By Aleksei Wechter

A Keystone update on the erosion of Licensing Solution Partner (LSP) incentives, the unfunded advisory gap this leaves behind, and why clients need to actively manage the risk on one of their most material and business-critical technology investments.

Our View

For most organisations, Microsoft licensing is one of the largest, most complex, business-critical technology investments that underpins identity, collaboration, security, and increasingly AI-enabled productivity across the entire enterprise. Historically, clients have leveraged (often without realising it) a layer of advisory capacity that their Licensing Solution Provider (LSP) funded out of Microsoft’s channel rebates to help with licensing and product advice, optimisation, renewal structuring, true-up modelling, and negotiation support. That funding has now effectively disappeared.

Microsoft has spent the past decade progressively defunding the LSP channel, and the pace of that change has accelerated sharply since January 2025. The result is a structural gap in the enterprise licensing ecosystem: LSPs are earning a fraction of what they once did for administering Enterprise Agreements, Microsoft has not increased its own resourcing to replace the advisory and account-management capability LSPs used to fund from those rebates, and clients are left holding the risk of reduced service, higher mark-ups, or advice that has simply stopped being commercially viable for these businesses to provide as a value-add.

Our position is straightforward: organisations can no longer assume that the licensing support they have historically leveraged from Microsoft and their LSPs will continue at the same depth, quality, and cost.

This is compounded by a structural conflict of interest that has always existed but is now more consequential than ever: both Microsoft and its LSPs generate revenue when clients buy more, and neither is incentivised to tell a client to buy less, buy smarter, delay a purchase, or challenge a commercial position. As the LSP’s rebates for the “soft” advisory layer disappear, that conflict is no longer offset by a funded, value-added relationship; it is just a conflict, with materially reduced service wrapped around it.

Given the scale of what is at stake, often tens or hundreds of millions of dollars in annual spending on Microsoft, clients need to be better organised internally and consciously decide where they need specialised, independent resourcing to fill the gap the channel can no longer fund. Key areas of focus include the alignment of business and technology strategy to licensing investment strategy, licensing optimisation, renewal strategy, and negotiation.

Recommendations

  • Govern Microsoft licensing as an enterprise risk. Given the scale and criticality of this investment, assign clear internal ownership for monitoring business alignment, forecast versus actual costs over time, licence optimisation, renewal timing, and negotiation strategy. If you do not have existing internal capabilities, do not wait until your next renewal to find out that your LSP is not able to provide the value-adds it has historically and Microsoft is not resourced to fill the gap.
  • Separate operational servicing from strategic advice. Software resellers retain their roles around order processing, licence administration, and true-up logistics, but treat licensing advice, licence optimisation, renewal strategy, and negotiation as distinct workstreams that sit with an independent advisor with no reseller margin, rebate, or designation status tied to your spending.
  • Invest in independent, subject-matter expertise for renewals and material new investment. As channel incentive-funded support evaporates, the value of engaging specialists who are remunerated only by you, not by Microsoft, increases correspondingly, particularly for whole-of-estate optimisation, benchmarking, and negotiation on material licensing investments, Unified Support, and Azure or AI commitments.

What’s Actually Changed

The reduction in LSP incentives is not a single event but a multi-year trajectory that has materially steepened over the past 18 months.

The headline numbers

Analysis of Microsoft’s own incentive structure indicates that, effective January 2025, an LSP servicing a client with 1,000 Microsoft 365 E5 seats saw their annual incentive collapse from approximately $148,000 to as little as $7,600 – a reduction of over 90% for that single product line.

Reporting on Microsoft’s own EA commission data shows total global LSP commissions falling from roughly $2.5 billion in 2023, to $1.67 billion in 2024, to $583 million in 2025, trending toward negligible levels in 2026 as EA renewals convert to Microsoft-direct or MCA-based models.

The channel program itself has been rebuilt, not just trimmed

Microsoft’s FY26 and FY27 partner incentive changes continued a trend that shifted incentives from transacting partners to partners who could prove they were supporting their clients to adopt Microsoft’s strategic solution sets aligned to a defined set of premium and AI-aligned SKUs, including Microsoft 365 E5/E7, Microsoft 365 Copilot, Windows 365 Enterprise, Defender, and Purview.

The net effect: partners are paid for growing premium and AI-aligned consumption, not for servicing a stable, well-managed estate.

For clients, the specific type of advisory support historically funded for well-managed, steady-state estates – proactive optimisation, roadmap alignment advice, true-up modelling, and renewal preparation – is precisely the category of support that has lost its funding.

Microsoft’s Position

Microsoft frames these changes as simplification and transparency: aligning all customers to consistent, published pricing, and redirecting partner investment toward partners who are “delivering transformational impact” in Microsoft’s stated strategic priorities, such as Copilot and AI adoption, security, and Azure cloud migrations. Microsoft’s public partner communications describe FY26 and FY27 as a “record year of investment” in the partner ecosystem overall, even as flat resale margins are removed and incentive eligibility is increasingly gated behind designations, capability scores, and growth metrics rather than simply holding the business.

Both things can be true at once: Microsoft is increasing the ceiling of what highly aligned, AI and security-focused partners can earn, while reducing what historically transactional LSPs earn for simply administering an existing estate. This makes business sense for Microsoft, but erodes value-add LSP services that clients have leveraged for decades.

The LSP Response

LSP commentary is candid about the pressure this creates. Industry analysis notes that some LSPs have historically derived up to 80% of their revenue from EA-related rebates, forcing a fundamental review of their business models including staff reductions in licensing advisory and support functions, and a shift of previously “included” services – true-up modelling, roadmap sessions, and Copilot readiness advice – to billable, chargeable engagements.

We are seeing this play out directly in client engagements. Across recent government renewal programs, we have observed incumbent LSP pricing positions sitting materially above the broader market benchmark, in a pattern consistent with LSPs increasing mark-ups or service fees to offset lost Microsoft-side incentives rather than any change in the services being delivered.

Consistently, we are observing clients struggle to get timely or accurate pricing positions for material investments and renewals from Microsoft or their LSPs. This is because Microsoft considers price modelling to be LSP work, but the LSPs are no longer remunerated to deliver these outcomes and their account managers need to prioritise work that supports them to attain their sales quotas.

Where clients have not established an internal capability to replace the advisory services they historically received from their LSP, they become reliant on guidance from Microsoft themselves – effectively inviting the ‘fox into the henhouse’.

Market Commentary

The broader market view is that clients have long relied on their LSP to help navigate nuanced licensing options and complex investment and renewal decisions, and that sourcing, procurement, and vendor-management functions now need to proactively assess the impact and risk as incentives are cut and direct-contracting models expand.

A related and more pointed thread of commentary addresses the underlying structural conflict directly: a reseller’s revenue, partner-tier status, and channel incentives are, by design, aligned with the vendor’s own strategic sales priorities and not with a client’s interest. On this view, supplier and reseller advice is never truly free; it is paid for through higher vendor spend and less optimal deal structures, with the cost simply diluted into the client’s overall bill rather than shown as a separate fee.

It is also worth noting that this is not the first time a major enterprise software vendor has restructured its channel this fundamentally. The historical precedent for this kind of transition succeeded, in large part, because it was paired with a deliberate mechanism to preserve advisory expertise through the change, a self-funded structure that kept clients supported while the channel adjusted. The current transition differs from that precedent in one important respect: no equivalent mechanism has been supported by Microsoft to replace the advisory capacity being withdrawn. The practical consequence is that channel expertise and client-side advocacy are eroding at the same time, rather than one stepping in to replace the other.

The early evidence of this is already visible in partner-side financial performance, which is beginning to diverge sharply depending on how exposed a given partner’s business model was to rebate-linked revenue versus more diversified, service-led offerings.

What This Means for Your Organisation

Step back from the channel mechanics and the implication for client organisations is straightforward: one of your largest, most complex, and most business-critical technology investments has quietly lost a layer of advisory support that used to help you manage it safely. Neither Microsoft nor their LSPs has an incentive to proactively flag this gap to you. Microsoft’s own commercial interests are generally served by more direct, less-intermediated client engagement, and an LSP has little to gain by advertising that its own service levels have quietly declined while costs increase.

This does not mean clients are without options. It means the responsibility for ensuring licensing decisions are optimised, renewals are benchmarked, and negotiation leverage is fully exploited increasingly sits with you. Given the scale of this investment, often comparable to other critical utility or infrastructure spend in terms of enterprise dependency, it deserves the same level of deliberate, formally governed risk management, supported where it makes commercial sense by independent advisors who are remunerated only by the client and carry no vendor partner status, resale margin, or designation-linked incentive of their own.

For a Microsoft Enterprise Agreement renewal, organisations should prepare the licensing position, technology roadmap, commercial priorities, risk appetite, and executive decision framework before negotiations begin. Keystone’s Microsoft EA negotiation and contract renewal services explain that preparation and negotiation approach. The same discipline applies to Azure and MACC negotiations, where a defensible forecast and clear risk allocation matter when consumption differs from the original plan.

About the Author

Aleksei Wechter worked in a variety of roles across multiple LSPs between 2007 and 2022, culminating in heading up Data#3’s Licensing Consulting Services business where he was charged with leading the transformation of their Software Solutions business to mitigate the risks presented by Microsoft’s changing rebate programs. Supporting organisations to realise greater value from their material software investments in the rapidly evolving technology industry delivered greater satisfaction than selling software licences, which is how he found his way to Keystone where he helps organisations negotiate with Microsoft to deliver a maximised return of value.

Keystone Negotiation is an independent Microsoft negotiation and licensing advisory firm. We hold no Microsoft partner, reseller, or LSP status, and our advice is never linked to product sales, resale margin, or vendor-aligned incentives. If you would like support assessing or managing your organisation’s Microsoft investments, or preparing for an upcoming Microsoft renewal, please contact Keystone Negotiation.