So, you want to move to the Cloud. What do you need to think about when contracting with Cloud vendors?

The pace of Cloud adoption shows no signs of slowing.  As enterprises increasingly rely on Cloud, it is quickly becoming a large-scale contract by spend for many IT functions.

So, what should enterprises consider when establishing contracts with their Cloud providers

1. Legal challenges -  Cloud has been around for a while, so the legal issues are not new, but increasingly deals will include a combination of technologies (for example, data analytics or AI), which have their own complex legal considerations. When combining these technologies, the legal issues can be greater than the sum of its parts and require careful consideration from expert technology lawyers to a) identify these new or novel risks; and then b) ensure that there is an appropriate allocation of risk between the parties. This involvement of expert legal counsel can inevitably result in additional costs, and such cost must be considered in the business case.

 2. Investment from Cloud service providers - Cloud service providers are willing to invest, so make use of it! Gone are the days of “take it or leave it”; providers are much more willing to co-invest in organisations to help them on their journey to the Cloud and large up-front investments in migration and engineering effort are far from unusual. This willingness to invest becomes particularly noticeable in deals of a larger scale, i.e. those with total contract values in excess of hundreds of millions of pounds. Where organisations want to realise the benefits of this scale and flexibility around investment, they can get the best commercial offer by using competitive leverage.

 3. Avoid the buzzwords - The world of Cloud is littered with buzzwords: SaaS (Software as a Service), PaaS (Platform as a Service) and IaaS (Infrastructure as a Service), to name a few. Once organisations move beyond the marketing, the differences come to fruition in the contracts; there needs to be clarity around what these services actually mean, for example, in terms of environments, applications, releases and scalability. Once these have been understood, negotiation is key; large deals or deals associated with compliance with laws and regulations can drive significant movements around some of the big topics, for example termination, suspension, security, data protection and liability. Regardless of the flavour of the Cloud service, it’s important to keep in mind the basics around: regulation (for example, GDPR, specific industry regulations etc.); points of demarcation (for example, security); and protecting the investment (for example, terms, renewals, price increases, intellectual property rights etc.). These will protect the organisation and ensure that they do not suffer if the deals go sour.

4. Who will manage these services?   There are a mix of models adopted by organisations, some choosing to manage the Cloud services themselves but others opting to pay integrators to manage their Cloud as part of a managed service, alongside the management of any remaining on-premises infrastructure. Previously, managed service providers typically required minimum revenue commitments of between 70% and 80% of an agreed baseline; usage of Cloud services has led to the market seeing broader hosting deals with minimum revenue commitments as low as 0% of the agreed baseline. The Cloud hasn’t replaced wider outsourcing but it has disrupted the models used for procuring and managing technology services across the estate.

5. Build robust vendor management capabilities - Once the contract has been signed, establishing robust vendor management capabilities will be essential in ensuring that the Cloud service provider is managed effectively and contractual obligations are met. Technology services require strong oversight around service performance, commercial performance and management of the relationship. Regarding the former, having absolute clarity on the service level agreements (SLAs) and the implications for missing them allows organisations to avoid leaving money on the table by failing to claim service credits where required. It is strongly recommended that organisations develop contract handbooks that describe the contracts simply and clearly, enabling all stakeholders involved to have a strong understanding of their contents.

Don’t be afraid to use the sourcing and procurement strategy to be clear about requirements and flush out vendors that don’t meet these early; this results in greater competitive leverage in the process, greater room for negotiation and, ultimately, more optimal best-and-final-offers from providers.

 Co Authors : George Tilbrook, Shiv Patel