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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

Chances are, if you haven't negotiated that into the contract, you will end up paying far more than you should. You may not enjoy volume discounts as you grow, you might have to pay for empty seats and you could even end up paying more to add a new user if the provider's offerings change. For example, discontinued its unlimited edition, which gave the user full access to all features and services. Now you may have to pay extra to give that user access to some features, such as Premier Support or mobile access.

In other cases the subscription pricing models of cloud vendors, most of which got started with small and mid-sized businesses, may not scale to the needs of very large enterprises. "When you expand from 100 users to 10,000 users globally, the [cloud] cost model just falls apart," Pearl says.

In those situations, the relative total cost of ownership implications between cloud and on-premises options may be clear only when analyzed over a long period of time -- say, seven years.

The more established players do tend to offer enterprise-scale tiers. But that brings up another issue.

Get the tiering right because you need to be able to flex down as well as up. Ray Wang, principal, Constellation Research

"As you add licenses you should be able to add them to volume discount or user count tiers," says Wang. Rather than straight volume discounts, contracts can be constructed so that the business pays one rate for the first 99 users, for example, with a discounted rate for the second tier starting at the 100th user and so on.

The contract should be negotiated such that it will flex both ways, with per-seat charges changing accordingly as you peel away users from a given tier. "Get the tiering right because you need to be able to flex down as well as up," Wang says.

It's also important to negotiate on the ability to turn unused licenses into future credit, Wang says. "Typical approaches are to park licenses or return them for credit without impacting your discount levels."

Mergers and acquisitions create yet another set of issues. Consider the case of a professional services firm that started out with a 50-seat contract for its CRM service before acquiring another company and quadrupling the number of seats it needed. The business then had two contracts with two different rates, and the vendor demanded that the customer pay at the substantially higher rate after the merger.

The vendor wouldn't merge the contracts because the acquired business operated in another country, nor would it let the business renegotiate. "So they cancelled," Wang says, approached a new provider and negotiated terms that allow it to scale to as many as 1,000 users during the five-year contract.


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