Get More Bang for Your Buck: Do’s and Don’ts in Formulating Cloud Computing Contracts

cloud contract checklistIn late September, high-profile cloud storage start up Nirvanix told its customers to stop replicating data on its servers and migrate to other providers like Microsoft Azure, IBM SoftLayer and Amazon S3. For several reasons, Nirvanix, sitting on a tidy $70 million in funding, was shutting down . Users had until October 15 to download their data. It was a wakeup call for the community of cloud providers, users and technology analysts. Business compulsions can take a heavy toll on cloud users. And incidents such as these where a cloud provider shuts down practically overnight gives credence to the voice of those who believe that cloud computing can’t be trusted. While business failure is difficult to predict, you can still aim to gain better value from the service.

The cardinal rule is that before you sign a cloud-based outsourcing contract, ensure your contingency and disaster recovery plans are water tight. Mitigating risk is the responsibility of the end user as is extracting value from outsourcing contracts (with or without cloud-based elements).

Difference between Cloudsourcing and traditional outsourcing

Cloudsourcing is when you engage a provider for services you may have built or assembled in-house. It sounds very much like outsourcing and in many ways it is. The differences, however, are in the details. Cloud services largely use a pay-per-use model with little or no volume commitments. On the other hand, most outsourcing contracts depend on an annual or monthly fixed contract. Traditional outsourcing models have focused on service delivery for dedicated infrastructure or for specially-skilled talent.

Contracts are changing. Over the last three years, practically every outsourcing contract has some element of cloud-based services. And given the benefits of moving apps to the cloud, the cloud component of nearly every outsourcing contract is likely to continue to grow in the future. This means your outsourcing contract must be designed to deliver cost savings, productivity improvements and shorter time-to-market for the cloud elements.

Contract Do’s and Don’ts

Today, every outsourcing contract must have the following considerations:

  1. Short-term Outsourcing/ Cloudsourcing. A short-term contract is essential as business demands will vary, changing the amount you Cloudsource (as a total of the outsourcing contract) as well as the nature of what you Cloudsource. In addition, Cloud technology is undergoing rapid change. Short-term contracts will help you decide how you want to leverage the changes.
  2. Insulation from changes in delivery of Cloud services resulting from acquisitions and mergers. The cloud eco-system innovation is being led by small, agile and widely differing companies. These companies are frequent targets of acquisitions. Acquisitions can lead to major changes in provider-customer relationships, and most of the time, the changes will be in favor of customers. But that isn’t always the case, so you must protect yourself.
  3. Balance between pay-per-use models and billing based on service consumption slabs. Fluctuations in business can result in major spikes in cloud-based service consumption. This means there is some benefit in pre-negotiating slab-based pricing. Within each slab, billing should be based on actual consumption. This means as your consumption of the cloud services grows, each slab delivers increasingly favorable pricing.
  4. Option to take additional volumes to a different provider. Moving additional volumes to a different provider may not always result in a cost saving. It may also mean sacrificing the lowered pricing that becomes available with each slab. However, changes in the business environment may demand that you lower the risk to your business by opting for multiple providers.
  5. Visibility into operations, management and governance. Traditional outsourcing contracts ensure that customers have adequate visibility into and control over operations, management and governance related to the outsourced service.  That is one reason most organizations are comfortable with outsourcing a number of complex processes and infrastructure. They have visibility into the operations, technologies, people and quality standards being applied by the outsourcing partner to their processes and infrastructure. Periodic reviews with the provider are meant to bring these operations and management practices in line with the vision and standards of the business. This is not completely replicable in cloud-based services that are standardized and centralized to ensure that low-cost services can be provided to a number of concurrent users. However, your contract with the outsourcing partner for cloud-based elements must baseline the operations, management and governance standards.
  6. Security standards as good as those for outsourcing sensitive business processes. With critical workloads, applications and data storage migrating to the cloud, your contract should ensure extremely high levels of security. In the event that security standards are not met, opt for a private cloud where it is easier to set up the security layers your business demands.

Outsourcing has changed dramatically. Procurement for IT infrastructure and services must undergo a radical a transformation to extract benefits from the cloud elements of an outsourcing contract. This means getting it right from the start. Before you ink a contract, ask yourself this question: was my RFP designed to attract services providers who truly understand cloud? If you answer “yes,” you can expect a contract to deliver what you want.

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