Negotiating Cloud Contracts

We’ve all heard the phrase. Cloud vendors speak it in somber, authoritative tones as frustrated customers grumble and curse. The phrase? “Sorry, we don’t make changes to our standard contract.”

A virtual fight has been brewing over “the phrase” in the last few weeks. The first volley was fired by Bob Warfield in a blog post called “Gartner: The Cloud is Not a Contract” where Mr. Warfield argues that it’s perfectly reasonable for a cloud provider to use “the phrase.” In fact, he says, if a cloud provider doesn’t say it at every opportunity, the provider risks becoming *gasp* a mere datacenter. He says:

What [the Cloud] is about is commoditization through scale and through sharing of resources which leads to what we call elasticity. That’s the first tier. The second tier is that it is about the automation of operations through API’s, not feet in the datacenter cages.

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Now what is the impact of contracts on all that? First, a contract cannot make an ordinary datacenter into a Cloud no matter who owns it unless it addresses those issues. Clouds are Clouds because they have those qualities and not because some contract or marketer has labeled them as such. Second, arbitrary contracts have the power to turn Clouds into ordinary hosted data centers: A contract can destroy a Cloud’s essential “Cloudness”!

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How do we avoid having a contract destroy “Cloudness?” This is simple: Never sign a contract with your Cloud provider that interferes with their ability to commoditize through scale, sharing, and automation of operations. If they are smart, the Cloud provider will never let it get to that stage.

Mr. Warfield goes on to argue that any deviation to a cloud provider’s contract that impacts scale, sharing, or automated ops essentially destroys the benefit of cloud computing, and results in turning a cloud contract into a managed data center contract. In other words, if a provider is not a “pure” cloud provider, they are a datacenter provider.

Lydia Leong at Gartner quickly escalated the battle, responding in a blog post entitled “The Cloud and Customized Contracts.” Ms. Leong counters that cloud providers should be careful in using “the phrase” since it might not align with their business goals. At the same time, she also cautions that customers looking for substantive customizations to a cloud offering might undermine the cost savings they are seeking:

[A] cloud provider has to make decisions about how much they’re willing to compromise the purity of their model — what that costs them versus what that gains them. This is a business decision; a provider is not wrong for compromising purity, any more than a provider is right for being totally pure. It’s a question of what you want your business to be, and you can obtain success along the full spectrum. A provider has to ensure that their stance on customization is consistent with who and what they are, and they may also have to consider the trade off between short-term sales and long-term success.

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Customers have to be educated that customization costs them more and may actually lower their quality of the service they receive, because part of the way that cloud providers drive availability is by driving repeatability. Similarly, the less you share, the more you pay.

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. . . I believe that customers will continue to make choices along that spectrum. Most of them will walk into decisions with open eyes, and some will decide to sacrifice cost for customization. They are doing this today, and they will continue to do it. Importantly, they are segmenting their IT portfolios and consciously deciding what they can commoditize and what they can’t. . . . [U]ltimately, the most successful IT managers will be the ones who be the ones that manage IT to business goals.

So should a customer negotiate a cloud contract or not? As Ms. Leong states, it depends on the customer’s business demands. If the business demands the lowest cost and is willing to bear additional risk, then a non-negotiated “pure” cloud contract might be best. On the other hand, if the business demands that costs and risks be balanced, or that risk mitigation take priority over cost savings, then a negotiated contract is likely the best option.

Fortunately for customers, market forces are already influencing cloud providers to make their contracts more detailed and customer-friendly. In a recent article about cloud predictions for 2011, journalist George Lawton writes:

As cloud providers compete for new customers, many will begin to extend more elaborate guarantees, concrete remedies and better data transit awareness. The guarantees will provide better legal protection on the control of data. Confident providers will also include more detailed service-level agreements (SLAs) and financial remedies, covering all aspects of the cloud service, that could affect the customer’s business performance. Cloud providers will also offer to provide improved visibility into the movement of data to maintain legal requirements.

If this trend continues and cloud providers include reasonable protections for customers in their standard contracts, then hearing “the phrase” might not be so bad after all. In the meantime, customers must continue to balance cost savings with risk mitigation, and negotiate (or not) accordingly.

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