It is understandable why many companies are making the leap to cloud solutions provided by vendors like SAP (see A CIO’s Checklist for your Company’s Next SAP Cloud Deal), Salesforce and Workday. A cheaper initial investment, less time to implement, and a hardware investment not being required are compelling reasons in the short-term. However, before moving away from your on-premise solution, we recommend understanding what the long-term leap means to your company before you are swimming in the deep end.
Snowballing Annual Increases
UpperEdge is seeing that despite the lure of a cheaper initial investment, you cannot expect the operating expenses tied to your cloud solutions to maintain the flat or even relatively flat annual increases you are used to for on-premise support. We are observing cloud vendors being so bold as to position CPI + 5% per year cumulative increases in the renewal years, quickly eroding the initial financial benefit espoused by cloud vendors during the courting phase. To emphasize the snowball effect, this would mean a 20% increase by year-3 of the renewal, quickly taking your competitive deal out of market and often for good.
Out of Market Solutions
Cloud vendors are not offering the compelling discounting levels they offered on the initial investments when it comes to additional solutions. Some cloud vendors quickly “disremember” the discounting provided to early adopters and treat each order form independently from the others. This means that the additional solutions executed in the separate order forms could be well below market (e.g., off by 15-30%) when compared to the discounting received on your initial investment.
Inconsistent Commercial Terms
While cloud vendors are treating each order form independently, some cloud customers are losing sight of the commercial precedent achieved in the initial investments when they were a coveted early adopter. Cloud vendors have subtlety dialed back commercial terms to make them less competitive. For example, a cloud vendor may initially provide additional subscriptions during the term at the same unit cost and subsequently provide additional subscriptions during the term at a premium.
As you consider your leap to cloud solutions, we recommend not only looking at the short-term benefits espoused by vendors like SAP, Salesforce and Workday. We propose challenging cloud vendors to explain how they can help leave you in a better position in the long-term.
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