Office 365 celebrated its first birthday in July, and the cloud service has attracted an impressive list of educational customers over the last year. But when it comes to gaining traction in the enterprise, the picture is far less encouraging for Microsoft.
That's not to say that Office 365 has been a failure--far from it: Microsoft recently introduced its Office 365 service to 46 new markets, and it has been adopted by high-profile conpanies including Burger King, Japan Airlines, Hallmark Cards and Origin Energy.
[Related: 13 Cool Features of Office 365]
Despite those marque wins, overall enterprise adoption has been sluggish, and a round of price cuts of up to 20% in March--perhaps in response to Google's aggressive pricing for the cloud-based Google Apps service--has so far failed to make much of an impact.
Anecdotal evidence suggests that not surprisingly Office 365 is faring best in the small office / home office (SOHO) market. Yet despite the big names that have adopted the service, Microsoft has found the enterprise market a far harder nut to crack. "Microsoft is certainly not happy with the speed that Office 365 is being taken up in the enterprise--it has fallen short of the company's expectations for the service," says Hans Koehler-Kruener, a research director at Gartner.
For many enterprises, the potential cost saving of moving to Office 365 are simply not enough to offset the time and effort of migrating to a cloud-based system, says Wes Miller, an analyst at Directions on Microsoft. "The migration is costly, complex, and fragile--and risks downtime with some of the most important services within an organization," he says. "These can't be underplayed, and for a lot of organizations, it just isn't worth the pain of migration to save the money."
Miller says it typically takes more than two years to recoup any operational savings following a migration to Office 365, and pointed out that projects that risk so much near-term disruption for gains that far into the future are unlikely to be a high priority for many CIOs. "In many ways, Office 365 suffers from the fact that the on-premises services are "good enough," and the operational costs are already understood and part of the organization," Miller says.
[Related: Office 365: It's Not Just for SMBs
Another factor weighing against Office 365 that shouldn't be underestimated is that, in many cases, the operational teams that could be reduced if Exchange, SharePoint and Office are moved into the cloud are the same ones that have a role in making the decision to migrate to Office 365. Few people make decisions that are likely to make themselves redundant.
Given all of the above, Koehler-Kruener says that lack of clear functional benefits makes selling Office 365 to organizations very tough for Microsoft. "You really have to ask yourself what the added value of Office 365 is when the client already has an on-premises deployment," he says. "It's fairly easy to see the benefits of Hosted Exchange, but what exactly are the benefits of cloud-based versions of Excel, PowerPoint and Word? It's really not clear."
Koehler-Kruener may have a point: Exchange Online has broadly the same features as enterprise-hosted Exchange, but while SharePoint Online offers almost all of the collaboration and workflow features of SharePoint on premises, it lacks several features like business intelligence. And voice, a key value point of Lync, is still unavailable for Office 365 a year after the service's launch.
Office 365 Earns High Marks in Education
While enterprises may be hesitant, Office 365 has met with considerable success is education. There are a number of reasons for this, and perhaps the key one is that Microsoft offers it for free or at a huge discount to the enterprise rate. (Microsoft probably has little choice but to offer it with heavy discounts: Google--its major competitor in the education space for cloud-based productivity services--offers its Google Apps for Education service free.)
Another reason that a cloud-based service is attractive to educational establishments is that students move through the system so quickly--a university student will typically spend four years at the school, so 25% of the student body is replace every year. (It is rare that an enterprise would have staff turnover this high.)
This makes license management, and particularly license retrieval, hard if students are issued installed versions of Office software. By moving the product to the cloud, de-provisioning the service from groups of students when they leave can be done automatically simply by disabling their Office 365 accounts.
There's another economic factor at work here, too, and that's to do with the fact that educational bodies receive large subsidies for their Internet connectivity. "Our WAN circuits are the least expensive component of our network--they are cheaper than our LAN," says Richard Charlesworth, CIO of the Tennessee Department of Education. "That's the complete reverse of what you see in an enterprise. It means that a cloud service like Office 365 is uniquely aligned to K-12 because it gets traffic off our LANs," he added.
Charlesworth chose Office 365 over Google Apps for Education, and more than 1,600 schools in 136 school districts across Tennessee will have access to the service. "It was very entertaining to watch those two big behemoths dance around the ring for dominance in K-12, but for us Microsoft was much more attractive in the long term," he says. "What we see in Office 365 is a surfacing platform, a commn platform onto which we can surface functionality. We want to build Web services for our schools and package them in SharePoint."
School districts in Tennessee will be able to deploy and manage Office 365 for themselves, or--for smaller districts--the Department of Education will build a fully managed service that it will deploy on their behalf. Students and teachers will be provided with access to email, office applications, and the ability to collaborate with each other using SharePoint.
Charlesworth is particularly excited by Microsoft's recent $1.2 billion acquisition of enterprise social networking company Yammer. "Microsoft's push into social networking was pretty stunted. My hope is that the Yammer acquisition is a drive to beef up social networking functionality considerably in SharePoint as it could be a very powerful element for students," he says.
[Related: Why Microsoft Really Bought Yammer]
Office 365 has also found favor with the Fresno Unified School District, which is in the process of migrating students and staff to Office 365. The biggest benefit will come simply from moving Exchange in to the cloud, according to Kurt Madden, the District's CTO. "We have six servers at our main site, and another site for redundancy, and we will be able to get rid of all of that," he said.
The district manages about 280TB of storage for Exchange, and adds about 30GB per day, all of which will be moved to Microsoft's cloud. The district also receives between 4 million and 10 million spam emails per day, an amount that Madden says was beginning to overwhelm the organization's anti-spam systems, but which Microsoft will now filter in the cloud.
Madden estimates that the cost savings from migrating Exchange alone will amount to a conservative $1 per student per year, saving the district up to $100,000 per year. But Office 365 will also provide students with access to Word, PowerPoint, Excel and SharePoint, something which has rarely been provided before, plus a shared My Site space. Students will be able to work on PCs in schools, and complete their homework on whatever device they happen to own--a Mac, a PC, or a mobile device such as an iPad.
With the cost benefits that it is able to offer, Office 365's success in the educational market looks assured. But what can Microsoft do to encourage adoption of Office 365 in the enterprise space?
Office 365 Seeks Position in the Enterprise
Microsoft appears to be hoping that its network of resellers can succeed in pushing Office 365 out of the enterprise doldrums, and at WPC 2012 in early July it announced new reseller terms and incentives for Office365.
Wes Miller at Directions on Microsoft says the announcement could well have the desired effect. "It is significant in two ways. First, this is a very big thing for resellers, and will encourage them to help drive momentum.
Second, resellers can in turn both help inform and motivate customers who may be either on the fence or not even considering 365. And it also enables the reseller to help bring in partners they're experienced with to assist in migration, one of the pieces that can terrify an organization and completely stall out a migration."
By the time Office 365 celebrates its second birthday, it's likely that enterprises will have another option to consider in the shape of Office 2013--a hybrid productivity suite that offers on-premise applications, the same applications streamed from the cloud, plus cloud-based content storage.
Migrating to this is probably less risky and certainly less daunting, so it may turn out that Office 2013--rather than Office 365--is the enterprise product that finally drives productivity applications into the cloud.
Paul Rubens is a technology journalist based in England. Contact him at email@example.com.
This story, "Office 365 earns high marks in education, struggles in enterprise" was originally published by CIO.