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Microsoft does back up Office 365. But the company's policies for Office 365 disaster recovery might not be what you would expect.
It's becoming increasingly common for software vendors to encourage customers to run their applications in the cloud as software as a service (SaaS) rather than installing the software in the usual way. SaaS provides a number of benefits, not the least of which is that the vendor handles most of the application-related maintenance. However, when it comes to SaaS, you have to take the bad with the good.
The downside to using SaaS is that you relinquish some degree of control over the application. One of the biggest ways in which an organization might lose control is in its ability to back up application data.
One of the most notable examples of this is Microsoft Office 365.
In all fairness, Microsoft's policies for performing Office 365 disaster recovery operations are somewhat vague, and the Internet is full of contradictory information regarding what Microsoft will and will not do for you in the event of a disaster. Even so, the consensus seems to be that Microsoft doesn't do item-level recovery for Office 365 customers, such as restoring a document from a SharePoint library or an individual email message.
Microsoft provides Office 365 customers with various tools so they can perform a granular recovery on their own. For instance, SharePoint Online has a versioning feature that can be used to retain multiple versions of the documents stored in a SharePoint document library.
The problem with these self-service features is that there are often limits as to what you can recover. For instance, you probably won't be able to recover an email message that was deleted a few months ago. Similarly, Microsoft restricts the amount of storage available to SharePoint, which may limit the number of document versions that can be stored. It is therefore a good idea for users to adopt their own Office 365 disaster recovery solution to improve their odds against losing Office 365 data.
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