IT organizations big and small are seeing significant benefits from some of their cloud computing contracts. The value of cloud services deals increased 60 percent in the last three years and the $40 billion global cloud services market is expected to grow 27 percent annually over the next three years, according to recent research by the Everest Group.
Indeed, many types of software are especially suited to an as-a-service delivery model, including customer relationship management, salesforce automation, human capital management, procurement supports and IT service management. Even cloud-based finance and accounting software is beginning to gain traction in some companies.
“The drivers of cloud-based delivery capabilities are typically based on how much customization and integration is required for the application,” Andrew Alpert, principal of outsourcing consultancy Pace Harmon. “Client-specific software, such as manufacturing execution systems and manufacturing planning systems, do not yet fit as well for cloud delivery due to the customization and performance requirements, but that may change in the future based on maturing models.”
Inflexible cloud deals risky for SaaS clients
The providers of these cloud solutions still prefer their customers to sign their boilerplate contracts. But those inflexible deals signed today could cause trouble for Software-as-a-Service (SaaS) clients down the road. “There are a number of potential issues specific to SaaS deals that CIOs should consider when selecting a delivery model,” says Alpert. For example, while confidence in cloud security is growing, many cloud packages still fail to provide complete compliance certification. SaaS vendors may offer standard—and generally lower—service levels across their portfolio of customers that prove problematic for customers seeking more meaningful response time or account support guarantees.
Cloud customers may not consider how the variable cost structure of a SaaS deal will impact them in a rapid growth environment. Application interface issues can also sneak up on clients who don’t negotiate terms to deal with complex integration requirements. And customers may be surprised down the road when non-production needs for development and testing trigger big cost increases.
It pays to future-proof cloud contracts up front, making sure the deal you sign today is aligned with evolving business needs. To do that, Alpert says SaaS buyers should insist on five terms in their new deals.
5 terms SaaS buyers should insist on
1. Make sure you can migrate or transfer access across user classes as needs change without added costs. SaaS vendors frequently try to lock buyers into one service and user type, explains Alpert. But, although a sales force automation client, for example, may pay for a three-year subscription that covers 1,000 sales users and 1,000 service users, they may find later on that they need 800 service users and 1,200 sales users. “The goal is to make sure there is flexibility to ‘right-size’ the number of users for each application,” says Alpert. “In addition, the client should have the flexibility to downgrade from the unlimited edition license type to a lower cost and feature type such as professional edition.”
2. Lock in more meaningful volume discounts for hitting predefined growth targets. Cloud providers will offer progressive discounts based on number of users, but often only those users in that added tier get the lower price. For example, if a SaaS vendor offers 10 percent off for up to 50 users and 15 percent for 51-100 users, only those additional 50 users get the bigger discounts. Insist that once you reach a given threshold, all users get the lower rate, advises Alpert.
3. Confirm that you can activate separate systems for non-production needs in a way that does not impact user counts—and therefore, costs. Alpert suggests negotiating additional instances or separate platform access for development, testing and training purposes without impacting subscription counts.
4. Include specific clauses to protect your company should you make an operational change, such as an acquisition. Some SaaS suppliers have licenses based on the number of employees the customer has. If the client acquires a company, for example, that increases their employee base. “This is to protect against large overage charges if the client is acquiring companies,” Alpert says.
5. Institute a flexible audit process to clean up unnecessary, unused, dormant, or inaccurate user counts and types and avoid big fees during annual renewal. Most cloud agreements are written to protect the vendor, says Alpert. If the license threshold is 1,000 users and there seem to be 1,100 users in the system, the buyer must pay. But, “frequently, many of these users are not active, no longer with the company, or were accidentally provisioned for multiple accounts,” Alpert says. “It is important for the company to have an opportunity to research whether the data is accurate and have a chance to clean up errors since the intention was not for these users to be in the system.”