The IT Leader’s Guide to Microsoft 365 Licensing Optimization in 2025

Microsoft (2)

By Alex Burton

Microsoft 365 (M365) has become a cornerstone of productivity for businesses worldwide, but many organizations significantly overspend on licensing due to poor alignment between what’s purchased and what’s actually used. Over one million companies rely on Microsoft 365 globally, yet studies show that a large portion of purchased licenses go to waste. In fact, more than half (56%) of enterprise Office 365/M365 licenses are inactive, underutilized, oversized, or even completely unassigned. This mismatch not only inflates IT costs but also impacts operational efficiency and can introduce security and compliance risks.

This report explores industry trends, common overspending areas, optimization strategies, and real-world examples to illustrate how proactive license management can lead to significant cost savings, improved efficiency, and reduced risk. Actionable steps are provided to help IT leaders and business owners take control of their M365 licensing before changes or renewals lock in unnecessary expenses.

The Cost of Overspending on M365 Licenses

Inefficient Microsoft 365 licensing translates directly into wasted IT budget. Organizations often pay for far more capability than they use:

Unused and Underutilized Licenses: Research found that on average 38% of enterprise software spend is wasted on unused or rarely used software. For large enterprises, this means roughly $7.4 million per year drained by under-utilized software subscriptions. In the M365 context, CoreView’s analysis of millions of users showed over 56% of Office 365 licenses in businesses are not fully exploited (sitting inactive, unassigned, or underused). In one example, nearly 50% of Microsoft 365 E5 licenses at organizations were found to be either inactive (23%) or unassigned (27%), essentially “shelfware” yielding no ROI.

Oversized Licensing (“Over-licensing”): Many companies err towards buying higher-tier plans (like E5 or E3) for all users by default, even if many users don’t need those advanced features. This “one-size-fits-all” approach leads to paying for features that seem nice-to-have but end up rarely used. For instance, an employee using only email and Teams might be assigned an E3/E5 license when a cheaper plan (like E1 or Business Basic) would suffice, resulting in unnecessary costs. Industry data backs this: roughly 11% of add-on licenses for premium apps (Power BI, Visio, Project) are typically unused and could be reclaimed, which for a 10,000-user organization could save about $40,000 annually on Project licenses alone.

Duplicate or Redundant Tools: Without awareness, organizations sometimes pay for overlapping capabilities. For example, maintaining a third-party security or collaboration tool while those same features are available in an existing M365 license can duplicate costs. If M365 E5 includes advanced security, purchasing a separate security solution might be redundant unless necessary – a form of overspend stemming from misaligned procurement.

“Shelfware” from Overallocation: It’s common to purchase too many licenses “just in case” (overallocation). Licenses bought but never assigned to a user sit idle while the meter runs. This is often seen when companies overestimate growth or fail to remove licenses after departures. Gartner famously estimates about 25% of all software licenses go unused. In M365, those unassigned or excess licenses contribute nothing to productivity but inflate the monthly bill.

Common Areas Where Businesses Overspend on M365

Understanding where and how overspending occurs is the first step to optimizing M365 costs. Some of the most common problem areas include:

Inactive or Orphaned Accounts: One of the easiest ways money leaks out is through licenses assigned to users who no longer use them. This often happens when employees leave and their M365 account isn’t deactivated or reclaimed. Eliminating or reassigning these licenses is an immediate cost win – CoreView found better management of inactive licenses alone can cut total Office 365 costs by about 14%.

Over-licensing and Oversized Plans: This happens when users are on a higher-cost M365 plan than needed for their job role. For example, frontline or task workers with basic email needs might be on a full Office suite license. Similarly, some companies put everyone on M365 E5 (the most expensive plan) to cover “all bases,” but many E5 features (advanced analytics, phone system, high-end security) may go unused by large subsets of users.

Unassigned “Shelfware” Licenses: Many organizations intentionally overbuy licenses (e.g. purchasing a block of 500 when only 450 users exist) to accommodate growth or to get volume discounts. But if that growth doesn’t happen or takes time, dozens of licenses can sit unassigned for months.

Misaligned License Mix: Microsoft allows combining different license types (even within the same tenant) so each user gets what they need. Failing to tailor the mix can mean some users lack critical features (hurting productivity or compliance), while others have expensive features they never use.

Strategies for Evaluating and Right-Sizing Microsoft 365 Licenses

To rein in costs and optimize your Microsoft 365 environment, a proactive evaluation strategy is essential. Here are key strategies and steps to assess your current licensing and right-size it to actual needs:

A Global Engineering Firm Saved $4.5M – After auditing licenses across multiple countries, they right-sized plans based on actual needs, resulting in $4.5 million in savings over three years.
A Manufacturing Company Achieved 200% ROI – By adopting a license optimization tool, the firm quickly reallocated underutilized licenses, cutting recurring costs and saving IT teams' valuable time.
A Mid-Market Business Reduced M365 Costs by 20% – This company switched light users from E3 to Business Standard while upgrading key users to E5, balancing cost efficiency and functionality.

Action Steps for IT Leaders: Take Control Before Changes Occur

Conduct an Immediate License Audit – Identify inactive and oversized licenses.

Identify Quick Wins – Remove or downgrade licenses for quick cost savings.

Engage Stakeholders – Collaborate with finance, HR, and department heads.

Plan for Renewals and Changes – Ensure licensing decisions align with business growth.

Use Security and Compliance as a Guide – Cost-saving shouldn’t introduce security risks.

Conclusion

Microsoft 365 licensing optimization is a high-impact area where IT can drive cost savings while also boosting efficiency and strengthening security. By auditing usage, right-sizing plans, and continuously monitoring, businesses can reduce waste, improve operations, and ensure compliance.

Need help navigating M365 licensing? Our team of Microsoft licensing experts can guide you through the process and help your organization achieve optimal efficiency. Contact us today to start saving on your Microsoft 365 investment!