CXOs Must Avoid Unfavorable Cloud Contracts

As the market shifts from on-premises to cloud deployment, the risk of getting locked into a disadvantageous cloud contract increases for three main reasons. Learn how to avoid unfavorable contracts.
Written by Ray Wang, Contributor
Cloud Contract Lock In

During the hey day of the early years for software as a service (SaaS) and Cloud, many line of business executives signed simple month to month, user based contracts without the burdens of IT and scrutiny of vendor procurement. These edge applications and best-of-breed point solutions gave the business side massive flexibility in accessing innovation and moving the business forward as IT teams struggled with stabilizing existing landscapes and identifying a strategy to repay technical debt.

Fast forward to 2015: Many organizations face challenges unlike the early years of cloud for a few reasons.

  1. Best of breed point solutions have evolved to cloud suites. From simple collaboration apps to sales force automation to talent management, successful SaaS vendors have evolved into cloud suites. The complexity of offerings have introduced mission critical functionality on the cloud that require a more deliberate approach to cloud contracts
  2. Average contract has substantially increased in length. Remember when your SaaS vendor contract was month-to-month with a one year contract being on the long side? Recent contracts with some HR Tech vendors have averaged from three to five years, with even seven starting to emerge as part of the standard contract. Longer term commitments impact an organization's agility which is why contract strategy should be coordinated with overall business strategy.
  3. Pricing models shift from simple to increasingly complex. SaaS vendors started out with simple per user, per month pricing (i.e. PUPM). Today, models have increased in complexity beyond user based pricing. Usage based pricing is based on employees, revenue, gigabytes consumed, connections, or other business metrics.
  4. Integration remains a complex issue. Early SaaS integrations were simple. Customers could leverage point-to-point tools. With Cloud becoming mainstream, the need to master data sources, address different granularities of process, harmonize workflows, and orchestrate API's increase complexity of ownership.
  5. Pace of innovation begins to plateau. Many early SaaS startups proudly announced monthly and quarterly updates with substantial improvements in functionality. Many vendors have now moved from quarterly updates to three a year and even two at some. Customers will want to understand the impact on road map and adoption.

The bottom line: Buyers locked in unfavorable contracts

Cloud apps have dominated new license sales in the enterprise applications market in recent years. Constellation estimates that 93 percent of all new enterprise software license sales offer a cloud deployment option. In the cloud model, buyers do not own the software license. Instead, the software is leased and accessed, while the purchaser owns the data. As the market shifts from on-premises to cloud deployment, the risk of getting locked into a vendor increases for three main reasons:

  1. The access model means users have limited rights and control. Cutting through the hype, buyers do not own the rights to the code in most public cloud models. Buyers pay for the right to access functionality and use the intellectual property, but at the full mercy of the cloud vendor. Should the vendor decide to take a different product direction or find itself bankrupt, users remain at the vendor's mercy.
  2. Costs of switching vendors remain ambiguous at best and expensive at worst. While users have access to and ownership of their data, the hurdle in moving from one cloud vendor to another increases with usage over time. Without rights over the app's functionality, users face lock-in if they cannot easily export their business processes that are instantiated in the vendor's functionality. Add in different architectural standards, varying granularity of process flows and complex metadata models, and users face an expensive and daunting challenge switching from one cloud vendor to another. Most migration plans are unclear on how to successfully switch from one vendor to another.
  3. Vendors currently eager for business may grow fat and lazy in the future. The rush to earn a customer's business remains intense. Most cloud vendors have customer-friendly policies. However, the risk of vendor complacency grows with each percentage point shift from on-premises to cloud deployments. Unless rights are stated up front today, buyers will lose leverage over time.

Recommendations: Take Steps From The Original Cloud Bill Of Rights To Protect Your Cloud Investment

Customers should leverage the software ownership life cycle to plan cloud contracts. The five phases include:

  1. Customer experience describes the client expectations of the vendor in the relationship.
  2. Selection describes the rights prospects and clients should expect from software vendors as they make their decision on a product and vendor.
  3. Deployment describes the rights clients should expect from vendors as they implement and consume the technology.
  4. Adoption describes the rights clients should expect from software vendors as they use the solution across the customer organization.
  5. Usage optimization describes the rights customers should expect from software vendors as they change how they expand, maintain or contract in their usage of the solution.
  6. Renewal describes the rights clients should expect from software vendors as they shift their usage requirements and change how they adopt SaaS solutions.

Use the Customer Bill of Rights in all contract negotiations. Make sure you protect yourself from the life cycle of technology engagement.

Learn how to structure a favorable cloud contract
How to Secure the Best Cloud Software Contract Webinar
November 10, 2015 11:00am PT/ 2:00pm ET

Get ready to learn the secrets of avoiding Cloud Vendor lock-in with this free introductory webinar brought to you by the Constellation Executive Network.

In the webinar, I will show how to structure the most favorable cloud software contract for your organization, and I will share top cloud negotiation tips derived from my involvement in 1,000+ cloud contract negotiations. The increasing complexity of cloud services contracts means you can not afford to miss this webinar.

You will learn:

  • Top cloud negotiation tips.
  • Common contract negotiation pitfalls
  • How to ensure you secure the best cloud services deal and avoid vendor lock-in.

Register here.

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