Microsoft's Software Assurance Customers On the Fence, Forrester Says

Published: July 11, 2007

by Alex Woodie

If a recent survey by Forrester Research is accurate, Microsoft could be facing a customer exodus from Software Assurance, the multi-year software maintenance program that has stirred controversy in recent years. A report released by the analyst group this week suggests more than three quarters of current Software Assurance contracts will end this year, but less than one quarter of customers plan to renew the contracts at the same level.

Microsoft's Software Assurance (SA) program was introduced in mid 2001, in time for the launch of the Windows XP-Office XP product line later in the year, although it was later pushed back to mid-2002. It was designed as a full-service volume licensing, software maintenance, and product upgrade program for Microsoft's largest customers purchasing desktop and server products. While the program today offers a number of benefits, including 24/7 phone and Web support, access to source code, training, and extended hot fix support, among others, the primary benefit that customers get when they sign multi-year contracts is free access to all product updates that Microsoft ships during the life of the contract.

In years past, Microsoft has faced stinging criticism from SA customers who felt they haven't gotten their money's worth--primarily due to product delays. Microsoft sought to assuage these customers in 2006 by giving them extra goodies, including access to Windows Vista Enterprise and Desktop Deployment Planning Service, which are only available to SA customers. Other SA-only bennies introduced last year are the Microsoft Desktop Optimization Pack (MDOP, which includes the SoftGrid Application Virtualization technology, the Asset Inventory Service, Advanced Group Policy Management, and the Diagnostic and Recovery Toolset, not to mention free training, technical services, more hand-holding during support engagements, and the extended hotfix support.

Despite the rich assortment of software and services Microsoft has bundled into its SA program, it hasn't done enough to alleviate the biggest concern of its SA customers, according to Forrester. In the analyst group's new report, titled "Economics And Alternatives To Microsoft's Software Assurance," Forrester suggests that many SA customers are seriously questioning the value they get out of SA--which costs 29 percent of the initial licensing cost of desktop products per year, and 25 percent per year for server products--and raises the possibility that many of them won't be signing up for it again.

According to Forrester's report, which is based on surveys and interviews it conducted with 63 Microsoft customers with SA agreements, licensing agreements are set to expire this year for 86 percent of organizations with SA contracts that it surveyed. However, only 24 percent of those surveyed said they would definitely or probably renew their contracts, compared to 26 percent who said they would not renew. The biggest chunk--31 percent--said they were still unsure about what they would do, while 18 percent said they would renew their SA contracts, but only for some products.

When Forrester asked why customers decided not to renew their SA contracts, three-quarters said it didn't make financial sense. More than half of the customers not renewing also questioned whether they'd get new releases of products, and a similar number said they already had access to the latest products.

While not statistically valid due to the low sample number (it really needs to be above 200 to get the sampling error down into the lower single-digit range), these results provide some validation behind the complaints that individual SA customers have been making for years.

These complaints typically have a common theme to them: Microsoft has not delivered on its commitment to release new products in a timely (three years or less) manner. Indeed, it took five years to get a new version of the Windows client (from Windows XP in late 2001 to Windows Vista in late 2006), five years to get a new version of SQL Server (from SQL Server 2000 to SQL Server 2005), and it will have been five years between versions of Windows Server--from Windows Server 2003 to Windows Server 2008.

When most SA contracts last three years, the five-year gap between major product upgrades just doesn't cut it. "The economics of buying SA for the next three years without any guarantee that they'll recoup their investment make holding off and buying new licenses until actually needed an attractive option," says Julie Giera, the Forrester vice president who wrote the report.

Once Bitten

Of course, Microsoft must realize that it has been over-promising and under-delivering for the past few years. High profile product delays, notably the numerous setbacks effecting its Windows "Longhorn" development program, have opened the company to public scorn, which has to be extremely painful to a company that puts as much time, money, and thought into shaping its public image as Microsoft.

Perhaps that is why the company no longer publicizes its product roadmaps to the extent that it did in the past. After all, if nobody knows what you have planned, they can't criticize you when you fail to deliver what you planned in private.

Forrester called out Microsoft for its failure to provide detailed product roadmaps for the wave of products released this past November, including Windows Vista, Office 2007, SharePoint 2007, Exchange 2007, and others. Instead, Microsoft has provided vagaries about its plans.

"Informally, Microsoft has been telling some customers to expect a 'minor' release every two years and a 'major' release every four years [but] at this point, minor and major remain undefined," Giera writes in the Forrester report. "This uncertainty regarding product releases makes it difficult for IT procurement and sourcing professionals to justify a three-year SA renewal."

Instead of paying 29 percent (for desktop products) or 25 percent (for server products) every year, some customers may be better off just waiting for Microsoft to ship new versions of products, and then paying full price at that time, Forrester says. This take-it-as-it-comes approach looks even more attractive when you consider the increasing complexity of large-scale software deployments and migrations and the extensive testing that must be performed before going live. "It isn't unusual for companies to skip releases because these projects are so time-consuming and costly, making the business case justification for renewing SA that much more challenging," Forrester writes.

But the nail in the coffin of SA for some customers was the introduction of the Enterprise Client Access License (CAL) program with the 2007 products, according to Forrester. SA customer that dutifully paid their SA dues for their CALs, with the expectation that they were entitled to get new features, were shocked when Microsoft told them they needed to buy additional Enterprise CALs if they wanted to use the latest versions of Exchange and SharePoint.

Forrester says a procurement specialist for a large health insurer told the group that he felt 'betrayed' by Microsoft. "We paid our money expecting we'd get everything," the IT procurement specialist told Forrester, according to the analyst group. "How do I know that Microsoft won't do this again in the next release?"

The reduction in SA contracts over the next few years could be a huge impact for Microsoft. Because product payments under SA are made over a period of two or three years, Microsoft has been able to spread out its revenues, thereby flattening the wild swings in sales that affect most software companies (and which gives Wall Street speculators ulcers). Microsoft had a little more than $10 billion in unearned revenue, which is how Microsoft records SA payments, on the books at the end of the third quarter, with about 70 percent of that from volume licensing programs, of which SA is the largest. However, if there's a widespread shift away from SA because customers sense they are overpaying for product upgrades, it could wreak havoc with Microsoft's smooth revenue growth curve, sending Wall Street into spasms.

Microsoft reports its fourth quarter and fiscal year 2007 results Thursday.

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