Your cloud contract needs to look beyond renewal time

Use your contract to keep from being surprised when it's time to renew

So you've done all the right things in selecting your new cloud vendor. You went through a competitive bidding process, evaluated the bells and whistles offered by each vendor, identified the service that best meets your needs, got a great price for the first year, trained your staff on the new service, and mothballed your old in-house solution. A whole lot of work, wasn't it? Don't want to go through that again soon, do you? Well, if your contract doesn't effectively address the terms under which you can continue to use the service, then the cloud vendor may have you over a barrel at renewal time.

Avoid renewal surprises

Did the vendor offer you special introductory pricing for the first year? Maybe with a minimum volume commitment based upon the vendor's projected adoption rate? Great, but when renewal time comes around and your usage was a lot different than projected, and the vendor hits you with a much higher "list price". Not a good place to be. So do your homework, and take steps to assure reasonable and predictable costs beyond the initial contract period.

Take steps to ensure that your contract specifies the costs of both renewing the service and changing the amount of data or number of users covered -- up or down. Start by negotiating to include renewal price caps in the contract that would ideally be determined by whichever of the following is lowest:

* A Consumer Price Index. There's more than one, so it's important to specify which one applies.

* A set percentage; shoot for something in the 3% to 5% range.

* What the vendor charges others, including its most favored customer of comparable size and scope.

* The cloud vendor's list price.

Negotiate to have these prices effective for as long as possible.

And don't overlook the likelihood that your needs will change. A highly touted benefit of cloud computing is that you only pay for what you use, so ensure that the contract doesn't tie you to minimum purchase volume or multiyear commitments.

Because cloud services are still new to many, it can be difficult to accurately predict volume of demand. To be ready for any expansion of your initial usage or volume, negotiate costs to pay for additional users and/or services. The cost should be equal to or less than the cost per unit of your initial purchase. On the flip side, be sure that your contract language doesn't increase your price per unit if your volume decreases. The exercise of these rights should be your choice.

Terminating the contract

Effectively addressing the terms under which your access may be terminated is equally important. Cloud vendor contracts often say something like this:

"If Customer violates any of the terms of this Agreement, Customer's permission to use the Services will automatically terminate. [VENDOR] reserves the right to revoke Customer's access to and use of the Services at any time, with or without cause, and with or without notice."

A little one-sided, don't you think? If revisions aren't negotiated in advance, the cloud vendor could terminate your access to its service without notice. This could mean that you won't have time to switch to an alternative service or to do so in an effective and well-planned manner.

To protect your rights to continued access to the services, contractually restrict the terms under which the cloud vendor can discontinue your service. Key points to consider include:

* Restricting vendor termination rights to triggering events such as customer actions that pose a significant threat to the vendor's infrastructure.

* Maintaining your reasonable opportunity to investigate and correct any such actions prior to termination.

* Establishing a minimum advance notice period for vendor termination rights. This minimum time frame should be long enough for you to switch to an alternative service.

* Including the stipulation that any payments subject to a legitimate dispute should not be cause for the vendor to terminate service.

These sorts of contract clauses will help you keep the decision of whether or not to change to another service within your control, just where it should be.

Interested in learning more about cloud computing risk mitigation via contract negotiation and vendor management? Registration is now open for the July session of my UCLA seminar Contracting for Cloud Computing Services. Hope to see you there!

Thomas Trappler is director of software licensing at the University of California, Los Angeles, and a nationally recognized expert, consultant and published author in cloud computing risk mitigation via contract negotiation and vendor management. For more information, please visit

Copyright © 2012 IDG Communications, Inc.

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