want to deploy, the customer keeps the money, not Microsoft.
Second, customers can choose to spend that money on the upgrade, skip the upgrade, or save their money or spend it elsewhere. If they do deploy the product, they can delay payment for licenses until actual deployment, which can be two or more years after the upgrade is released.
SA customers do not have those choices. They may skip the upgrade, but Microsoft still keeps the money.
The lesson from Vista
Vista is the classic example: After paying for five years for a Windows upgrade, the majority of Microsoft Software Assurance customers never deployed it. Instead, they stuck with Windows XP until Windows 7 came along three years later.
The eight-year span between Windows XP and Windows 7 required SA payments for three consecutive three-year volume agreements, or nine years of SA at 29% a year, which works out to 261% of the license price.
In contrast, a company that held onto its money could have stopped after three years of payments and let that money collect interest while it waited for a compelling upgrade.
In a delicious bit of irony, when Microsoft finally did release Windows 7, customers who had not purchased SA got a 15% discount on the product for the first six months after its release.
Windows 8: Déjà vu?
As we approach Windows 8's release, customers should keep the Vista lesson in mind.
IDC analyst Al Gillen calls Windows 8 "largely irrelevant" for traditional PCs. BMO Capital Markets analyst Keith Bachman expects Windows 8 to be a disappointment, at least initially. Gartner's Michael Silver says he expects most organizations to skip Windows 8.
If those analyses are accurate, most customers who purchase SA on Windows today will get little for it. Worse, three years from now, they may renew SA for another three years to get a discount on Windows 9. That is six years of SA payments with no predictable payoff.
Office, which costs about three times as much as Windows, is a similar case. Many customers skipped Office 2007 and are only now moving to Office 2010. The odds that they'll deploy the next version of Microsoft Office anytime soon are not high.
Broader SA benefits
Fans of Microsoft Software Assurance will point out that I am ignoring the licensing scheme's other benefits.
One reason is that very few customers make any significant use of SA's 25 supposed benefits. Only about 25% of customers use even three of them. Microsoft's own analysis of one of my customer's SA benefit utilization showed that the customer saved about $200,000 by using six SA benefits, excluding upgrades, while spending about $850,000 on SA.
Second, many popular benefits, such as training vouchers, technical support incidents and home use of Office, can be purchased at lower cost outside of SA, particularly among customers with Enterprise Agreements.
Microsoft says that SA is "much more than upgrades," but the reality is that upgrades are the largest single benefit for most customers.
The odds against you
The SA fans are right about one thing -- the pay-yourself approach to avoiding Microsoft Software Assurance costs is not optimal for everyone. Here are some of the potential benefits and risks:
VDI adopters. Companies that are major users of virtual desktop infrastructure could find that SA on Windows is the most cost-effective way to license them.
MDOP users. Organizations that have widely adopted some components of the Microsoft Desktop Optimization Pack should be prepared to shift to alternatives, since their right to use the MDOP requires SA on Windows. There are alternatives to all of these products, but they may be more expensive.
Price-sensitive customers. Organizations that purchase SA get price protection for any upgrades released during their agreements. This price protection is not critical for desktop products like Windows (up 1% since 2003) and Office (down 1% for Standard, up 11% for Professional Plus). But the price of some server products -- SQL Server in particular -- has risen 35% to 50% in a decade, plus there were changes to virtualization and migration rights that only SA customers gained.
CAL suites. Maintaining SA on products like the Core CAL and Enterprise CAL Suites simplifies client access license (CAL) maintenance, particularly for customers who depend on Microsoft productivity servers such as Exchange, Lync and SharePoint. Even if customers don't maintain SA on Windows and Office, SA on CAL suites will deliver financial and management benefits for these customers.
The odds for you
Here's who can benefit from putting their SA dollars out of Microsoft's reach.
Windows 7 and Office 2010 standardizers. Customers who have completed companywide Windows 7 and Office 2010 upgrades in the past two years will probably stick with that desktop configuration for at least the next five years.
Limited desktop virtualization. Organizations that target only a portion of their desktops for virtualization should resist SA on Windows in an Enterprise Agreement, which covers all of their PCs. Agreements such as Select Plus can get the desired results for a subset of PCs at lower cost.
Cloud users. Microsoft's insistence on per-device licensing for Windows and Office makes migration to Microsoft's per-user cloud services complex. The discounts through volume agreements, even with SA, aren't much better than what you'll get with ad hoc purchases of Microsoft's cloud services. And if you decide to go with IBM, VMware, Cisco or Google for cloud collaboration and productivity, you'll get no credit for your SA payments to Microsoft.
By not purchasing Microsoft Software Assurance for on-premises products, you may actually increase your cloud bargaining power with Microsoft -- the vendor knows that you are not locked in to one option.