The other solutions mostly cover getting 8 guitars together, but I've had some problems finding the right way to play as 4-vs-4 after that. After some trying, this worked for us:
If you have all instruments in one Xbox Live party, start a new game on mode 'Competitive' and when you're on the lobby screen (with the rocker avatars), invite the party to the game.
The first four players will be shown front and center, the other four will be shown by GT only at the bottom of the screen.
Now you (or whoever is party leader, shown by the crown picture) hit 'Everyone Play!' and verify that all 8 players/instruments are listed.
Select Team Pro Face-Off or similar on the next screen.
When the song ends, the achievement should unlock.