Presumably the set of authentication options which office365 supports doesn’t include any of the options that Discourse (or, rather, the SMTP library that Discourse uses) supports. What authentication modes does Office365 support?
Also, note that we don’t recommend using a mailbox provider such as Office365 or gmail for outgoing e-mail, as it is usually a violation of the provider’s terms of service, and often balks at sending the volume of mail that Discourse generates.