Thinking differently about sourcing: negotiating a smarter cloud contract

From start-ups to global enterprises, companies are keen to exploit the benefits offered by cloud infrastructure services (IaaS). But in recent work with clients, PA Consulting Group has found that organisations are being caught out by cloud contracts that load inappropriate outsourcing-style risks on to the customer.

To realise the full potential of cloud, companies must review traditional outsourcing contractual arrangements. In doing so, they can realise five specific and significant benefits that will help drive board-level buy-in for the adoption of enterprise IaaS.

• Achieve totally scalable costs

Cloud solutions enable unlimited scalability, so it is vital that non-scalable costs are removed from the pricing model. By ensuring that pay-per-use pricing is transparent and excludes one-time cost elements, such as set-up and governance, you can achieve totally scalable costs. We have identified and resolved situations where cloud unit charges included elements of service set-up cost, a model that would have destroyed the value predicted by the business case.

• Exit large-scale agreements at will

The flexibility provided by cloud is contrary to the concept of a fixed-term contract, so you should be able to exit an agreement at any point with close-to-zero notice and without big penalties. It is not uncommon for suppliers to attempt to link the exit costs of each customer with the full book value of underlying shared assets – but it is the supplier that owns the infrastructure and it is their responsibility, not yours, to maximise the investment in underlying hardware.

• Share your innovation with suppliers - and be rewarded appropriately

Suppliers are still evolving and this means they can be influenced by the priorities of early adopters. Services should include common regulatory and security requirements as standard, and you should not expect to pay for any necessary customisation. Suppliers can share any innovations developed to meet your specific needs with other customers and re-coop investment costs in this way.

• Make ‘pay for what you use’ a reality at last

Cloud enables suppliers to leverage economies of scale and the top suppliers are passing these savings directly on to customers. Ensure that the commercial model recognises only capacity that is actually being used rather than allocated storage. And be aware that reservation fees and monthly minimum usage periods for servers can make cloud an uneconomical and inflexible solution.

• Switch from managing IT capacity to managing business demand

Customers that share uncommitted demand forecasts allow their suppliers to maintain cost-effectiveness and commit to greater certainty of provision. In return for this visibility, customers can expect suppliers to provide information on business demand and proactively manage down unutilised capacity.

To help your company deliver maximum value and reduce the risks of moving to enterprise cloud services, contact us now.