Tuesday, October 25, 2016

Office 365 vs. On-Premises Exchange Server

A large client is currently running Exchange 2010 and is evaluating moving to Office 365 vs upgrading to Exchange Server 2016. I talked with them about it and thought it would be useful to document it for future reference.

If you are a very small organization, then Office 365 is a slam dunk. It's going to perform better and be more cost effective than your could ever implement on your own. This is even before we consider the cost of the the consultants to get your on-premises Exchange up and running.

For mid-sized and large businesses there are more things to think about....


Direct cost is the first thing everyone wants to evaluate when considering Office 365. Your exact costs are going to vary depending on how you want to implement Exchange and which Office 365 plans you think are appropriate. So, I'm going to let you figure out the exact costs, but here are the things you need to consider:

On premises:
  • Exchange Server licenses
  • Exchange Server CALs (basic and enterprise if required)
  • Hardware for the Exchange servers
  • Storage for the Exchange servers
  • Backup software and storage
  • Antispam and antivirus solution
 Office 365:
  • Monthly or yearly license (subscription-based)

High Availability

On-premises Exchange Server can be made highly available. This is done by configuring multiple Exchange servers in a database availability group (DAG) and by using load balancers. This configuration is well understood but definitely requires some planning and expertise to implement.  In most cases, hardware load balancers are used which are an additional cost.

Other high availability considerations for on-premises Exchange include redundant Internet connections, and alternate data centers. To provide a solution that is truly highly available, it takes a lot of redundant infrastructure.

Office 365 is highly available out of the box. You don't need to do anything, that's just the way it's designed. Your data is automatically located in multiple data centers in your region. If one data center fails, your data is still safe in another data center and you're still able to access it. This is one of the big advantages for Office 365, particularly for mid-sized organizations that might not have the resources to deploy office 365 across multiple data centers.


On-premises Exchange Server uses Active Directory (AD) for authentication. When users are on a domain joined computer, authentication is performed automatically by Outlook. Externally, the AD username and password are used.

For Office 365, there are multiple ways that authentication can be configured. First lets talk about user accounts...

Very small organizations might choose to create user accounts in Office 365 manually. For these organizations, the users will sign in by using their email address and a password that is set in Office 365. This password could be different from the AD password on-premises and there is no synchronization of the passwords between AD and Office 365.

Larger organizations will use Azure AD Connect to synchronize user accounts with Office 365. This avoids the need to manually create the accounts. Azure AD Connect also has an option to synchronize passwords with Office 365. This simplifies password management for users. It also simplifies password resets when users call the help desk.

When passwords are synchronized with Office 365, all authentication is still handled by Office 365. There is no reliance on any on-premises infrastructure for the authentication process. So an on-premises service outage does not cause an Office 365 service outage.

Very large organizations may consider using Active Directory Federation Services (AD FS) for Office 365 authentication instead of password synchronization. When AD FS is implemented, Office 365 directs authentication requests to AD FS which then authenticates the request against AD. This is significantly more complex to configure than password synchronization but provides the following benefits:
  • True single sign-on where workstation credentials are passed through for authentication just like on-premises Exchange.
  • When an on-premises AD account is locked or disabled, this also applies to Office 365 authentication. Without this, disabling an Office 365 account is a separate process.
A key point to remember is that if your AD FS infrastructure is down, so is Office 365 authentication.

Account Lockout

For on-premises Exchange, the account lockout policies in AD are applied to authentication for Exchange mailboxes. The only exception is if a device such as a proxy is performing pre-authentication. If pre-authentication is performed then the device providing pre-authentication might have more restrictive policies than what is configured in AD.

When password synchronization is used with Office 365, there is a account lockout mechanism included in Office 365. After 10 failed attempts, an account is locked for 1 minute and if account lockout is triggered multiple times the lockout time is increased each time. This account lockout mechanism is not configurable.

When AD FS is used with Office 365, the account lockout policies in AD are used.

Mailbox and Archive Size

In on-premises Exchange, the maximum size of mailboxes and archive mailboxes is limited by the storage design. Or, more often by the cost of the storage being used. Using direct attached storage (DAS) with 7.2K SAS drives (rather than a SAN) is the most cost effective solution to provide large mailboxes and archives.

In Office 365, the maximum size of mailboxes and archive mailboxes is limited by the license assigned to the mailbox:
  • Kiosk: 2 GB mailbox, no archive
  • E1: 50 GB mailbox, 50 GB archive
  • E3: 50 GB mailbox, unlimited archive
  • E5: 50 GB mailbox, unlimited archive

Online Reading and Editing Attachments

In Exchange 2010, there was basic functionality for rendering attachments as web content in OWA. In Exchange 2016, this functionality is not included. Instead, you need to implement Office Online Server. Office Online Server is included with most volume licensing agreements for Exchange Server 2016.

Implementing Office Online Server is not terribly complex for a single server, but requires at least an additional virtual machine. If you want the functionality to be highly available you need to implement multiple servers and load balancing.

Office 365 includes the ability to read and edit attachments by default. No additional configuration is required.

Spam and Antivirus Filtering

For on-premises Exchange, you need to purchase additional products for spam and anti-virus filtering.

Office 365 licenses include Exchange Online Protection for anti-spam and virus protection at no additional cost.

Network Configuration

Most implementations of on-premises Exchange Server require you to implement proxies, load balancers, and firewalls. External access from the Internet to the Exchange servers also need to be configured.

For Office 365, you just need to ensure that clients on the internal network can communicate with Office 365 over the Internet.

Client Communication

Most on-premises deployments of Exchange server use Outlook in cached mode. However, because the internal network is reliable and fast, you can implement Outlook in online mode instead. This can be useful if you are concerned about the size of cached data on computers that are shared by multiple users.

Outlook clients must communicate with Office 365 servers over the Internet. This may result in higher Internet bandwidth usage. Generally, Outlook cached mode is used to minimize network utilization and provide better performance over networks with high latency.

Recent versions of Outlook cache only recent data in a mailbox rather than the entire mailbox. This mitigates concerns about large mailboxes being cached in local profiles. The amount of data cached is configurable.


Exchange Server 2016 can co-exist with Exchange Server 2010 or Exchange Server 2013. Migration is just a matter of moving mailboxes to Exchange Server 2016. There is almost no impact on users and the Outlook client is automatically redirected to the new mailbox location.

Office 365 can be integrated with Exchange Server 2010 or later by using hybrid mode. Once in hybrid mode, mailboxes can be migrated to Office 365 with minimal impact on users. Outlook is automatically reconfigured when mailboxes are moved.


Most common backup software can be used for backup with an appropriate agent on the Exchange servers. The restore functionality in the software varies but most can restore individual mailboxes or databases. This software is an extra cost.

There are third party options available for backing up Office 365 mailboxes, but there is no built-in functionality in Office 365 for this purpose.  However the same Single Item Recovery available in on-premises Exchange can be used in Office 365 to recover items for up to 30 days (default 14 days) after they are removed from deleted items.

Microsoft maintains multiple copies of mailbox data to avoid the need to restore from backup due to server error.

If you use E3 licenses, you can implement a hold on mailboxes to permanently retain messages received or sent from mailboxes. This held data is searchable for discovery purposes. Data holds can also be implemented for specific retention periods. Microsoft is positioning this type of hold to replace journaling and archiving solutions.


For an on-premises Exchange deployment you need to perform the following management tasks:

  • Monitor performance
  • Monitor hardware for failures
  • Update firmware
  • Apply operating system updates
  • Apply Exchange Server updates
  • Manage mailboxes
On a system that is properly designed, there is minimal need to monitor performance (you built it with some head room), but there is an ongoing need to address issues such as failed indexes and large delivery queues. These issues are not relevant for Office 365 management.

As a cloud-based service, you are not responsible for any monitoring or updates in Office 365. Management of user mailboxes is still required.

New management tasks for Office 365 include:

  • Managing directory synchronization
  • Managing user licenses

Directory synchronization typically requires little management. There may be occasional troubleshooting, but it is rare. Generally once directory synchronization is configured, it just works.

Processes for creating new mailboxes do need to be modified to include assignment of Office 365 licenses. This can be scripted and run as a scheduled task if it is not required to be time sensitive.

If all users are migrated to Office 365 a local Exchange server is still maintained for management purposes. This is required because changes are made in the local AD and synchronized to Office 365. However, outages for this management server do not affect Office 365 users only management functionality. Microsoft provides a free license for this purpose.

Additional Features

Many Office 365 deployments begin as a replacement for on-premises Exchange. However, for mid-sized and large organizations, when you do a raw comparison of Exchange on-premises costs and Office 365 licensing costs, you may find that Exchange on-premises is actually a lower cost.

You need to consider that Office 365 includes more than just Exchange functionality. Depending on the licenses you select, there are various features. Also note, that you can mix and match licenses as required to give different features to different users to meet the needs of your organization.

For an accurate list of Office 365 plan features, see the Microsoft web site. However, here's a quick summary you can use to get a general idea of what's included with each license type:
  • Kiosk:
    • Exchange Online
    • SharePoint Online
  • E1: Kiosk features plus
    • One Drive for Business (1TB)
    • Skype for Business
    • Yammer
  • E3: E1 features plus
    • Office 365 Proplus (desktop office suite)
    • Azure Rights Management
  • E5: E3 features plus
    • Cloud PBX
These extra features provide more value than just Exchange online. I've been surprised at the number of larger organizations that have subscribed to Office 365 with E3 licenses as their preferred method of deploying Microsoft Office. Skype for Business is also a bit of a pain to implement on-premises and having that included with the E1 licenses is beneficial.


  1. Remember that the Cloud PBX in E5 isn't available in Canada (yet), so it's of limited use up here.

    1. Excellent point. Thanks. I had forgotten about that.