Adding domain to Office 365 caused outlook to point to office 365 instead of on-premises exchange

Easiest way is to create a GPO with this reg setting and apply it to your users.

If you want to remove the licenses, it depends how your infrastructure is built, do you already have Azure AD Connect established?
If yes, I would create a new Security Group like "M365 Business" and apply it to all affected users. Then in M365 admin console, remove every license assignment to you users. Instead use this newly created AD group and assign the M365 license to the group, there you can remove Exchange Online plan for the whole group at once. After this is processed, all users have this predefined set of licenses.

If you have no AAD sync in place, you can either start with this, but then you might face other issues during initial sync as the local AD users might not map with the already existing cloud users and result in a mess - we had assistance from a certified partner for this step. Then it might be the fastest to to click though every user and remove the Exchange Online plan manually..