Microsoft 365 Local

If you’d told me five years ago that Microsoft would be shipping Exchange Server and SharePoint Server to run on on-premises infrastructure managed through Azure, I’d have questioned your sanity. The entire Microsoft strategy for the better part of a decade has been to move productivity workloads to the cloud. Microsoft 365, Teams, Exchange Online, SharePoint Online, the trajectory has been consistently and emphatically cloudward.

And yet here we are. Microsoft 365 Local is now generally available, running core M365 server workloads natively on Azure Local. Exchange Server, SharePoint Server, and Skype for Business Server can be deployed on your Azure Local cluster, in your building, under your control. Connected mode is available now, with disconnected mode for fully air-gapped environments expected in early 2026.

This isn’t Microsoft admitting that the cloud strategy was wrong. It’s Microsoft acknowledging that for certain customers, in certain environments, with certain regulatory and sovereignty requirements, the cloud isn’t an option. And for those customers, having no path to modern productivity workloads running locally is an unacceptable gap.

Who This Is For

Let me be clear about the target audience here, because M365 Local is not for everyone, and isn’t intended to be.

Government and defence organisations that operate in classified or sovereign environments are the primary target. These organisations often have strict data residency requirements that prohibit any data, including email and documents, from leaving national jurisdiction or specific network boundaries. Many of these organisations have been stuck on ageing, unsupported versions of Exchange and SharePoint because there was no path to modernise without moving to the cloud.

Critical national infrastructure operators, including energy, telecommunications, and transportation, often have similar constraints. The control systems and operational technology environments in these sectors frequently require isolation from the public internet, and the personnel working in those environments still need email and collaboration tools.

Healthcare and financial services in certain jurisdictions face data handling regulations that make cloud-hosted productivity tools complicated at best and prohibited at worst. While many organisations in these sectors have found ways to use cloud M365 compliantly, there are edge cases where local deployment is the only viable path.

How It Works

M365 Local runs on Azure Local as a set of managed workloads. The server components (Exchange, SharePoint, Skype for Business) are deployed as VMs on your Azure Local cluster, managed through Azure in connected mode, or through local management tooling in disconnected mode.

The key differentiator from just “installing Exchange on a server” is that M365 Local is delivered as a managed experience through the Azure Local platform. Microsoft provides the deployment automation, the update mechanism, and the management tooling. You provide the infrastructure (Azure Local on Dell AX or other validated hardware) and the operational environment.

In connected mode, your M365 Local deployment is managed through the Azure portal, receives updates through the Azure Local lifecycle management process, and can integrate with other Azure services. Monitoring flows to Azure Monitor, policies can be applied through Azure Policy, and the overall management experience is consistent with the rest of your Azure Local environment.

In disconnected mode, which is the configuration that most sovereign customers will need, the management experience is local. Updates are applied through an offline process, and monitoring and management are handled through local tooling. This is more operationally intensive than connected mode, but it’s the only option for air-gapped environments.

The Dell AX Fit

Running M365 Local on Dell AX nodes is a natural fit. The compute requirements for Exchange and SharePoint servers are well understood, and Dell AX node configurations can be sized appropriately for the expected user populations.

For sovereign deployments specifically, Dell’s ability to provide hardware through secure supply chains, with validated configurations and offline-capable lifecycle management through the Solution Builder Extension, aligns with the requirements of the customer base that M365 Local is targeting.

The storage requirements for Exchange and SharePoint are worth paying attention to. Email stores and document libraries can grow substantially, and the storage performance characteristics matter for user experience. For smaller deployments, Storage Spaces Direct on the Azure Local cluster will be sufficient. For larger deployments, the PowerStore integration or PowerFlex with the AX-4520c provide additional storage scale and performance.

Is This a Step Backwards?

I think this is a question worth addressing directly. Is running Exchange and SharePoint on-premises in 2026 a step backwards? My answer is no, but with nuance.

For the majority of organisations, Microsoft 365 in the cloud is and should remain the default. The scale, feature velocity, security investment, and operational simplicity of cloud M365 is difficult to replicate on-premises. If you can use cloud M365, you should.

But “can use” is doing a lot of heavy lifting in that sentence. For organisations that genuinely cannot, for legal, regulatory, security, or sovereignty reasons, the previous answer was “tough luck, you’re stuck on old software.” M365 Local replaces that with a modern, managed, supported path to current productivity workloads running locally. That’s not a step backwards. That’s extending the reach of a modern platform to customers who were previously excluded from it.

The fact that M365 Local runs on Azure Local rather than on standalone Windows Server installations is also important. It means these deployments benefit from the same Azure management, monitoring, and lifecycle management that all Azure Local workloads receive. It’s not a throwback to the old days of racking Exchange servers and manually patching them. It’s a managed experience on modern infrastructure.

Looking Ahead

The disconnected mode availability is the next milestone to watch. For many of the target customers, connected mode is a nice starting point for testing and evaluation, but production deployment will require disconnected operation. I’ll be watching closely as this matures and will share practical experiences as they become available.

M365 Local is a niche product for niche requirements. But for the customers who need it, it fills a gap that’s been open for years. And its delivery through Azure Local reinforces the platform’s positioning as comprehensive cloud infrastructure for distributed and sovereign locations.