Microsoft 365 License Optimization: E5 vs E3 vs F3 Decisions

Microsoft 365 License Optimization

Introduction: Why License Optimization Matters in Microsoft 365

Every dollar counts in an enterprise IT budget, and Microsoft 365 licensing is often one of the biggest line items. Choosing between E5, E3, and F3 plans will drive your costs far more than any volume discount you negotiate.

Microsoft might promote the top-tier E5 for its all-inclusive benefits, but savvy CIOs and IT managers approach that pitch with caution.

Optimizing your mix of E5, E3, and F3 licenses to fit actual user needs is the surest way to avoid overspending while still meeting your organization’s requirements. Read our strategy guide, Microsoft EA Cost Optimization: Strategies to Reduce Spend and Eliminate Waste.

License choice matters because a blanket “everyone on E5” policy means paying for advanced features that many employees simply don’t use. In contrast, a strategic blend of license tiers – giving each user only what they need – can reduce your Microsoft 365 spend by a significant margin (often 30-50% or more).

Those savings can then be reinvested into other initiatives or targeted upgrades where they truly make a difference.

In the sections below, we explore how to balance capabilities against cost, implement a hybrid licensing model, utilize add-ons instead of full upgrades, plan safe downgrades at renewal, and continually review licenses to optimize costs.

Capabilities vs Cost: E5 vs E3 Explained

Not all Microsoft 365 licenses are created equal. The E5 plan is Microsoft’s top-tier offering, bundling virtually every advanced feature from security to analytics to telephony.

The E3 plan is a mid-tier license covering all the core productivity and collaboration needs of a typical knowledge worker (without the extra frills). Meanwhile, F3 (Frontline) is a low-cost plan designed for deskless or low-use employees who primarily require access to email, Teams, and web-based apps.

Understanding the trade-offs in capabilities and cost between E5, E3, and F3 is the first step toward optimizing your license strategy.

E5 includes everything in E3 plus a suite of premium capabilities.

For instance, E5 comes with advanced security tools (such as Microsoft Defender threat protection and Azure AD Premium P2 for identity governance), enhanced compliance features (like advanced eDiscovery, auditing, and information protection controls), rich analytics (including Power BI Pro and Workplace Analytics for organizational insights), and voice/conferencing capabilities (Teams Phone System for enterprise telephony and Audio Conferencing for dial-in meetings).

These features make E5 appealing to organizations with strict security or compliance mandates, as well as those that require built-in analytics and telephony. However, all these extras come at a significantly higher price.

E3 covers the essentials at a more moderate cost. An E3 user gets the full Office suite on desktop (plus web and mobile apps), a large Exchange Online mailbox (50–100 GB with archiving), 1 TB of OneDrive storage, and access to SharePoint, Teams (standard collaboration features, but not the PBX phone system), and Yammer.

E3 also includes baseline enterprise security and device management (Azure AD Premium P1, Intune for mobile device management, and basic threat protection), which is sufficient for many organizations.

In short, E3 provides everything that the average information worker needs to be productive and secure, without the specialized add-ons of E5 – and its lower cost reflects that.

F3 is a stripped-down license designed for frontline or first-line workers who don’t require a full desktop Office experience. With F3, users get Office apps only in their web browser or mobile device (no desktop app installation required), a smaller 2 GB email mailbox (available only through Outlook web access), and 2 GB of OneDrive storage, as well as the ability to use Microsoft Teams for chat and video meetings.

F3 still includes fundamental security and management (Azure AD P1 for identity, Intune for device management, basic conditional access), but it omits all the advanced features.

This plan is ideal for roles such as retail staff, factory floor operators, field service teams, or call center representatives – employees who may use shared kiosks or personal smartphones to check email and Teams, but who won’t be creating complex documents or analyzing data. The F3 license comes at only a fraction of the cost of the E3 license, reflecting its limited scope.

To illustrate the differences between these plans, here’s a high-level comparison of E5 vs E3 vs F3 in terms of features, cost, and best-fit users:

As the table shows, the cost jumps significantly from F3 to E3 to E5, and so do the capabilities. This highlights why it’s crucial to match each user with the right plan for their needs. E5 can cost roughly 60% more than E3 – that premium is worth it only if a user is actively using E5’s extra security, compliance, or voice features.

Otherwise, you’re paying for unused potential. Conversely, assigning an F3-level user an E3 or (worse) an E5 license would be overkill – you’d be overspending for lots of functionality they won’t use.

The goal is to right-size every user’s license: align the license’s capabilities (and cost) with the actual value that the user gets from the tools.

Checklist: Features Mapped to Business Needs?

• Have you documented which advanced features (such as security, compliance, analytics, and telephony) are truly required for each team or role within your business?
• Are you avoiding a one-size-fits-all license approach and instead aligning specific feature needs to the users who actually need them?

Read about, Azure Cost Optimization Under an EA.

Hybrid Licensing Approach for Cost Optimization

One size does not fit all when it comes to Microsoft 365 licenses. A hybrid licensing strategy involves using a combination of E5, E3, and F3 licenses across your workforce to strike a balance between functionality and cost.

In practice, many organizations find that the majority of users can thrive on E3, while a select group of power users or those in high-risk roles truly need E5. Additionally, a segment of frontline or occasional-use employees is perfectly served by F3.

By tailoring license levels to user needs, you avoid paying for expensive E5 features that most employees won’t use, while still providing those who do need them with the right tools.

Crucially, Microsoft allows you to mix and match E5, E3, and F3 licenses within the same tenant. You might have 100 users on E5, 800 on E3, and 100 on F3, all in one environment – there’s no requirement to put everyone on the same plan.

This flexibility enables a cost-optimized deployment. For example, consider an organization of 1,000 people: if all 1,000 were put on E5, the license costs would be astronomical.

Instead, if only 10% truly require E5 and the rest use E3 (with some F3 for frontline staff), the overall Microsoft 365 spend could drop by a third or more.

All users still collaborate seamlessly – they can email, chat, and work together regardless of license – but expensive capabilities like advanced security or phone system are only enabled for the subset that needs them.

Adopting this hybrid approach typically yields the best ROI on your Microsoft investment. You’re effectively right-sizing the spend: high-end tools are paid for only where they deliver value, and lower-cost licenses cover the baseline needs elsewhere.

Many CIOs report freeing up significant budget by reducing “license bloat” (e.g., not giving E5 to 100% of staff by default). Those savings can be redirected to other projects or targeted improvements, such as security add-ons for those who truly need them, rather than overspending across the board.

Checklist: Hybrid Licensing Plan Approved?

• Has leadership and IT governance agreed on a mixed licensing model (using E5 only for specific roles instead of all users)?
• Did you calculate and review the projected cost savings from a hybrid E5/E3/F3 allocation versus an all-E5 scenario?

Read about more strategies, Microsoft EA Cost Optimization Strategies (Mid-Term and Renewal).

Using Add-On Modules Instead of Full E5

What if your organization only needs a few of the extras that come with E5, but not the whole package? In that case, add-on licenses can be a cost-saving alternative to upgrading everyone to E5.

Microsoft offers à la carte add-ons that let you bolt on specific E5-level features to an E3 (or even F3) user. By using add-ons, you pay only for the particular advanced capabilities that certain users require, instead of paying for the entire suite of E5 features that most of your users won’t use.

For example, rather than assigning E5 to every employee solely to obtain phone system capabilities, you could purchase the Teams Phone System add-on for those who require telephony.

An E3 user with the Phone System add-on (plus a calling plan) can make and receive external calls in Teams just like an E5 user – but you’d be paying perhaps ~$8 extra for that user instead of the ~$20+ extra for full E5. Similarly, Power BI Pro (for data analytics and dashboards) is included in E5.

Still, you might choose to buy a $10/month Power BI Pro license for only the analysts or managers who actually need to create BI reports, while keeping them on E3 for all other purposes.

Microsoft also offers packages such as the “Microsoft 365 E5 Security” or “E5 Compliance” add-ons, which bundle several advanced security or compliance features from E5 and can be attached to E3 licenses. In short, there’s a lot of flexibility to mix and match capabilities without upgrading a user’s entire license level.

Using targeted add-ons often results in significant savings. If only 15% of your company needs a particular E5 feature, it’s far cheaper to buy 150 add-on licenses for that feature than to upgrade all 1,000 users to E5.

The key is to evaluate which specific E5 features are truly needed in your environment and see if they’re available as standalone add-ons. By performing this analysis, you might discover you can get the same functionality for a subset of users at a fraction of the cost of full E5.

One caution: keep an eye on “add-on sprawl.” Suppose a single user ends up needing multiple different add-ons (for instance, one person needs the phone system, advanced security, and Power BI Pro all separately).

In that case, the combined cost might approach or exceed the cost of simply moving that user to E5. In those cases, a full E5 license for that individual could simplify management and potentially be more cost-effective. However, for one or two additional needs per user, add-ons provide granular control to avoid overspending on broad upgrades.

Checklist: Add-On vs Full E5 Analysis Completed?

• Have you identified which E5-only features your organization needs and checked if those are available as add-on licenses for E3/F3 users?
• Did you compare the cost of giving select users an add-on (or two) versus upgrading them entirely to E5 to ensure you choose the more cost-effective route?

Safe Downgrade Path at Renewal

Many organizations today have at least some users on E5 licenses, especially if they initially opted for “full coverage” to be on the safe side.

But if you suspect that portions of your staff are over-licensed (using E5 when E3 would suffice), it’s wise to plan a downgrade strategy – and the ideal time to execute it is at your contract renewal.

Microsoft Enterprise Agreements typically lock in your license quantities and editions for the term. While you can always upgrade mid-term, reducing licenses usually occurs at renewal (or an annual true-up) to avoid penalties or breaking the contract.

Begin by analyzing usage data and business requirements before the renewal. Identify which users or departments are not utilizing the E5-specific features significantly.

Common signs include E5 users who never schedule Teams meetings with dial-in numbers, don’t use any Power BI or advanced analytics, or aren’t leveraging the advanced security and compliance tools.

Those users are prime candidates for a move to E3 at renewal. Likewise, some E3 users might even be candidates for F3 if their work is sufficiently light – for example, a person currently in a part-time role who only checks email occasionally.

Downgrade Planning Steps:

• Inventory and Assess: Review your Microsoft 365 admin reports or use a third-party tool to see which E5 features are being used and by whom. List out the roles that truly require E5 capabilities and those that do not.
• Identify Downgrade Candidates: For each E5 user, ask, “Would anything break if this user were on E3?” If the answer is no (or the only loss is minor conveniences), mark them as a downgrade candidate. Compile a list of users (or entire teams) that can be safely moved down to E3 or F3.
• Plan Alternatives if Needed: Ensure that downgrading does not remove something business-critical. In cases where a user only needs one aspect of E5, consider providing them with an add-on under E3 to cover that need after downgrading. For example, if a sales manager on E5 only used it for Power BI, you can downgrade them to E3 and add a Power BI Pro license – they keep the functionality that matters without staying on full E5.
• Align with Renewal Cycle: Coordinate the license downgrade with your EA renewal or true-up date. Give Microsoft or your licensing partner advance notice that you plan to reduce E5 counts. This avoids any surprises and ensures the change can be made contractually at the right time.
• Communication and Training: Inform the affected users (and their managers) about the upcoming license change. Emphasize that their core tools (Office apps, email, Teams, etc.) will remain the same with E3, and highlight any minor features they might lose. Often, users won’t even notice the difference, but it’s good practice to manage expectations and provide support for any questions.

Following these steps will enable you to safely reduce your E5 footprint without business disruption. Done right, a downgrade wave at renewal can significantly lower your costs while still keeping everyone productive and secure on the appropriate license tier.

Checklist: Downgrade Plan Aligned with Renewal Cycle?

• Have you evaluated all current E5 users and identified which ones can be moved to E3 or F3 without impacting their work?
• Is your license reduction scheduled to coincide with your contract’s renewal or true-up period so that you can adjust license counts without penalty?

Periodic License Assignment Reviews

Optimizing licenses is not a one-and-done project – it requires ongoing oversight.

Over time, employees change roles, projects start and end, and usage patterns shift.

A user who required an E5 license last year may no longer need those capabilities today, or vice versa. This is why it’s essential to conduct periodic license assignment reviews (for example, every six months) to ensure your Microsoft 365 licenses remain appropriately sized for current needs.

Regular audits of license usage help identify oversights, such as E5 licenses assigned to users who aren’t utilizing any E5 features, or dormant accounts that still have an active license allocated. Microsoft 365’s admin center provides usage reports to highlight under-utilization.

For instance, you might find a group of E5 users with zero activity in advanced Power BI, compliance, or Teams Phone features, indicating a downgrade opportunity. Conversely, you may discover that some staff members have outgrown their E3 licenses and now require an upgrade to E5 due to new responsibilities (for example, an employee transitioning into a cybersecurity role).

To keep on top of this, establish a recurring audit process. Align these check-ins with your business cycle – many organizations conduct semi-annual or quarterly reviews. In each review, involve IT asset managers and department leads to confirm that team members have the appropriate license for their current role.

As people join or leave the company, make sure to reallocate or remove licenses promptly (to avoid paying for unused seats). By treating license management as an ongoing practice rather than a set-and-forget task, you’ll continuously optimize costs and prevent “license creep” over time.

Checklist: Semi-Annual License Audits Scheduled?

• Do you have a routine (e.g,. twice a year) to review user license assignments and usage patterns?
• Are you monitoring Microsoft 365 usage reports for signs of underused E5 licenses or other mismatches that signal it’s time to adjust some users’ license levels?

5 Actionable Microsoft 365 License Optimization Tips

• Don’t Default to E5: Only assign the E5 license where its advanced security, compliance, or telephony features are truly essential. Avoid the expensive “E5 for everyone” approach by default.
• Adopt a Hybrid Mix: Make E3 your default license for most users, use E5 sparingly for the select power users who need it, and leverage F3 for frontline staff. A mixed environment maximizes value.
• Explore Add-Ons: Instead of full E5 upgrades, buy only the advanced feature add-ons that specific groups need (e.g., Teams Phone, Power BI, or security add-ons). This targeted approach cuts costs significantly.
• Downgrade at Renewal: Reevaluate your license distribution before each renewal to ensure optimal usage. Plan to safely shrink your E5 footprint where possible, ensuring that users keep core tools via E3 or F3, so that nothing business-critical is lost.
• Audit Regularly: Don’t set and forget. Revisit license assignments periodically (e.g., semi-annually) as roles and needs change. Continual monitoring prevents creeping increases in licensing costs and identifies inefficiencies early.

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