Cloud solutions have become popular in enterprises over the last several years largely due to the promised ability to:
- Cut costs
- Reduce implementation timelines
- Eliminate direct active management by the user
- Provide flexibility not typically found in more traditional on-premise software arrangements.
But in such uncertain times, enterprises need to revisit their cloud management practices to ensure they optimize cloud spend where it makes sense.
How to Take Control of Your Cloud Spend
Most cloud providers are publicly traded companies, so they openly speak about wanting to grow the ACV (Annualized Contract Value) tied to all of their customers. This is absolutely critical to their success in order to continuously add to their R&D spend and their Sales and Marketing budgets. They do this by adding new products and/or increasing the use of the current products to which customers have already subscribed.
At times, it may seem impossible to cut costs, but there are two fundamental ways to gain control over cloud spend:
1. Understand Actual Use at the Feature Level
Look at your cloud subscription products and dig down. Get an understanding from your users of the functionality they’re actually using, what they’re not using now, and what they will most likely never use. Armed with that insight could lead to an end result indicating you don’t need the edition you’re currently using (which is also likely the most robust edition that your cloud provider pushed you towards).
By doing this exercise, you can also use the outcome to create leverage during your next negotiation. In cases where you choose to remain on the more robust edition, you could negotiate for additional discounting, if done effectively, if there is enough value that will remain lost moving forward.
Consider Salesforce’s Unlimited Edition vs. a less robust, less expensive, option that may map more closely to your needs, like the Enterprise Edition. At half the price per user, the Enterprise Edition is “a deeply customizable sales CRM for your business.” The major difference between the two editions is the 24 x 7 support and configuration services as well as sandbox depth. And if you can make do with even less features, there is a Professional Edition that could even meet your needs.
2. Ensure Proper Flexible and Long-term Price Protections are Included in your Agreement
When an enterprise enters into a cloud subscription agreement, you are renting access to the functionality. Once the term is up, you must renew if you want to continue to have access.
Regarding flexibility, if you were able to get the ability to swap a product or user volume that is not being used for other products that you need, this would remove the necessity to actually spend more with your cloud provider for the products and volume you would be swapping for. If you don’t have the ability to swap (which most don’t, or if they do, there are often many conditions that effectively make the right worthless), you would have to procure the additional products or volume while still paying for the products and users you’re not using. Hopefully, you also locked in the pricing you would have to pay for the additional products or volume.
“With cloud, you might be locked in for 3-5 years, but in-term, you can really renegotiate sizes to right-size or redistribute products for the things you need if your deal is structured right,” commented Tim Brown, VP of IT Rayonier AM Canada. “You may not be able to reduce your overall spend, but I’ve found that you can redistribute the dollars you are spending with functionality that brings more value.”
Concerning price protections, too many enterprises are hit with unexpected significant price increases at renewal because they did not negotiate the proper terms on those increases for a period of time. For example, they should have negotiated for no increase after the term ends or an increase cap that doesn’t come with a long list of conditions that need to be met for the cap to be applied. Under this scenario, cloud spend can get out of control very quickly without those protections and, often because it’s cloud-based, it’s very hard to correct the problem because you need to renew to keep the functionality.
The #1 Mistake in Planning Your Cloud Spend
The biggest error when planning cloud spend is the assumption that cloud vendors will accommodate changes in your needs in-term or even at renewal without a negative impact to the resulting cost profile of what would be left. This is common with a reduced product or user requirement and the resulting reduced ACV for the provider. Also, a common mistake is the assumption that growing, adding product, or adding volume in-term will naturally lead to improved product or per-user pricing for the products and users already subscribed. But you know what they say about “assumptions,” right?
You may not have previously thought to obtain contractual commitments to be able to reduce your products and users without a negative impact or you may not have negotiated a volume discount structure at the outset to lower the per user cost profile as your volume (commitment) increases. If this is the case, you’re often not going to have control over your cloud spend from a planning perspective, because you’re going to be fully reliant on the hope that the cloud vendor will do the right thing.
Contract language should either remove the ability to increase for a specified period of time after the term (i.e., for the upcoming renewal term) or specifically limit or “cap” the price increase that the cloud vendor may impose at renewal. In addition, customers should not be required to maintain a certain quantity of products or a certain volume of users to receive the benefit of the committed price protection.
“It’s all about having the right contracts,” remarked Joe Caro, Sr. VP and CIO at Post Holdings. “It is about not being transactional. It is something built for the long-term, which is about price certainty, but whereas most people look at 3-year deals or longer-term deals, we structure everything as a series of one-term deals. We are very adamant about not doing anything longer than one year because we do want the ability to switch out as circumstances change. We also want a defined exit plan upfront and we build that plan and the terms into the agreements so that we can exit. “
How Enterprises Can Lower Cloud Spend Waste
The best way to lower cloud spend waste is to devote the proper amount of time and due diligence prior to signing your cloud subscriptions. It is critical that you spend time working with line-of-business executives and end users that are going to be using the functionality to determine not only the proper volumes, but the proper edition of the product needed.
Also, it’s important to assess the timing of when the products and particular user volumes are going to be needed so you don’t commit to everything at the outset of your contract, but instead, you structure the contract in phases to align to your determined timeline of actual needs. This should be easy to achieve but it will take a strong negotiation strategy.