3 Keys to Negotiating Successful Cloud Agreements

The cloud is a requirement that all enterprises need to use in order to drive expected business outcomes.  Failing to find new ways to lean heavier on cloud solutions for these outcomes is often a “fireable” offense.  For years, enterprises have been drawn to the cloud’s promise of agility, flexibility, reduced costs, and faster time-to-benefits realization.

Cloud adoption is no longer cutting edge or something executives are hesitant to give the green light to.  It is no longer a question of whether moving to the cloud is viable; it is more a question of how quickly and how many cloud solutions can be adopted and integrated effectively.

The Cloud Climate

Prominent cloud vendors like Salesforce have been quite successful in gaining significant market share.  Salesforce continues to execute their “land and expand” strategy, getting many customers to more of Salesforce’s Customer 360 complete solution. This includes using solutions from acquired companies like Tableau, Slack and MuleSoft.

Salesforce’s success has also given them the confidence to publicly put a $50B revenue target on the board.  While Salesforce has dominated Customer Relationship Management (CRM), Microsoft is focused on grabbing market share by aggressively pushing their Dynamics 365 solution onto their expansive and long-standing base of enterprise customers.

In Human Capital Management (HCM), vendors such as Workday, SAP (through its acquisition of SuccessFactors), and Oracle (with Oracle Cloud HCM) have been aggressively fighting to gain adoption of their respective cloud-based solutions.

You also can’t cover enterprise cloud vendors without mentioning hard-charging ServiceNow, who has been landing more and more enterprise customers while expanding customer portfolios to include solutions beyond their core ITSM, ITOM and ITBM.  With enterprise software executive Bill McDermott now at the helm, you can bet ServiceNow is going to land even more enterprise customers in the coming years.

Tips for Your Cloud Evaluation

• Spend ample time conducting product demonstrations and going through proof of concepts (POCs) as needed. It is important to ensure you have both IT and line-of-business participation and that the cloud vendor brings the right people to the room.
• Conduct reference calls while assessing the solutions to learn whether the product provided the expected results and if they didn’t, why?
• Be sure to balance reference calls coordinated by the vendors with those provided by more impartial sources like sourcing advisors, research firms, and even your peer network.
• Think through where the vendor being evaluated fits into the larger digital transformation or cloud roadmap. How compatible is the solution?  Are there additional solutions offered that could be considered downstream?

Once comfortable with the solution and product set, approach the necessary and often challenging cloud negotiation with the same attention and rigor that you would apply to any other enterprise agreement.  Given the fact that you don’t own the solutions but rent access to them, it is in many ways more critical that you get your cloud subscription agreement negotiation right.

While there are many items that ultimately must be negotiated, these three key items absolutely must be addressed to ensure you execute a best-in-class cloud subscription agreement:

1. Flexibility: Ability to Scale and Adjust

Many cloud subscription agreements afford the ability to purchase additional users at the upfront discounted price as demand increases over the term.  Cloud vendors should not be applauded for providing this right because, isn’t this the whole point of the cloud?  Buy what you need upfront and scale usage over time to map to needs. 

This right is often limited to the products enterprises have already adopted and paid for.  Cloud vendors should provide enterprises the ability to add products and users of those products in term that were not already adopted upfront.  This should not simply be at “list” price either.

It is also important to have a mechanism in place that allows you to adjust the go-forward annual spend commitments should your actual demand decrease.  Since most cloud subscription agreements require upfront annual commitment levels, there are too many cases of “shelfware”.  Although not easy to achieve, it is critical to push your cloud vendor to afford you the contractual right to reduce your commitment level and receive a corresponding reduction in the go-forward fees, even if you have to wait until your anniversary date.

Given the impact COVID-19 has had on many enterprises and the real need to reduce commitments in response to employee reductions, this has become an even more critical item to gain commitments on moving forward.  It will also be important to check the fine print of any renewal price protection achieved to ensure there is no minimum volume commitment since many come with a requirement to maintain or even increase your volumes at renewal.

In addition to having the ability to reduce your volumes, it is important to have the ability to exchange and/or swap products and users for other products and users.  In this scenario, the cloud vendor is not losing revenue, but the enterprise gains the flexibility to adjust their portfolio to align with changing go-forward needs.

2. Protections: Cloud Renewal Terms and Pricing

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 you wish to continue receiving the services or functionality delivered by your chosen cloud vendor.

Enterprises essentially rent from their cloud vendors with the promise that their “landlords” will use their expensive subscription fees to make updates to the product along the way.  Ideally, the largest portion of the subscription fees tied to the high margin products will be put towards R&D, not sales and marketing budgets.  This is not hard to confirm — just look at the financial reports.

Once a cloud product is adopted and an enterprise’s user base is up and running (hopefully with increased agility and productivity), it is very difficult and often impossible not to renew.  Doing so would require not only the appetite to do this but also extensive upfront resources, time, transition planning, migration execution, and renewed change management.  At the first renewal after adoption, the ability to walk away will essentially be non-existent.  There is no way after all that went into adopting the cloud product in the first place, that an enterprise, barring some drastic need to do so, would make a switch or rip out the cloud solution.

Cloud vendors know this, which is exactly why they love renting their products to enterprises.  Given the risk of dependency and lock-in, it is important to properly negotiate the length of your renewal term(s) as well as the associated price/fee protections in advance of signing the initial deal and/or upcoming renewal paperwork.

When it comes to the prices and fees associated with a renewal, it is critical that the cloud subscription agreement and/or order forms include a commitment regarding the extent the prices may increase.  Ideally, there is a period where there is no increase to your pricing and fees.  But if this can’t be achieved, there needs to at least be a cap in place.  It is also important that any increase is a one-time increase if executing a multi-year renewal.  Lastly, as mentioned above, don’t forget to keep an eye on the conditions that often come along with such renewal term price protections.

Not having a committed cap on the increase the cloud vendor can apply at renewal often proves to have a significant impact beyond just needing to scramble to find additional budget.  The impact of these increases tends to be compounded as the magnitude of the increase is unknown and typically unplanned.  The graphic below shows an example of how much your costs could increase after a few terms if you fail to put pricing caps in place.

For example, if the initial term of the contract is three years, then the pricing tied to year three should be available and applied to the next renewal term.  Ideally, the enterprise is able to negotiate a renewal term protection that also includes the ability to execute to three one-year renewal terms rather than a full three-year commitment.  Essentially, with this protection, the cloud vendor is investing in the relationship by committing upfront to provide the same discount they used to win the enterprise’s business after they secured the business.

3. Investments: Commitments to Value Received

Many enterprises fail to push their cloud vendors far enough to provide commitments that extend beyond pricing, protections, and flexibility tied to the cloud products.  Cloud vendors need to make commitments that tie directly to the successful rollout of the solutions they are selling.  Frankly, cloud vendors should be making these commitments without being asked.  Adopted cloud products are not solutions until they are being utilized and they provide the enterprise with their expected outcome.

Specifically, enterprises should obtain investments from their cloud vendors in the form of hard dollars available to be used on the necessary, and often very costly, consulting services required to implement, migrate, or roll out the cloud product.  These investment dollars should be available without conditions to help with the chosen implementation partner’s fees, change management fees, or even training being provided by another partner.

In other words, the enterprise should have the discretion to determine where these funds will be most valuable and useful to ensure a successful rollout.  The magnitude of the investments the cloud vendor is willing to provide is often a good indicator of how strong the relationship is.

As enterprises continue to adopt more cloud products, it becomes even more critical that they ensure the underlying contractual relationship is where it should be and includes the right level of flexibility, protections, and investment commitments.  The good news is that cloud subscriptions have renewal dates, which means there is always the opportunity to correct and improve the agreement.  Also, if an enterprise makes the decision to add to their cloud vendor portfolio in term, that could also be a great time to reset and correct.