Microsoft 365 bills arrive with a seat count on them, and the seat count grows a person at a time. Somebody joins and the number goes up that afternoon, which is exactly how it should work. Somebody leaves and the number often stays where it is for a while. Do that for four or five years and the shape of the subscription is whatever the joining and the leaving left behind. Nobody sat down and decided it.
The short answer is that both terms should be in use at once. Split the estate in two. The floor is the number of seats the business genuinely will not drop below this year, and that group goes on an annual term, which usually costs less per seat. Everything above the floor stays monthly, where the extra per-seat cost buys the freedom to hand seats back. Then somebody in the business names the floor once a year, on purpose.
A split like that often lowers the bill, because annual terms usually cost less per seat than monthly ones for the same product. That’s a side effect. The point is that the shape of the estate becomes something a person decided.
How do we work out the floor number?
Work upwards from the bottom. Take the current seat count and take away every seat you could imagine handing back inside twelve months: roles you wouldn’t refill, contract and project staff, the seats that exist because of one big customer. What’s left is the floor. It’s a different number from today’s headcount, and it’s a long way from the one in the growth plan.
The floor will feel low. A floor that feels low is doing its job, because the two ways of getting this wrong are not the same size. Set it too high and you pay for those seats until the term ends, whatever the year does. Set it too low and you pay a little more per seat on the ones you left monthly. When you can’t decide about a seat, leave it monthly.
Can we reduce an annual commitment part-way through?
Usually not, and that’s the trade you’re making. At the time of writing (September 2026), an annual Microsoft 365 term generally runs to its end date: the seat count can go up during the term, and it typically can’t come down. There’s normally a short window straight after an order is placed when it can still be cancelled, and it is short.
This works the same way whether licences are bought from Microsoft directly or through an IT provider on the provider’s agreement. Both are ordinary. So when a provider says an annual seat can’t be dropped in month four, they aren’t being difficult. The term is enforced upstream of them too, and they’d be paying for it either way. Worth knowing before that conversation starts.
What about all the add-ons on the bill?
Underneath the seat counts there’s usually a second layer: premium tiers, extra security, telephony, compliance features, storage, the thing somebody trialled once and everybody kept.
Give each of them a line. One sentence, in ordinary words, saying what it does for this business and who wanted it. A line looks like: we pay for the higher security tier on every seat because our insurance application asked about multi-factor sign-in and conditional access. “It came with the bundle” doesn’t count.
Anything nobody can write a line for isn’t necessarily wrong. It’s unexplained, and unexplained things on a recurring bill stay there for years. Once the line exists, the add-on is a decision somebody made.
Who should own the licence decision?
Somebody in the business, by name, once a year.
Your IT provider can tell you what each licence does, what the terms are, what it costs and what they’d recommend, and a good one will do all of that in an afternoon. What they can’t tell you is whether you’ll be smaller in six months. That’s a judgement about your trading year, and it belongs with whoever sits in the room when those conversations happen: the owner, a director, the person who signs off recurring spend.
Owning it means the number is yours. You set the floor, you say it out loud, and at renewal the question arrives on a named desk. The alternative isn’t somebody making a bad call. It’s the setup from four years ago surviving another year because nobody was asked.
How we size this for the businesses we look after
This is the method we use to size commitments for the businesses we look after. Split the estate at the floor, commit that group annually, leave everything above it monthly, and go back to the split once a year. It isn’t clever. It’s a number and a date in a diary.
What we keep meeting on discovery calls is the other version: every seat monthly, right across the estate, with no split at all. The reason is almost always the same one, and it’s a fair one. Monthly was the safe answer at setup. Nobody knew how fast the business would grow, flexibility was worth paying for, so everything went on the flexible term. That was right at the time. Then several years pass and nobody has been back to it, because nothing went wrong and nothing ever made them.
Name your floor once a year, commit to it annually, and keep every seat above it monthly. The floor is the seat count you’d still be paying for in a bad quarter. That’s a business number, and it wants a business person to set it.
So write two things on the same page this week. The floor number, with the date you set it. And the name of the person who sets it next year. The number will be slightly wrong, which is fine, because a number with somebody’s name on it gets corrected. Then put the renewal date in that person’s diary a few weeks early, so the question reaches them while the number can still move.
Questions we get asked
Somebody leaves three months into an annual term. What happens to their seat?
The seat normally stays paid for until the term ends, and you can hand it to someone else. Take the licence off the leaver and put it on the next joiner, or on somebody currently sitting on a monthly seat, and drop the monthly one instead. The commitment is to a quantity for a period, and the quantity moves between people. Taking the leaver’s access away is a separate job, and a more urgent one.
We take on seasonal staff every autumn. Which group are they in?
Monthly, every time. A seat can be perfectly predictable and still belong above the floor. The question the floor asks is whether you’d still be paying for it if the season didn’t happen, and with seasonal staff you wouldn’t. A reliable pattern makes the extra monthly cost easy to budget for, and it leaves those seats where they are. Same for anyone on a fixed-term contract ending inside the year.
Can we really run annual and monthly terms side by side?
Yes, and it’s ordinary. The term usually sits on the subscription, so one product can appear as two lines on the same account: a block of annual seats and a block of monthly ones, on the same tenant, working identically for everybody using them. Nobody in the business notices a difference in the software. The bill is where the split shows up, which is also where you’ll read it back next year.
What should we do the month before renewal?
Set the floor again from scratch, with everything you know now that you didn’t know last year, and write the current seat count next to it. If the floor has gone up, move seats from the monthly block onto the annual one at renewal. If it’s come down, renewal is normally the one point in the year when the annual block can shrink. Let the date pass and the old number rolls forward.
We’re growing. Can we add to the annual block mid-year?
Adding seats is usually easy, and it’s worth knowing what you’re adding them to. Seats added to an existing annual subscription typically take on whatever is left of that subscription’s term, so they finish when it finishes. A new annual subscription bought mid-year normally starts its own twelve months, on its own renewal date. Two renewal dates is how an estate gets complicated. If the growth isn’t urgent, monthly until renewal keeps it to one.
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