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A New Deal from Microsoft?

By Jeff Muscarella

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On October 20, 2010, Microsoft signed a headline-grabbing deal with New York City that may be a bellwether for how Microsoft technology will be purchased in 2011. During the press conference, Microsoft CEO Steve Ballmer stood shoulder to shoulder with Mayor Michael Bloomberg to announce a $100M, 100,000-user deal with the city.

Surprisingly, while the size of the deal is impressive, it wasn’t the lead in the story. What got the attention of IT executives across the world was the savings that would come from this atypical bulk software purchase -- a whopping $50 million over the next five years.

Microsoft usually dictates how its customers buy technology. However, the agreement with NYC uncovers an untraditional level of flexibility in Microsoft’s contracting practices in close collaboration with the city’s ambitious IT strategy.

Many enterprise CIOs and their procurement teams have scratched their heads wondering how a government IT purchase suddenly set the standard for IT procurement effectiveness. It’s not everyday that municipal purchasing gets lauded for its efficiency and progressiveness. But, if your enterprise plans to buy new Microsoft technology in the coming year (or renew your current enterprise agreement), there are several things you can learn from the Big Apple.

The leveraging power of centralization - In July, NYC announced a major plan to consolidate IT infrastructure and the recent deal with Microsoft is a milestone in that pursuit. In the past, the city’s different departments (like many large enterprises) had dozens of separate agreements with Microsoft. Today, the current agreement covers 120 agencies and departments within the city. In turn, NYC is able to assemble the leverage to demand more flexibility from Microsoft, as well as improve the manageability of its IT infrastructure.

This also demonstrates forward thinking on the part of NYC’s IT leadership. It’s never easy to cut IT costs while simultaneously re-engineering how IT is managed and owned internally. They have found a way to accomplish both and, in addition the Microsoft win, have positioned themselves to tap into other savings opportunities and to more quickly adopt new technology trends down the road.

The benefits of tiered usage - The “pay as you use” model has never been part of Microsoft’s repertoire … until now. In the past, if you needed to provide Excel to 1000 workers, you had to buy the entire Microsoft Office software stack for each user. In fact, this bundle approach to software selling has been a driving force in Microsoft’s financial success over the years. So when Microsoft agreed to tiered usage in the contract with NYC, many jaws dropped.

The new deal is structured to accommodate three different tiers of users based on how many applications they use: power, regular and occasional. A power user has access to all Microsoft Office applications and is the most expensive tier. In contrast, regular and occasional users can only access select applications and therefore fall into a much lower pricing tier. As a result, the city will only pay for how much software is actually being used. It’s a wise approach for today’s enterprises, many of which are looking to reduce software purchase and maintenance costs so they can fund other IT priorities.

The merits of hybrid - Like many enterprises, NYC is approaching cloud computing cautiously. While a majority of its users will be served by a traditional software model, approximately 30 percent will use cloud services. The contract specifies access to Microsoft’s BPOS cloud-based applications for approximately 30,000 “deskless” workers.

Instead of paying a one-time license and annual maintenance fee for each user, this service costs a few dollars per user per month. Additionally, NYC will move a portion of its data into Microsoft’s data centers thereby priming the city for future migration to the cloud. It has also signed on for Microsoft Azure, a platform-as-a-service offering that will enable the city to develop applications for internal and external use. This will allow the city to cost-effectively provide the tools to foster IT innovation internally while outsourcing storage, servers and maintenance.

This is another area where enterprises should consider taking a play from NYC’s playbook. Microsoft is clearly willing to sacrifice traditional software model revenues to gain a stronger foothold in the cloud services sector. Conversely, companies are choosing to adopt cloud services slowly (but surely). Enterprises should leverage these dynamics when negotiating new license and maintenance agreements.

As Microsoft continues to push its presence in the cloud, they will be forced to focus on flexibility. It’s not exactly a quality they’re known for, but in a world where flexibility is just as important as functionality, it’s crucial to their long-term survival. Those enterprises that understand how to leverage Microsoft’s flexibility have the potential to achieve unprecedented IT savings in 2011.

Jeff Muscarella is EVP of IT at NPI, a spend management consultancy, focused on delivering savings in the areas of IT, telecom, transportation and energy. In addition to helping world-class companies reduce technology costs, Jeff is a frequent speaker and author on IT spend management best practices.