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Contracting for cloud: making the right decisions to maximise value

Outsource Magazine

11 July 2013

Cloud computing is realising its promise of cheaper and more flexible IT and is changing both the way CIOs contract for IT services and how they engage with their businesses.  As a result, as the market matures, more and more enterprises are deploying cloud-based services. However, many of these enterprises are not securing the best services and right contracts to maximise the value they get from the cloud.

To maximise the value gained, businesses need to start by understanding that cloud is not just a technical innovation but it also enables new commercial and business operating models. By enabling experiments and pilots, cloud provides businesses with a way of putting the motto of “fail early and often in order to succeed sooner”, into practice. For instance, the ability to spin up new services quickly without having to make long-term IT spend commitments can be a real game-changer in markets that demand agility. So there are real business advantages to be gained if CIOs choose the right cloud services.

Yet these choices are not straightforward.  There are many commercial, risk and capability issues to be considered (such as the level of service integration across distributed services). These decisions are then made more complex because there is little consistency in the market in terms of what is offered, how it is defined and how it is priced.

There are three simple things that CIOs can do to help them make the right choices to maximise the benefits of the cloud.

For standard services, use standard contract terms

When looking to contract for a cloud solution (i.e. software-as-a-service, infrastructure-as-a-service, or platform-as-a-service) CIOs are almost always purchasing a standard, leveraged solution. Suppliers’ standard contracts now recognise and largely adequately address previous weaknesses around security and data placement.

This should make things simpler because there is no longer a need to worry about defining the scope and dictating the level of performance that is required.  If cloud services are seen as commoditised products then there is little need for definitions of scope or extensive performance guarantees. Instead the CIO should focus on understanding the additional services that they need, and then ensuring that the contract adequately specifies such ‘service wrap bolt-ons’. An essential part of this should be ensuring clarity about what is included and what is not included: you do not want to find out during implementation that half of the technology and service components needed to make your solution work are not included in the agreed price.

Be sure that you are not being sold outsourcing in disguise

Unlike conventional outsourcing, real cloud solutions enable unprecedented flexibility, so it is vital to remove non-scalable costs from the pricing model.  This means moving from traditional outsourcing models and ensuring that pay-per-use pricing is transparent and completely excludes one-time cost elements, such as set-up and governance. However, some offerings in the market still have traditional outsourcing constraints ‘under the bonnet’. The key things to look for are:

  • Ensuring that the commercial model recognises only capacity that is actually being used – cloud enables suppliers to leverage economies of scale and the top suppliers are passing these savings directly on to customers.
  • Avoid fixed-term contracts. Agreements should be exit-able at any point with close to zero notice and without big penalties – some traditional term-based contracts can cost as much to exit early as it would to continue to completion.
  • Avoid binding contractual commitments to consume a given capacity as, in a cloud environment, capacity management is only an issue for the suppliers.
  • Expect cloud sourcing transactions to be shorter and have smaller total deal values than traditional IT outsourcing arrangements.
  • Do not pay investment costs for customisation as new innovations that meet the specific needs of your own business can be shared to benefit multiple customers, and suppliers can gain substantial market advantage by investing in these opportunities themselves.

Moving to cloud is a journey: the contract must allow you to change the route along the way

Most organisations start using cloud in a tactical way, in advance of doing something that fundamentally affects the way a business is run, such as greater use of anonymised data for testing and data warehouse type interrogation. As the CIO is increasingly becoming a broker rather than provider of services, they should recognise that what the business is asking for today may not be what it needs tomorrow. That means it is important that any contract does not constrain the option of moving between different cloud types in the future and allows the introduction of new services into a hybrid cloud solution. It is essential to ensure that contracts do not embed inappropriate and outdated outsourcing-style risks that limit the chance of achieving flexible business-led capabilities.

It is clear that the opportunities of cloud are huge, but equally clear that there are potential pitfalls in realising those opportunities. So businesses need to understand the way cloud is different from traditional arrangements and scrutinise contracts carefully. Only then will they be able to maximise the true value of the cloud.

To visit PA's pages on shared services and outsoucing, please click here.

This article was first published in Outsource Magazine.

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