3 Keys to Negotiating Successful Cloud Agreements


Nowadays it is both impossible and impractical to avoid the Cloud. Regardless if your organization is a growing SMB or finds itself within the Fortune 500 or Global 2000 list, it is highly likely a cloud solution is currently under serious consideration or has already been implemented. Many different types of cloud offerings have been implemented such as Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS) as companies have been drawn to the cloud’s promises of agility, flexibility, reduced costs and faster time to benefits realization. The debate on whether these promises are delivered is for another post, so please check back in with us in a few weeks as we debate the cloud’s impact on fostering and sustaining vendor lock in.

Within the SaaS (Software-as-a-Service) category of the cloud, vendors such as Salesforce.com have been quite successful in gaining significant market share within the CRM (Customer Relationship Management) space as organizations and their respective sales branches have decided this would be a good place to start their journey into the cloud. Also, in the HCM (Human Capital Management) space, vendors such as Workday, SAP (through its acquisition of SuccessFactors), and Oracle (through its acquisition of Taleo) are aggressively pushing their cloud based offerings to the market. Salesforce.com and Workday continue to sell based upon a best-of-breed approach while continuing to develop and broaden the capabilities of their respective platforms.  SAP and Oracle, on the other hand, are laser focused on their installed base, leveraging their pedigree and vast resources to push their customer base to integrate their respective cloud solutions with existing on premise environments.

If currently performing due diligence on a cloud solution, we recommend you spend ample time conducting numerous reference calls while assessing the likely cost/benefit ratio of the solution against the more intangible agility and flexibility benefits. Be sure to balance reference calls coordinated by the vendors with those provided by more impartial sources (i.e. sourcing advisors, research firms, your peer network…etc.)  Once comfortable with the solution and model, we recommend you approach the negotiation with the same attention and rigor that you would apply to any other enterprise agreement.

The following list is a summary of three key items UpperEdge recommends be addressed to ensure you execute a best-in-class cloud agreement. For a more expansive list of items to address, be sure to check out our “SaaS Matters” blog series as well as our “Negotiating Cloud Agreements” webinar.

1. Ability to Scale

Many cloud agreements afford you the ability to purchase additional users or services as your need increases during the term of the agreement. However, it is also important to have a mechanism in place to adjust the economics should your actual demand (i.e. usage) decrease. Since most cloud agreements require upfront annual commitment levels (i.e. user count, defined scope of services/capacity), there is plenty of room for “shelfware” and/or “shelfservices”. Therefore, it is critical to ensure your vendor affords you the contractual right to reduce your commitment level and receive a corresponding reduction in the go-forward fees. If you agree to include an upfront payment schedule, require a refund and/or credit towards future use. Lastly, if your cloud agreement permits you to purchase additional users or services/capacity, ensure the prices and fees for such additional users and/or services are clearly stated in the contract. Without this certainty you may find yourself hit with numerous incremental and unbudgeted price/fee increases.

2.  Renewal Terms and Pricing

As mentioned above, the nature of certain cloud agreements fosters increased vendor dependency and heightened scenarios for vendor lock-in. In its simplest sense, cloud agreements are subscription arrangements which require renewal if your organization wishes to continue receiving the services and/or functionality delivered by your chosen provider. Once an organization and its user base are up and running (hopefully with increased agility and productivity), it is very difficult and often impossible to not renew. Doing so would require extensive upfront resources, time, transition planning, migration execution, and renewed change management. The cloud vendors know this which is exactly why they love selling cloud solutions. Given the risk of dependency and lock-in, it is important to negotiate the length of your renewal term(s) (i.e. terms/durations beyond the initial term) as well as the associated price/fee protections in advance of signing the initial deal.

Most cloud vendors want you to renew for multiple years. A multi-year renewal term means multiple years of renewal bookings which eventually convert to recognized revenue. We recommend companies negotiate the ability to renew in one (1) year increments as this ensures you have appropriate options and reinforces the mindset that your cloud provider must earn your business every year.

When it comes to the prices and fees associated with the renewal term, most cloud agreements will include a stated price increase after the initial term (i.e. on the renewal date).  This may come in the form of a stated cap (i.e. 2% or CPI) on the increase.  Not having a stated price increase and/or cap on the increase further enhances your exposure to price/fee increases as the lack of clarity could make you susceptible to mid-term as well as renewal date increases. The impact of these increases tends to be compounded as the magnitude of the increase is unknown and typically unplanned. UpperEdge recommends companies negotiate no price/fee increases until three years from the first renewal date.

By way of example, if the initial term of the contract is three years, then the price/fee afforded the organization over the initial term should be available and applied to the next three one-year renewal terms. Essentially, you are asking your cloud provider to invest in the relationship by providing you the same discount they used to win your business once they have secured your business. Subsequent to this price/fee flat-line period, we recommend all price/fee increases be contractually limited to CPI or another measure to which the parties agree. Incorporating a cap at this point limits your cloud provider from trying to make up for perceived lost revenue.

3.  Termination Rights and Obligations

Cloud agreement should provide your company with the ability to terminate for convenience with no associated penalty or “termination fee”. In addition, the ability to terminate for serious or continuous failure to meet committed service levels (i.e. uptime, response time, resolution, etc.) must be included within the agreement. Service level adherence is critical when dealing with a cloud based solution especially when the application and/or service is critical to the business. Having the ability to terminate should there be service level non-conformance is one way to ensure your vendor is standing behind their service levels rather than simply providing you with “objectives” and/or “targets.” A vendor’s reluctance to provide this trigger for termination should be a red flag. Ensure the vendor’s obligations upon termination are clearly stated. This includes the return (in both the vendor’s data format and a platform-agnostic format) and removal of data (i.e. certification that your data has been removed from the vendor’s servers) as well as an obligation to provide appropriate transition services.

Finally, do not permit your cloud provider to have the contractual right to terminate or suspend services other than for cause. If a business or enterprise critical application or service, you can’t afford to have the vendor choose when it wants to walk away from the relationship.

We welcome your feedback and the opportunity to discuss how best to approach your upcoming cloud negotiations. Please do not hesitate to contact me at amansfield@upperedge.com with any feedback or inquiries.

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  1. Julie Smith

    May 15, 2013

    Thanks for sharing excellent information about contract negotiation

    Reply
  2. Tom Lofft

    February 26, 2013

    Cloud Agreements sound like any other agreement for future services based upon up front contracts, payments and huge investments of startup brain damage (negotiation and learning curves). What’s the absolute surety that they will be there at any critical future date when they are most needed?
    For the small user, perhaps the economy of scale warrants the costs, but for the larger user, the certainty of internal control may warrant managing it in house?

    Reply