Negotiating cloud contracts: deal or no deal?

By Derek du Preez
21 Jun 2011 View Comments
Handshake to complete negotiations


Chief information officers and IT chiefs gathered this month at the London Stock Exchange for Computing’s IT Leaders Forum to discuss how their enterprises could take advantage of cloud-based services.

Further reading

Negotiating a contact for IT services hosted by external – or cloud – providers was among the hot topics and is currently a big area of concern for companies evaluating cloud services.

But larger enterprises are better able to negotiate a cloud contract, as small companies simply will not have the financial resources in-house to conduct such negotiations, one expert concluded.

Speaker Alex Hamilton, director at technology and outsourcing legal firm Radiant:Law, advised delegates on how to negotiate a cloud contract with suppliers.

“If you are going to negotiate a contract, you need to bring a lot of money to the table. The answer for a small firm trying to negotiate a contract without much capital behind them is almost always no,” said Hamilton.

For companies that do have the resources, negotiations should be a competitive process, carried out with more than one potential service provider.

“A competitive process is a wonderful way of creating leverage. Competition fundamentally changes behaviour, and if you want to get your terms negotiated, then this is your best bet,” he added.

Companies should also try to get some sense of the state of the market and understand what can be realistically negotiated in a contract when going through this process.

“If you don’t do this, you could spend a year discussing points that a cloud supplier will never agree to, and projects will be put on hold when they don’t need to be.”

Hamilton went on to outline some real-life examples of cloud contract terms, all of which highlighted the fact that these contracts are often heavily biased in favour of the supplier.

For example, the terms usually place sole risk with the customer, and often the supplier cannot be blamed for any outages or downtime in service. Relying on getting out of the contract at a later date because of perceived unfair terms is also unwise.

“There are pretty scary terms out there, and we deal with contracts of this kind all the time,” said Hamilton.

“The general position with these contracts is that if you sign a deal, you live by the deal. You should never assume that because a clause is blatantly unfair it will not be enforced, especially when it’s a business-to-business contract,” he added.

Despite the words of warning from Hamilton, CIOs on the panel provided members of the audience with positive examples of the financial benefits that can be gained from well-planned cloud deals.

One not-for-profit organisation has seen first-hand the results of putting together a business plan based around the costs and savings of using the cloud.

Alan Lee-Bourke, CIO of the Wise Group, said: “The sums were easy for us. Our finance director loved the fact that the cloud meant no more capex, and we could work with operational expenditure.

“I just picked individual items and showed how it could work. It would cost me £25,000 for an on-premise telephony exchange for about 25 people. We now pay £2.60 per user per month. As a result, we are saving £300,000 a year in a 600-person organisation. They’re easy savings.”

John Harris, chief architect and global vice president of IT strategy at GlaxoSmithKline, said that moving into the cloud is often prompted by an IT refresh. “The catalyst for us moving to Microsoft’s Business Productivity Online Services was that we had reached a point where it was time for a refresh and investment was necessary,” said Harris.

He also said that cloud-based services are ideal for organisations that are not certain what the future holds. “We weren’t quite sure where our business was headed, and that was a big part of our decision,” he said.

“We were going to expand into certain countries, while simultaneously decreasing our presence in others, and managing this was a big driver for moving to the cloud. But if you know exactly what’s happening over the next 10 years, a cloud model might well be less attractive.”

Opportunity knocks

A topic that excited many of the delegates at the Forum, and members of the panel, was the idea that the death of the desktop would create cloud opportunities.

Dan Simms, IT director at law firm Browne Jacobson, argued that cloud uptake will be driven by consumers, and the big driver will be the emergence of “cloud-based desktops in the consumer space”.

Dave Foster, IT director for nuclear research company CERN, agreed with Simms and said the IT industry could have done more in the past to make this happen.

“I think we have failed in the computing industry to make IT totally manageable to the average consumer. I consider myself a bit of an expert and I spend most of my time fixing stuff – I don’t know how people at home manage their PCs,” he said.

“With cloud desktops, all the traditional problems are taken away from the end user. They would have a simple device that doesn’t require any maintenance at all, and yet they can use it and the applications as though they are running on a local machine,” he added.

“When we get to this stage, I think we will see widespread adoption.”

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