OpenAI is the creator of popular image generation tool Dall-E and the chatbot ChatGPT.
In 2019 Microsoft invested $1bn (£808m) in the company, founded by Elon Musk and tech investor Sam Altman.
The Windows and Xbox maker plans up to 10,000 redundancies, but said it would still hire in key strategic areas.
Breaking the news in a memo to staff last week, chief executive Satya Nadella said: "The next major wave of computing is being born, with advances in AI."
Announcing the extended partnership, the firm said it believed AI would have an "impact at the magnitude of the personal computer, the internet, mobile devices and the cloud".