Beginning on June 1st, Microsoft is introducing a new three-year subscription term for Microsoft 365 E3 and E5 offerings under the Cloud Solution Provider (CSP) program. In July, this three-year term model will also be extended to Microsoft’s suite of Security solutions.
Key Dates:
These changes are more than just an update to billing cycles. They signal another advancement in Microsoft’s broader strategic direction to achieve long-term cloud commitment among users. This is part of the broader global trend of cloud adoption, which has reached a tipping point with more than half of enterprises and SMBs running their workloads in the cloud in 2025.
“Enterprises and SMBs now run more than half of their workloads in public clouds.”
If you’re an organization that relies on M365 as a cornerstone tool for productivity, collaboration, and security infrastructure, understanding the implications of this change is critical. In this blog, we’ll unpack what these changes mean, who they affect, and how your company can respond strategically.
The Essentials of the Three-Year Subscription Model
An essential part of interpreting major licensing changes is looking at the motive behind them. The three-year subscription model through the CSP channel is a response from Microsoft to growing demand from enterprises for longer-term commitments that allow them to more accurately predict and control cost and operational continuity. While Enterprise Agreement (EA) customers have had access to multi-year term options for years, this is the first major extension of terms to customers purchasing via CSP.
“This shift allows many organizations to benefit from CSP’s attractive commercial options with long-term price protection. However, unlike the EA, you can’t scale down annually.”
This change affects Microsoft 365 E3 and E5 licenses. The three-year term subscriptions will only be available with annual or upfront billing options, meaning you’ll need to prepare for higher upfront financial commitments than with monthly billing models.
The three-year term will also only be available to customers purchasing a minimum of 100 licenses, a threshold that Microsoft will enforce at the SKU level. This indicates that the offering is tailored for mid-size to large enterprises and isn’t intended for small organizations or departments that are seeking licensing flexibility for fewer seats.
Perhaps most notable is the restriction around FromSA SKUs. Customers using From Software Assurance (From SA) licensing, a transitional option for migrating from on-premises to cloud solutions, cannot use the three-year CSP Subscription. Since FromSA is unavailable in CSP, these customers find better pricing in the EA.
Microsoft’s decision to extend three-year term licensing to the CSP channel reflects their strategic focus on the long-term vision for their cloud ecosystem. This move is intended to encourage enterprises to transition away from EA agreements. This initiative aligns with their overall contract strategy to phase out legacy EA contracts and promote the new flagship Microsoft Customer Agreement (MCA) as an alternative option.
Improved Budget Forecasting: One potential benefit for enterprises that take advantage of the three-year term structure is cost predictability. At the start of 2025, Gartner predicted that IT spending would increase by 9.8%, but that most of it would be absorbed by price hikes on recurrent spending. More than half of software vendors are increasing their licensing prices in 2025, and according to Vertice’s SaaS Inflation Index, it’s not uncommon to see price hikes of 25% year-over-year. SaaS inflation is currently 4x higher than consumer inflation, meaning that companies will pay significantly more for the same set of tools each year.
“While budgets for CIOs, a significant portion will merely offset price increases within their recurrent spending, with price hikes absorbing some or all of budget growth.”
In an extremely uncertain economic climate, insulating yourself against the year-over-year price hikes that eat into IT budgets locking prices for 3 years is extremely attractive to companies that want to know exactly what to expect from operational costs in the coming years. This stability is especially valuable if you have complicated budgeting processes and long-term IT roadmaps.
Strategic Re-Focusing: Longer-term subscriptions also support more alignment between licensing and strategic digital initiatives that are planned over years. Many enterprises are currently implementing multi-year plans for cloud transformation, cybersecurity modernization, and AI integration. Locking in core productivity and security tooling for the duration of these initiatives could allow IT teams to focus on deployment, adoption, and value realization over frequent contract renegotiation.
Higher Up-Front Costs: However, it’s also important to assess trade-offs. The commitment to a three-year license term requires confidence in headcount stability and technology stack consistency. If your company anticipates significant workforce fluctuations or platform switches, a shorter-term and more flexible licensing arrangement may be more appropriate. With billing only available annually or upfront, financial planners also need to account for larger payments and ensure they align with budgetary cycles and cash flow constraints.
Larger Price Hikes: Another important caveat to consider with this change is that a price hike delayed is often a price hike increased. While prices are locked over the three-year term, this may justify Microsoft in make increases even bigger. This is an important aspect to include in financial planning and forecasts.
“The price increases from Microsoft over the last three years have presented a significant budget challenge for most customers. Organizations are experiencing price hikes of 30 to 40 percent, and sometimes even more than 50 percent, which were not accounted for in budget forecasts. EA customers can mitigate most of these increases, but CSP customers are left to fend for themselves.”
No Annual Scale-Back: One of the most significant drawbacks of this licensing term is the inability to scale down annually. If your company has shorter planning horizons or is planning any software consolidation efforts, locking into a three-year commitment isn’t ideal.
In July, Microsoft will also extend the three-year term option to their Security Suites. While the full details on which security offerings will be included have not yet been released, it’s expected that key platforms like Microsoft Defender, Microsoft Entra and Purview, and Sentinel will be part of the eligible portfolio.
This shift towards more stable, long-term security licensing reflects the reality that cybersecurity is no longer a tactical concern but a strategic imperative. Cyberattacks are more frequent, more sophisticated, and more expensive to recover from. With high-profile ransomware attacks, phishing exploits, and insider threats affecting enterprises across sectors, robust security measures must form part of every enterprise’s core stack.
Organizations that are building a Zero Trust security framework, adopting secure development practices, or pursuing compliance under regulations like NIS2, EU AI Act, and other relevant legislation can now structure their licensing to match the timelines of those initiatives. This makes cost stability and logistical coherence easier by simplifying the procurement and renewal of critical security software.
The SMB Opportunity
From a financial operations (FinOps) perspective, the introduction of longer-term licensing opens new avenues for cost management. Multi-year contracts often come with discounted pricing, and Microsoft has indicated that the three-year term for E3 and E5 licenses will be competitively priced, especially for organisations with up to 2,400 users.
This is an important nuance. Enterprise licensing has traditionally favoured larger organizations through volume discounts. This change means Microsoft is also offering smaller enterprises the opportunity to access similar pricing advantages if they meet the minimum license threshold and are not using From SA SKUs. This will democratize access to long-term cost efficiency and could potentially draw more mid-market organizations into Microsoft’s ecosystem.
The Impact of Operational and Staffing Forecasts
Nonetheless, user base and growth forecasts will be a big deciding factor in whether this new licensing model will be beneficial. Committing to three-year licensing without a clear understanding of staffing trends could lead to over-licensing and wasted spend. With widespread layoffs due to market uncertainty and the replacement of key functions with AI, staffing uncertainty is at an all-time high. If you have a seasonal or project-based workforce variability may find it difficult to optimise under a fixed-volume, long-term license.
“Human workers are facing layoffs, replaced by AI. In early 2025, UPS announced plans to lay off 20,000 workers, marking one of the largest workforce reductions in its 116-year history.”
The Impact of Capital Diversion from Upfront Payment
Financial decision-makers also need to be aware of the trade-off between upfront discounts and opportunity cost. Paying for licenses annually or in full upfront will divert capital that could be used elsewhere. While this is offset by predictable costs and potential savings, it requires another level of strategic prioritization and clear return-on-investment justification.
Key Financial Considerations:
Operational and Procurement Considerations
The operational impact of moving to a three-year term is another factor that shouldn’t be underestimated. IT procurement teams will need to adapt their contract review and renewal cycles, ensuring they are not caught off guard by long-term commitments that are harder to unwind. Contractual flexibility, which is often a hallmark of CSP models, will be reduced in these longer-term agreements and require more due diligence up front to secure a favourable agreement.
It will be important to coordinate with your IT, finance, and legal teams to determine whether your current processes are equipped to manage multi-year subscriptions. Renewal schedules will also need to be integrated into strategic planning documents, and a system of regular review should be implemented to track license utilization, adoption, and business value.
Additionally, CSP partners will play a vital role in helping companies transition to and manage these new licensing structures. They should be vetted not only for their ability to provision licenses but also for their advisory services, billing flexibility, and long-term account management capabilities. As licensing becomes more complex, the expertise of a knowledgeable CSP partner will be a major competitive advantage.
Key Operational Readiness Takeaways:
Preparing for the Transition
If your organization is interested in transitioning to the three-year term model, it’s advisable to being preparations immediately, especially if your renewal windows fall in the second half of the calendar year for 2025.
Step 1: Review Your Current Entitlements and Usage
The first step is a review of current licensing, user counts, usage patterns, and contractual obligations. Understanding your current state will clarify whether a three-year term aligns with your operational reality and strategic goals.
Step 2: Engage CSP Partners and Stakeholders
Next, companies should engage with their CSP partners to explore their eligibility for the new SKUs. Confirming minimum license thresholds and exclusions, such as From SA usage, will prevent misunderstandings during the purchasing process. Discussions with CSPs should also cover potential pricing structures, billing terms, and contract language.
It’s also advisable to involve senior leadership and finance teams early in the process. The decision to lock in three-year licenses shouldn’t be made in isolation. It should be integrated into broader discussions about cloud transformation, capital allocation, and enterprise risk management to make sure that there are no surprises for other departments three years down the line.
Step 3: Phase or Full Send
Finally, companies should consider whether to phase in the new term structure or transition fully upon renewal. Phasing allows for greater flexibility and risk mitigation, while a full transition simplifies contract management and aligns all users under the same terms in one go. The right approach will depend on your company size, organizational maturity, and the complexity of your current licensing landscape.
Final Thoughts
Microsoft’s decision to expand three-year term subscriptions to Microsoft 365 E3 and E5 under the CSP model, along with the forthcoming extension to Security Suites, marks a notable shift in enterprise licensing. It reflects the realities of modern enterprise IT: longer planning horizons, the need for more predictable funding models, and a deeper integration of cloud services into core business operations.
For organizations that are ready to commit to Microsoft’s ecosystem and are confident in their long-term user needs, the new licensing structure offers compelling advantages. However, it also requires more diligence, coordination, and forward-thinking to extract maximum value.
Key Takeaways:
By understanding the full scope of these changes and preparing accordingly, you can ensure that your licensing strategies not only support today’s operations but also position your organisation for sustainable growth, innovation, and security in the years ahead.
2Data is an independent software licensing advisory specializing in Microsoft, Oracle, SAP, Salesforce and IBM optimization. We help companies reduce contract costs, manage risk, and simplify their software licensing.
