With so much money sloshing around the cloud industry, it's time for hard negotiating
Last month, it was disclosed that the National Security Agency re-awarded a massive and hotly contested cloud computing contract worth up to $10 billion to Amazon Web Services.
One can assume a large government agency procuring $10 billion of cloud services has quite a bit of leverage over the terms of the agreement. However, for mainstream companies, the opposite may be true -- the cloud provider holds many of the cards, in a legal or contractual sense, with terms that may come back to bite the consumer.
Worldwide end-user spending on public cloud services is forecast to grow 20% in 2022 to total $495 billion, up from $411 billion in 2021, according to Gartner. In 2023, end-user spending is expected to reach nearly $600 billion. So there is a lot of money now pouring into the cloud sector. It's time to hold vendors' feet to the fire; they're not hurting for income.
"Often complex and vendor-centric, cloud subscription agreements require a unique negotiation approach," writes Adam Mansfield, practice leader of the Microsoft, Salesforce, and ServiceNow advisory services at UpperEdge. "Companies adopting cloud applications must approach their cloud agreements with the proper rigor and ensure they include necessary upfront and downstream protections as well as flexibility while also addressing various security concerns."
In his seminal work on the topic of cloud negotiations, The Ultimate Guide to Cloud Subscriptions Agreements (available for free download), Mansfield states that subscribing companies can assert themselves with cloud agreements. Remember, everything is negotiable. Here are some key bits of advice Mansfield provides on negotiating reasonable terms with a cloud vendor:
- Beware of the myth of on-demand: "Most cloud subscription agreements don't reflect a truly flexible, on-demand model," Mansfield states. Instead of metering usage, they tend to resemble on-premises software agreements, "with fixed fee payments for a specified set of products and a committed number of users." Seasoned users of on-premises software may see all the familiar traps, he adds, such as "autorenewals and required multi-year upfront commitments."
- What cloud vendors want are assured revenue streams: "Often, organizations must contractually commit to multi-year terms requiring upfront payments of fees for each year of the term," he says. Vendors want predictable revenues above all else.
- Make sure price protection is in place: "Cloud subscription agreements are often ambiguous regarding protections against price increases applied to any additional products or users added during the term," Mansfield cautions. Make it clear that adding additional products or users will come under the original pricing agreement.
- Watch out for renewal hikes. After three years, it can be assumed there is some degree of vendor lock-in, making a migration to another platform more complicated. "Having price protections in place at the time of renewal is critical," he urges. Renewal time means price-hike time. A good contract should at least cap any potential increases when it's time to renegotiate a new contract.
- Handle downtime terms with precision: Even the most robust cloud providers have their share of glitches that incur downtime for customers. While it's a given that cloud agreements include enforceable service-level agreements (SLAs), Mansfield urges cloud customers to insist on tight measurement periods for SLAs. "The longer the measurement period, the more diluted the effects of the downtime," he states. "The moment the downtime starts, the clock needs to begin ticking in terms of calculating downtime." Importantly, there should be "clear and specific penalties defined and enforced," he continues. Don't buy into free application time, which is "of little value to enterprises if they are dissatisfied with the service in the first place. A better penalty structure should involve service credits that escalate as the length of downtime increases."
- Ensure free and clear termination: When vendors fail to meet SLA provisions, customers should be able to cancel the agreement without penalty. "The vendor obligations upon termination need to be clearly stated," Mansfield adds.
Cloud engagements are now the lifeblood of forward-looking enterprises seeking the flexibility and adaptability to compete in today's economy. Cloud providers are partners in this journey, and it's important that these engagements are started and maintained on an equal footing.