How to Avoid Vendor Lock-in with Cloud Subscription Agreements

Most companies rely on multiple SaaS solutions to run their business and changing out cloud products is not easy. A major caveat to these subscription models is that the cloud vendors that sold these solutions know their customers have diminishing leverage at each renewal and that they effectively “locked-in” their customers.

Whether you are adding net-new cloud solutions this year or preparing for challenging renewal negotiations, it’s important to understand how cloud vendors create lock-in. Here we will cover what vendor lock-in is and how you can either avoid vendor lock-in at the outset of your negotiations or effectively address it at your cloud subscription renewal to achieve the most favorable and flexible terms in your cloud subscription agreement.

What is Vendor Lock-In and How is it Established?

Vendor lock-in refers to a situation where customers are essentially stuck using a product or service regardless of quality because it is too costly and/or impractical to switch to a different vendor. The main way cloud vendors establish vendor lock-in is by having customers subscribe to their solution because the customer does not own the licenses to that SaaS product. The following are other ways cloud vendor lock-in is established:

• Usage and Dependence on Product Functionality

Under a cloud subscription model, there is a term end date that requires renewal if the customer wants to maintain access to the solution’s functionality. Assuming the users accessing these subscriptions are actually using the product or enough of its functionality, it is likely that they will have to renew to maintain business operations, creating vendor lock-in.

• Adoption of Multiple Products

Cloud vendors can also create lock-in by getting customers to adopt multiple products from the vendor’s portfolio at the outset of their subscription term. Vendors will also try to get customers to add products in-term, creating a multi-product portfolio over time.

The more cloud products a customer uses, the harder it becomes to move off any one product because these individual products become integrated into the customer’s environment as one vendor solution. This integration creates an elevated and extended level of reliance on the vendor within the customer’s organization.

• Product Bundling

When a cloud vendor sells multiple products as part of a bundled offering, it is almost impossible to move away from part of the bundle downstream. If the customer no longer needs a part of the bundle at renewal, the vendor will often present a proposal that is significantly more expensive than the cost of simply keeping the bundle.

This is often the case even if the customer negotiated renewal term price protections because there are often conditions that remove any negotiated price increase if the customer is looking to change products at renewal.

• High Switching Costs and Lower Productivity

Lastly, lock-in is a result of the often extremely high switching costs that come with trying to move off a cloud solution. The costs tied to data migration and the implementation of a new cloud solution can be expensive and prohibitive. There are also change management issues when moving to a new cloud solution, and executives fear a loss of productivity because users will need to learn new tools to do their job.

Why is Vendor Lock-in a Problem?

Unfortunately, customers often find themselves unable to move off a product or reduce usage through product take out or volume reduction without significant push back from the cloud vendor. The promise that cloud solutions allow customers to “buy what you need, when you need it” has never been kept. Once the customer’s cloud subscription agreement and order forms are finalized, there is already vendor lock-in.

Vendor lock-in also poses a risk to companies’ data. Losing control over the data and infrastructure that runs your business’s applications can affect your security, uptime, and infrastructure management. Most companies don’t want to lose control over those critical functions. If the vendor does not fit your future needs or goes out of business, transferring that data over will be a challenge.

How You Can Avoid Vendor Lock-In

The best way to avoid vendor lock-in is to negotiate the proper level of flexibility and downstream price protections. It is critical that there are specific provisions included in your cloud subscription agreement or associated Order Form.

1. Downstream Price Protections

For the downstream price protections, there should be a pre-negotiated cap on the increase the cloud vendor can apply to the customers’ existing product pricing at renewal. Additionally, there should be no conditions that require a certain set of products or volume at renewal. Some cloud vendors will even push for a maintained or even increased Annual Contract Value (ACV) at renewal for the price protection to apply.

2. Flexibility

You need to push for the flexibility to swap out or exchange products over the term and prior to renewal. Negotiating these terms affords your company the ability to adjust your portfolio and ensure it aligns with your current and future needs.

3. Ensure Data Migration

Ensure you negotiate terms that state your rights to extract and transfer your data should you decide to migrate to a different platform or vendor. It also helps to keep your data as portable as possible so that it can be easily moved from one environment to another. Instead of catering your data formats to the specific vendor you are currently using, define your data models so that they can easily be used across multiple platforms.

4. Have Alternative Cloud Solutions

You can have all the right contractual provisions in place, but if you want to move away from a vendor and trying to put yourself in the best position to overcome vendor lock-in, you need to have alternative cloud solutions lined up. It is impossible to move away from one solution if there is not a viable and fully vetted alternative available.

There must also be buy-in internally to move to a new cloud solution. Cloud vendors can sniff out internal alignment or lack of alignment, especially if they have relationships in place that they can call upon to get a sense for how realistic a move is.

Those looking to pitch changing solutions will also need to allow enough time to get the proper commercial deal in place with the new cloud vendor in a timeframe that will allow for the cut over to happen with limited to no disruption.

5. Consider a Multi-Cloud or Hybrid Cloud Approach

Creating a multi-cloud environment eliminates reliance on one vendor. If customers opt for a hybrid cloud approach, they maintain some control over their cloud data by way of a private cloud or on-premises storage.

The Bottom Line 

When it comes to cloud solutions, customers need to understand that vendor lock-in is very real and likely. The good news is, there are ways to ensure the negative aspects of being locked in can be prevented if properly addressed with a cloud exit strategy. This is something UpperEdge helps its clients with every day. If your company is ready to think more strategically about your cloud subscription negotiations and exit strategy, contact us to learn how we can help.