Most businesses we speak to are paying for at least three or four Microsoft 365 licences they do not actually use. Over a year, for a 30-person firm, that is often enough to pay for a new laptop or a high-end firewall. A Microsoft 365 licence audit is the process of looking at what you are paying for versus what your staff are actually using, then trimming the excess.
Microsoft’s billing system is designed to be easy to scale up but slightly more obscure when it comes to scaling down. If you add a user, you buy a licence. If that user leaves and you delete their account, the licence often stays in your 'pool', quietly billing you every month until someone manually reduces the count. This guide explains how to find that waste and stop it.
What a Microsoft 365 licence audit actually means
In plain terms, a licence audit is a sanity check of your Microsoft admin portal. It involves three specific checks. First, you look for 'unassigned' licences, which are subscriptions you pay for that are not attached to any person. Second, you look for 'dormant' accounts, which are licensed users who have not logged in for 30, 60, or 90 days. Third, you look at 'right-sizing', which is ensuring that a staff member who only needs email is not sitting on a high-end Business Premium plan that includes advanced device management they do not use.
For a UK SME, this is not just about saving a few pounds. It is about governance. An unused licence often points to an orphaned account, and an orphaned account is a security risk. If a staff member left six months ago and their account is still licensed and active, it is a door left unlocked.
Why licence optimisation matters commercially
Microsoft 365 costs have risen steadily, and for many UK businesses, the IT subscription bill is one of the largest monthly overheads. If you are on a Monthly Commitment plan, you pay a premium for flexibility. If you do not use that flexibility to reduce your seat count when staff leave, you are paying the higher rate for no benefit.
There is also the matter of plan tiers. We frequently see businesses where every user is on Microsoft 365 Business Standard because that was the default choice when the company started. However, a significant portion of the workforce might only need the web-based versions of Word and Excel, which are covered by the much cheaper Business Basic plan. Conversely, some users might lack the security features they need, such as those found in Microsoft 365 Business Premium, leaving the business exposed to risks that could have been mitigated for a few extra pounds per month. Balancing these costs is the core of a good audit.
How to perform a Microsoft 365 licence audit
To begin, you need Global Admin or Billing Admin access to your Microsoft 365 tenant. Follow these steps to identify immediate savings.
1. Identify unassigned licences
Navigate to the Microsoft 365 Admin Center, then go to Billing > Your products. Here you will see a list of every subscription you own. Look at the 'Assigned licences' column versus the 'Total licences' column. If you see '25 assigned of 28 total', you are paying for three ghost licences. These should be reduced immediately unless you have three new starters arriving Monday morning.
2. Spot the 'Leaver's Trap' in shared mailboxes
A pattern we see on most tenants we take on is that shared mailboxes still have a paid Business Standard or Basic licence attached because nobody clicked 'remove' after the user left. In Microsoft 365, a shared mailbox is free as long as it is under 50GB and does not need its own dedicated login. When a staff member leaves, you can convert their mailbox to a shared one and remove the paid licence entirely. The data is preserved, and your team can still access it, but the monthly cost drops to zero.
3. Check for dormant accounts
Go to Reports > Usage and look at the Email Activity or Microsoft 365 Apps usage. Filter for the last 90 days. If you find accounts with zero activity, investigate why. It is often a service account created for a project that ended a year ago or a part-time contractor who no longer works for you. These accounts should be blocked and their licences reclaimed.
4. Right-size the tiers
Review which staff actually need the desktop-installed versions of Office. If you have frontline staff who only check email on a phone or use a browser for simple spreadsheets, Microsoft 365 Business Basic is often sufficient. If you have staff handling sensitive data or using company-owned laptops, they should be on Business Premium to take advantage of Intune device management and advanced threat protection.
A worked cost scenario
Consider a typical 25-person UK firm. Over two years of hiring and turnover, their tenant might look like this:
- Unassigned licences: 3 x Microsoft 365 Business Standard (£10.30 each) = £30.90
- Leavers kept as licensed users: 2 x Microsoft 365 Business Standard = £20.60
- Shared mailboxes still licensed: 2 x Microsoft 365 Business Basic (£4.90 each) = £9.80
This firm is wasting £61.30 per month, or £735.60 per year. This does not account for the potential savings of moving five 'web-only' users from Standard to Basic, which would save another £324 per year. Total annual waste: over £1,000. For many SMEs, that covers the cost of their Microsoft 365 backup for the entire year.
Common technical traps to avoid
While the goal is to save money, there are several ways to break your setup if you are not careful:
- Removing licences from service accounts: Some integrations, like a scanner that sends email or a CRM that syncs calendars, require a licensed mailbox. If you remove the licence, the service stops working. Always check the 'Display Name' and 'Job Title' in the user list before pulling the trigger.
- The 50GB shared mailbox limit: If you convert a user with 60GB of data to a shared mailbox and remove the licence, the mailbox will stop receiving mail because it exceeds the 50GB free limit. You would need an Exchange Online Plan 2 licence to keep it active.
- Annual vs Monthly commitments: If you are on an annual commitment, Microsoft generally does not allow you to reduce the seat count until the renewal date. You can still unassign the licence from a user, but you will keep paying for the empty seat until the contract ends. Mark your renewal date in the calendar and do your audit 30 days before it hits.
The security benefits of a tidy tenant
Auditing your licences is a fundamental part of Microsoft 365 management. Beyond the money, it forces you to look at who has access to your data. Every licensed account is a potential entry point for an attacker. If an account is licensed, it is often 'active', meaning it might not have been caught by your offboarding process.
We frequently find that dormant accounts lack Multi-Factor Authentication (MFA) because they were created before MFA was mandatory. An attacker who finds a dormant account with a simple password can use it to send internal phishing emails that look perfectly legitimate to your staff. Cleaning up your licences is, effectively, closing those backdoors.
How Black Sheep Support helps
We perform a deep-dive licence audit for every new client we onboard. We do not just look for unused seats; we look at whether your staff are on the right plans to meet Cyber Essentials requirements and protect your business from modern threats. We ensure you are not overpaying for features you do not use, and that you are not missing critical security features you actually need.
If you want to stop the waste and secure your tenant
and we will show you how we manage Microsoft 365 for firms like yours.
Not ready to talk yet? Run our free IT Health Check to assess your business risk and security posture: 30 to 60 minutes with one of our engineers on a Teams call, or 15 to 20 minutes on your own, no commitment. We also handle hardware, broadband, mobile and networking, helping you keep your entire IT estate lean and efficient.
Microsoft 365 licence audit FAQ
How often should I audit my Microsoft 365 licences?
We recommend a quarterly check. Staffing changes happen, and it is easy for a single leaver’s licence to go unnoticed for months. A quick ten-minute review every three months ensures that waste does not accumulate and that your offboarding process is actually working as intended.
Can I get a refund for unused licences from Microsoft?
Generally, no. If you are on a monthly commitment, you can reduce the seat count for the following month. If you are on an annual commitment, you are committed to that number of seats until your anniversary date. This is why timing your audit before your renewal is critical.
Does removing a licence delete the user's data?
No, but it makes it inaccessible. If you remove a licence from a user, their mailbox and OneDrive data are held for 30 days before being permanently deleted. Always ensure you have converted the mailbox to a shared one or backed up the data to another location before removing the licence.
What is the cheapest Microsoft 365 licence for a basic email account?
Microsoft 365 Business Basic is the entry-level commercial plan. It includes a 50GB mailbox and web versions of Office apps. For accounts that do not need a mailbox at all but need to be managed (like a kiosk PC), there are even cheaper 'Frontline' or 'Device' licences available.
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