Microsoft 365 Licence Optimisation: A Practical Guide for 2026

Why Your M365 Licensing Drifts Out of Alignment

M365 licence drift is not the result of deliberate mismanagement — it is the predictable consequence of how enterprise IT and procurement decisions are made. Licences are provisioned when employees join and are rarely reviewed when roles change. IT teams default to assigning the higher-tier SKU to avoid future provisioning requests. Security teams push for E5 for everyone following a risk conversation, without mapping features to actual user requirements. Procurement teams renew the existing mix at EA renewal because there is no bandwidth for a thorough review.

The result, after three years of an EA term, is typically a licence estate where 15 to 25 percent of users are on higher-tier SKUs than their roles require, 10 to 15 percent of licences are assigned to users who are inactive or have left, and a further 5 to 10 percent of the total contract value is consumed by redundant add-on licences that duplicate entitlements already included in the base SKU.

In 2026, this drift is more expensive than it has ever been. Microsoft's SKU stack now runs E1, E3, E5, and E7 — with E7 as the top tier, bundling Copilot and advanced AI capabilities that are adding a new upsell layer above E5 at renewal. Microsoft's field teams are actively moving E5 customers to E7. The removal of EA discount tiers B, C, and D means baseline pricing is higher for all customers. And the July 2026 list price increases compound the cost of any unresolved licence waste.

Step 1: Pull the Data You Actually Need

A licence optimisation exercise starts with data, not assumptions. The Microsoft Admin Center provides the reporting tools needed for a comprehensive licence usage review. The three key data sources are the Licence Usage report (active vs. assigned across each SKU), the Microsoft 365 Apps Activity report (Office application activation and usage frequency per user), and the Exchange Online Activity report (mailbox last activity date).

Export these reports across a 90-day activity window. A 90-day window smooths out temporary absences, holidays, and project-based inactive periods. Users with zero activity across all three reports over 90 days are strong candidates for licence review — they may be on extended leave, have departed without licence revocation, or have changed roles that no longer require M365 access.

Beyond activity data, pull the EA price sheet (the Customer Price Sheet, or CPS) from the Microsoft Volume Licensing Service Centre. The CPS shows the unit price committed to in your EA for each SKU. Compare these prices against the current list prices at your committed discount level — in the post-discount-tier-removal world, your contracted prices may be at Level A plus a small negotiated discount, and knowing exactly where you stand is the starting point for any renewal negotiation.

Step 2: Map Usage to SKU Requirements

The usage data tells you what is being consumed. Mapping that consumption to SKU requirements tells you whether the assigned SKU is justified. The mapping exercise should be done at the role level, not the individual user level, to create defensible policy decisions rather than case-by-case exceptions.

E5 to E3 Right-Sizing

E5's incremental features over E3 fall into three categories: advanced security (Defender for Endpoint P2, Defender for Identity, Entra ID P2), advanced compliance (Advanced eDiscovery, Insider Risk Management, Communication Compliance), and Microsoft 365 Phone System. An E5 licence is justified when a user genuinely requires capabilities from at least one of these categories. An E5 licence on a standard office worker who uses Teams, Outlook, and Word — with none of the Defender XDR, Purview, or Entra ID P2 features active — is a $21 per user per month overspend.

The Defender for Endpoint activation report and Entra ID P2 feature usage data (available in the Entra ID portal) provide the evidence needed to identify E5 licences where advanced security features are inactive. Industry data suggests 38 percent of enterprise E5 licences fall into this category. For a 5,000-seat E5 deployment, identifying and right-sizing 30 percent to E3 saves approximately $1.89 million per year.

E3 to F-Series Right-Sizing

Microsoft's frontline worker SKUs — F1 at $3 per user per month and F3 at $10 per user per month post-July 2026 — are designed for users without a fixed office workstation as their primary work interface. Employees who primarily use Teams Shifts for scheduling, SharePoint for document access, and mobile devices rather than dedicated desktops can legitimately be licensed on F1 or F3, generating significant savings against E3 at $39 per user per month.

Common populations eligible for F-series reclassification in enterprise environments include large retail or logistics operations, manufacturing floor employees, healthcare clinical support roles, and field service staff. A usage audit that identifies E3 users with zero desktop Office activations, limited Exchange mailbox activity, and primary Teams and mobile usage typically surfaces 5 to 15 percent of the E3 population as F-series eligible.

Step 3: Assess the E7 Upgrade Question

Before your next EA renewal, you will almost certainly have a conversation with Microsoft's account team about upgrading to E7 — the top of the commercial M365 stack above E5. E7 bundles Microsoft 365 Copilot (which costs $30 per user per month as a standalone add-on), advanced security, and enhanced compliance capabilities. Microsoft positions this as a consolidation of what would otherwise require multiple separate add-on purchases.

The correct analytical sequence is to evaluate E7 only after completing the right-sizing exercise. Upgrading to E7 for the full E5 population when 38 percent of those licences are not using E5 features compounds waste rather than eliminating it. The evaluation of E7 should apply only to the E5-consuming population that has genuine Copilot productivity use cases and is actively deploying E5 security and compliance features. For that population, the E7 consolidation may be commercially rational. For the broader E5 population with underutilised E5 features, the priority is right-sizing to E3, not upgrading to E7.

Step 4: Clean Up Inactive and Unassigned Licences

Unassigned licences — purchased and paid for but not provisioned to any user — are the simplest source of savings to identify and act upon. Export the licence assignment report, count unassigned licences by SKU, and initiate a reduction at the next available EA amendment. For NCE (New Commerce Experience) annual commit agreements, mid-term reductions are permitted at anniversary. For legacy EA customers, consult your LSP on the earliest opportunity to reduce below the EA committed baseline.

Inactive assigned licences require a process. Validate with HR or line managers before revoking access — an inactive user may be on approved leave or a secondment. For confirmed leavers with unrevoced licences, revoke access immediately and queue for the next True-Up period. An ongoing leavers process that triggers licence revocation within the first week of departure prevents inactive licence accumulation from growing between renewal cycles.

Step 5: Enter the EA Negotiation with Evidence

Licence optimisation work should not happen in isolation from the EA renewal. The optimisation output — right-sized licence counts, quantified savings scenarios, and elimination of inactive licences — creates the commercial brief for the negotiation. Microsoft's field teams will negotiate far more seriously with a buyer who arrives at the renewal conversation with consumption data, a documented right-sizing proposal, and a clear view of the savings achievable outside of the EA (through renegotiation or platform alternatives) than with a buyer who simply presents last year's licence count for renewal.

Using Q4 Leverage

Microsoft's fiscal year ends June 30. April through June is Q4 — the window of maximum field rep incentive to close and discount. We are in that window right now. EA renewals negotiated in Q4 consistently achieve better terms than those negotiated outside Q4. If your EA does not expire until late 2026 or 2027, the commercial conversation can still be initiated in Q4 through an EA amendment or early renewal discussion, particularly if your current agreement includes a renewal price escalation clause that creates urgency before July 1.

Benchmarking and Competitive Positioning

Microsoft's EA negotiations respond to benchmarking evidence. Knowing that comparable organisations are achieving 15 to 18 percent below the new list prices on E3, or that comparable E5 deployments are securing 10 to 12 percent discounts, provides the anchor for your opening commercial position. Without benchmarking data, most procurement teams accept whatever discount Microsoft's field team offers without knowing whether it is competitive.

Competitive positioning matters separately from benchmarking. Microsoft responds to credible evidence of evaluation of alternative productivity suites — Google Workspace Enterprise pricing, alternative communication and collaboration tools — not as a bluff but as a documented alternative that has been commercially scoped. This is distinct from benchmarking within the Microsoft universe and provides leverage that internal Microsoft comparisons cannot generate.

Step 6: Build a Continuous Licence Review Process

A one-time optimisation exercise at renewal is valuable but insufficient. Licence drift resumes immediately after any clean-up that is not anchored to an ongoing review process. Building a quarterly licence review cadence — using the same Microsoft Admin Center data exports, reviewed against a licence allocation policy, with a defined process for right-sizing and revocation — is the difference between a one-off saving and a sustained programme of cost management.

The quarterly review process should be owned by IT asset management or IT finance, with defined escalation paths to procurement for EA amendments, and a clear connection to the HR joiners, movers, and leavers process that is the most reliable source of licence waste in enterprise environments. Organisations that build this process typically maintain savings of 10 to 15 percent below their pre-optimisation baseline on a sustained basis, compounding across successive EA terms.

Five Common M365 Optimisation Mistakes

Running the optimisation too late: Starting the right-sizing exercise four weeks before EA renewal leaves no time to implement changes that reduce the committed baseline. Begin at least six months before renewal to allow time for data collection, analysis, right-sizing implementation, and EA amendment if needed.

Accepting the E7 upsell without analysis: Microsoft's E7 pitch is compelling for users who are actively using E5 features and have genuine Copilot requirements. It is expensive and wasteful for users who have not activated E5 capabilities. Evaluate E7 only for the subset of your population that has earned it through demonstrated E5 consumption.

Benchmarking only within Microsoft's ecosystem: Using Microsoft's own pricing proposals as the benchmark anchors the negotiation to Microsoft's preferred starting position. External benchmarking from comparable enterprise agreements and alternative platform pricing is materially more effective as negotiating evidence.

Not linking the leavers process to licence revocation: The majority of inactive licence accumulation originates from delayed or missed licence revocation when employees leave. Integrating M365 licence revocation into the HR offboarding checklist is the highest-ROI process improvement available for ongoing licence cost control.

Treating M365 optimisation as a one-time project: The value of a licence optimisation exercise is multiplied across successive EA terms only when it establishes a continuous review process. Without that process, the savings erode within 12 to 18 months as drift resumes.

For more Microsoft licensing guidance, visit our Microsoft Knowledge Hub — covering EA negotiation, M365 SKU strategy, Azure pricing, and audit defence.