April 17, 2025 Atomic Data

Understanding Microsoft 365 Over-licensing (and Avoiding the Pitfalls)

Microsoft 365 has become the go-to solution for businesses worldwide, offering a range of management and productivity tools that help streamline identity and endpoint management, enable more efficient team collaboration and communication, and much more.

Despite its myriad capabilities—or maybe because of them—businesses can often fall into the trap of over-licensing, which can lead to unnecessary costs and resource mismanagement. In fact, recent research indicates that 44% of Microsoft 365 licenses are either underutilized or oversized.

The Pitfalls of Over-licensing Microsoft 365

Unnecessary Costs—The most obvious pitfall of over-licensing is the direct financial cost. Microsoft 365 operates on a tiered, subscription-based pricing model and paying for more licenses or more advanced plans than necessary means your business is effectively throwing money away (e.g., the average business could reduce their total Microsoft 365 costs by 14% if they discovered and better managed inactive licenses). These extra expenses can quickly add up, straining your budget and diverting funds from other essential areas.

Underutilization of Features—Many businesses purchase Microsoft 365 plans with advanced features, such as enterprise-level security, compliance tools, or collaboration features like Teams. However, not all employees may require these features, and in some cases, they might never be used. This results in paying for capabilities that don’t add value to your team, further inflating your costs.

License Management Complexity—over-licensing often leads to confusion and difficulty in tracking which users are assigned which licenses. This can create administrative headaches and increase the likelihood of errors, such as assigning licenses to employees who no longer need them or forgetting to revoke licenses when employees leave the company. This can cause even more unnecessary costs and inefficiencies.

Security and Compliance Risks—Another significant risk associated with over-licensing is that businesses may purchase features or services they don’t fully understand. Some advanced features, like compliance or security settings, can be complex to manage. When businesses don’t use these tools properly, they can inadvertently create security gaps or compliance issues, exposing sensitive company data to potential risks.

Avoiding Over-licensing

Assess Your Business Needs—The first step in avoiding over-licensing is to accurately assess your business’s needs. Not every employee needs access to all Microsoft 365 applications or advanced features. Evaluate each department’s requirements to ensure you’re purchasing only the licenses and features they truly need.

Use Microsoft’s License Management Tools—Microsoft offers a range of tools that allow businesses to track their usage and manage licenses effectively. The Microsoft 365 admin center provides insights into how many licenses are in use, which applications are being used, and which services are underutilized. Use these tools to monitor usage regularly and adjust your licenses as necessary.

Implement a Regular License Review Process—Businesses should establish a routine for reviewing their Microsoft 365 licenses. Regular audits allow you to identify and revoke licenses that are no longer needed (e.g., when an employee leaves, or their role changes). By implementing a formal review process, you can ensure that your organization always has the right number of licenses, without overspending.

Choose the Right Plan for Your Business—Microsoft 365 offers a range of tiered subscription plans, each tailored to different business needs (i.e., E1, E3, E5). Selecting the plan that suits your organization’s size and requirements will prevent you from paying for features you won’t use.

Consolidate and Standardize Licenses—If your company is growing or has a variety of departments with different needs, it may make sense to consolidate licenses. Standardizing plans across departments or roles can help ensure everyone has the tools they need without buying excess or unnecessary features.