Newham Council expects to save £1m a year by sticking with Microsoft rather than migrating to an open source alternative, after negotiating much-improved terms with the software giant.

But the deal, which offers the council more favourable terms than those negotiated by the Office of Government Commerce (OGC), will not become widely available for the public sector.

The east London council piloted a Linux-based system late last year, and was considering a move to open source.

But a stumbling block with open source support for Exchange 5.5, and Microsoft's decision to slash licensing costs, prompted a rethink.

Richard Steel, Newham's IT director, told vnunet.com he has now negotiated a deal that gives him best value.

It allows the various Microsoft applications to be installed in any combination on any workstation, including catering for Newham's planned remote and home-working initiatives.

"This flexibility is important," said Steel. "It will drive down our infrastructure costs by around a £1m a year. It's not all Microsoft. It includes hardware and software refresh."

But this licensing flexibility is not included in the OGC's agreement, so Microsoft does not have to extend the terms to the wider public sector.

If the council had renegotiated the exact same terms as those in the OGC's deal but at a cheaper price, this price would have applied to all public sector buyers.

The local authority had been named by the OGC as one of the participants in public sector trials of open source software, but said that its trial predated that initiative.

"It was a bit of a surprise to us that we were on the OGC trials list. I don't know who put Newham's name forward," said Steel. The council had since withdrawn from the trial.

But Steel added that Newham's talks "mirrored" those of the OGC's with Microsoft and included upgrading to the latest Windows XP and Exchange 2003.

The council plans to roll out future upgrades six to 12 months after new Microsoft releases.

Proposals should be tabled for approval by the end of February, although this might slip a month. Steel expects implementation to begin shortly afterwards.