KMSpico works by emulating a Key Management Service (KMS) server on your local machine. When you run KMSpico, it modifies system files and settings to trick Microsoft Office or Windows into thinking that it is communicating with a valid KMS server. This process generates a product key that activates the software. However, because KMSpico is not an official Microsoft product, using it is against Microsoft’s licensing terms and can result in software malfunctions or legal issues.