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8 sure-fire ways to screw up a cloud contract

Robert L. Mitchell | Nov. 20, 2013
Read these tips before you sign anything

Something happened on the way to the cloud: Too many business customers got burned by bad contracts. It's not that cloud services can't deliver value. But in the rush to the cloud, enterprises often end up stuck with contracts that don't fully meet the business's needs, lack accountability and cost considerably more than anticipated.

There are several reasons for that, say people who make their living studying licensing issues and advising businesses on contract negotiations. Among other things, seasoned veterans of on-premises software licensing may mistakenly assume that cloud services contracts are just another variation on the same theme.

But as enterprise software vendors move to the cloud, software licensing has become so complex -- Microsoft's licensing strategy alone has ballooned from fewer than 50 options to more than 170 -- that even consultants and resellers are struggling to fully understand it. And even when expertise is available in house, businesses aren't always aware, or don't take advantage of it for political or other reasons.

For all their differences, cloud and on-premises contracts share at least one major trait: Once you sign on the line, you're stuck with the terms. And if you've committed to enterprise software such as ERP or CRM as a service, moving to another provider can be just as difficult as switching out on-premises software.

Computerworld asked four experts to talk about the most common mistakes that never should have happened, the consequences and what enterprises did to resolve them. If you really want to screw up a cloud service contract, they say, here are eight good ways to go about it.

1. Pay for all of your cloud services up front
You don't have to work in a small company to make this mistake. Frank Scavo, president of management consulting firm Strativa, recalls how a $100 million business that signed on with a cloud ERP provider got burned. The ERP contract included the monthly subscription fee plus implementation support and ongoing support.

The problem came about during the integration work required to connect the ERP system to the business's front-end e-commerce application. When that integration project got bogged down, the customer found that it wasn't getting the level of support it needed.

"But they prepaid, so the customer had no leverage over the vendor. It's a mistake to prepay for implementation services," Scavo says. Eventually the matter had to be escalated to the vendor's chief executive officer before the situation was rectified. "It shouldn't take a call to the CEO to resolve a routine implementation problem," Scavo says.

2. Sign a long-term contract without negotiating service-level commitments and penalties for noncompliance
In the early days of SaaS, businesses often paid for cloud services on a month-to-month basis. If the contract didn't work out you could walk away. But now it's common for SaaS providers such as Workday to pitch contracts that last three to five years, says Ray Wang, principal at Constellation Research Inc.


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