What Is a Microsoft Licence?
A Microsoft licence is a legal permission to use a specific Microsoft software product or cloud service. Without a valid licence, using Microsoft software is a compliance breach — and Microsoft actively enforces compliance through audits, with average audit findings of $3.4 million in 2026. A licence defines what you can use, on how many devices or for how many users, in which environments, and for how long. Licence terms also govern what happens when you stop paying, whether you can upgrade to newer versions, and where the software can be physically or virtually deployed.
Most enterprise Microsoft licensing today falls into two broad categories: subscription licences (you pay monthly or annually; access stops when you stop paying) and perpetual licences (you pay once and own the right to use a specific version indefinitely). Microsoft's commercial direction is firmly toward subscriptions — products like Microsoft 365, Azure, and Dynamics 365 are all subscription-based — but perpetual licences remain available for on-premises products like Windows Server and SQL Server.
The Key Microsoft Product Families
Understanding what Microsoft actually sells is the foundation of licensing literacy. Microsoft's commercial portfolio in 2026 organises around four main product families:
Microsoft 365 (M365)
Microsoft 365 is Microsoft's flagship productivity suite — Office apps (Word, Excel, PowerPoint, Outlook), Teams for collaboration, OneDrive for storage, SharePoint for intranet, and a growing stack of security and compliance tools. M365 is sold in tiers. The enterprise tiers run E1 → E3 → E5 → E7, where each higher tier adds more capabilities. E7 is the new top SKU, announced by Microsoft in March 2026 and reaching general availability in May 2026 at $99 per user per month. It sits above E5, bundling advanced AI, security, and compliance capabilities. E5 is no longer the highest or most comprehensive M365 enterprise tier — that is now E7. Microsoft 365 Copilot (AI assistance across all M365 apps) costs an additional $30 per user per month or is included in E7.
Azure
Azure is Microsoft's cloud computing platform, providing infrastructure (virtual machines, storage, networking), platform services (databases, AI, analytics), and software services (Azure OpenAI, Azure DevOps). Azure is priced on consumption — you pay for what you use, measured by the hour, GB, or API call depending on the service. Azure can be purchased with a prepaid Monetary Commitment under an Enterprise Agreement, which provides a negotiated discount rate on consumption. Reserved Instances and Savings Plans are Azure pricing mechanisms that offer discounts of 40–72% on compute in exchange for 1- or 3-year commitments.
Dynamics 365
Dynamics 365 is Microsoft's enterprise business applications suite — CRM (Customer Relationship Management), ERP (Enterprise Resource Planning), field service, project operations, and more. Dynamics 365 uses a per-user subscription model with qualifying user rules: any user who accesses Dynamics 365 functionality, even indirectly, must hold an appropriate licence. This makes Dynamics 365 one of the most complex licensing areas in the Microsoft portfolio and one of the most common sources of audit exposure.
On-Premises Server Products
Windows Server, SQL Server, Exchange Server, SharePoint Server, and similar products can be licensed as perpetual licences with optional Software Assurance. These products are still widely used and are increasingly connected to Azure through hybrid scenarios. Server licensing has some of the most complex rules in Microsoft's portfolio — particularly around virtualisation, where SQL Server and Windows Server licensing requirements vary significantly depending on how your virtual machine environment is configured.
The Main Purchasing Programmes
Once you know what Microsoft products you need, the next question is which programme to buy them through. There are four main options for enterprise buyers in 2026:
Enterprise Agreement (EA)
The EA is Microsoft's traditional flagship programme for large organisations with at least 500 users or devices. You commit to a three-year term, set an initial quantity of licences, perform an annual True-Up to reconcile additions, and receive volume pricing with discounts typically running 10–20% off list price. EAs include Software Assurance, which provides upgrade rights and other benefits. The EA is the most negotiation-friendly Microsoft commercial vehicle — because you are making a large upfront commitment, you have leverage to negotiate price, terms, and structure.
Cloud Solution Provider (CSP)
CSP allows organisations to buy Microsoft cloud subscriptions through an authorised Microsoft partner rather than directly from Microsoft. Your partner handles billing, provides first-level support, and may add advisory services. CSP monthly commit is charged at list price with no discount. CSP annual commit provides up to 5% discount. CSP is flexible and works well for smaller organisations or those that want a managed service relationship with a partner — but it is typically not the most cost-effective choice at large scale.
Microsoft Customer Agreement (MCA)
The MCA is Microsoft's newer, preferred commercial model that is replacing the EA for some customer segments. It is an evergreen agreement (no fixed end date) where you subscribe to products as needed and add licences when required. Unlike the EA, there is no annual True-Up — you simply pay for what you use in each billing cycle. The MCA is administratively simpler but gives buyers less negotiating leverage than an EA, because you are not committing to a large upfront commercial event that creates incentive for Microsoft to discount.
Direct (MOSP — Microsoft Online Services Programme)
The simplest path — buying directly from Microsoft's online store at list price, typically month-to-month. This is appropriate only for very small organisations or for individual product trials. It is not the right vehicle for enterprise procurement.
The Annual True-Up: What It Is and Why It Matters
If you are on an Enterprise Agreement, the True-Up is the most important commercial event in your Microsoft calendar. Once a year — in the 60-day window before your EA anniversary date — you must report to Microsoft all the licences you have added in the preceding 12 months. Added 200 new M365 E3 users? Those get reported and invoiced at your EA unit price. Deployed SQL Server on new servers? Those get reported too.
The True-Up is not just an administrative obligation. It is a negotiating event. If you have over-deployed (used more licences than you have paid for), the True-Up is when that gap becomes payable. If you have under-deployed (paid for more licences than you are using), the True-Up is when you can challenge whether you need to renew those excess seats. Organisations that approach True-Ups with a right-sizing analysis — rather than simply rolling forward the previous year's numbers — consistently reduce their renewal cost.
Software Assurance (SA) Explained Simply
Software Assurance is an annual maintenance programme that layers on top of perpetual volume licences. In simple terms: when you buy a perpetual licence for Windows Server or SQL Server, you own the right to use that specific version forever. If you want to use the next version when Microsoft releases it, you need either to buy a new licence or to maintain Software Assurance. SA costs approximately 25–29% of the licence value per year.
SA also unlocks important benefits beyond just upgrades. The most valuable for most organisations is Azure Hybrid Benefit — which lets you apply your on-premises Windows Server and SQL Server licences with active SA to Azure virtual machines at dramatically reduced cost (40–85% savings on qualifying workloads). Many organisations pay for SA but do not activate Azure Hybrid Benefit, which means they are losing the most financially significant SA benefit. If your organisation runs any workloads in Azure and holds SA on Windows Server or SQL Server licences, check whether Azure Hybrid Benefit is activated today.
Understanding the M365 E-Series SKU Stack
The M365 enterprise SKU stack is frequently misunderstood, partly because Microsoft has historically not been transparent about what each tier includes and partly because the stack changed in 2026 with the introduction of E7. Here is a clear breakdown:
- M365 E1 ($10.50/user/month): Web and mobile Office apps only (no desktop), Teams, SharePoint, Exchange 50GB. Entry-level, typically for users who primarily need email and Teams and do not need desktop Office productivity.
- M365 E3 ($39/user/month from July 2026): Full desktop Office apps, Exchange 100GB with unlimited archive, Intune Plan 1 and Plan 2, Entra ID P1, DLP, Defender for Office P1. The core enterprise tier for information workers.
- M365 E5 ($60/user/month from July 2026): Everything in E3 plus advanced security (Defender for Endpoint P2, Defender for Identity, Defender for Cloud Apps), E5 Compliance (advanced eDiscovery, Insider Risk Management), Power BI Pro, Phone System, and the full Intune Suite. For organisations with advanced security and compliance needs.
- M365 E7 ($99/user/month, GA May 2026): The new top tier above E5, bundling Microsoft 365 Copilot AI, all E5 capabilities, advanced AI-powered security and compliance, and the full Intune Suite. E7 is where Microsoft field teams are pushing E5 customers at renewal.
The key rule for beginners: never accept that the tier your account team recommends is the right tier for your organisation. Microsoft has significant commercial incentive to move customers to higher tiers. Validate that you will actually use the capabilities of the higher tier before upgrading — at scale, the difference between E3 and E5 alone is $21 per user per month, and the difference between E5 and E7 is $39 per user per month.
New to Microsoft licensing and approaching your first EA renewal?
Our Microsoft licensing advisory team supports organisations at every stage — from understanding your current position to negotiating your best-ever deal.The Most Common Beginner Mistakes
Based on 500+ Microsoft licensing engagements, these are the errors organisations most commonly make when they are new to managing a Microsoft estate:
- Accepting list price without negotiating. Microsoft list price is not the price you should be paying. Virtually every enterprise buyer can negotiate a discount — particularly through an EA or with good timing (April–June, Microsoft's Q4).
- Not tracking licence entitlements properly. Every Microsoft licence you purchase needs to be tracked against where it is deployed. Organisations that do not maintain this record are vulnerable in an audit.
- Assuming E5 is the top or most comprehensive SKU. As of 2026, E7 sits above E5. If someone tells you E5 is the most comprehensive M365 tier, they are out of date.
- Over-licensing everyone at the highest SKU. Not every employee needs E5 or E7. A disciplined tiering of your user population — matching SKU to actual role requirements — typically saves 15–30% against the cost of blanket E5 deployment.
- Ignoring Azure Hybrid Benefit. If you have on-premises SQL Server or Windows Server licences with active SA, Azure Hybrid Benefit can reduce your Azure VM costs by 40–85%. This is often the single highest-value optimisation for hybrid organisations.
- Letting Microsoft dictate the commercial model. Microsoft's preferred model (MCA for everything, NCE monthly at list price) is preferred because it is commercially advantageous to Microsoft. Evaluate whether an EA is more appropriate for your scale and commitment profile.
Key Dates and Calendar Points
Microsoft's commercial calendar has two landmark dates that every buyer should know. First, Microsoft's fiscal year ends June 30. This means April, May, and June — Q4 in Microsoft's calendar — is the period when Microsoft's sales teams are under maximum quota pressure to close deals. If you are negotiating a new EA or a significant commercial change, doing it in this window gives you the most leverage. Microsoft field reps have strong incentive to offer discounts and concessions to close before June 30 that they simply do not have in Q1 or Q2.
Second, your EA anniversary date (which is specific to your agreement) is when the annual True-Up is due. Begin your True-Up preparation 90–120 days before that date — building your right-sizing analysis, understanding what you have deployed versus what you have licensed, and preparing your negotiating position. Arriving at the True-Up window without this preparation means you are accepting whatever Microsoft's account team puts in front of you.
Essential Glossary for Beginners
In one engagement, a mid-size UK logistics company inherited an over-engineered M365 estate from a prior IT leadership team — the previous CIO had standardised on E5 for all 1,200 users. A licensing review showed that 400 users only required email, basic Office apps, and Teams. Retiering those users to E1 saved £420,000 per year. The engagement fee was less than 6% of the annual saving.