Amazon: Enterprises should adjust cloud expectations

The reported problems Amazon had last week in negotiating a contract with Eli Lilly point to a disconnect between what cloud providers offer and what large enterprises expect -- though some analysts say they also reflect a lack of flexibility at Amazon.

Last week reports surfaced indicating that Eli Lilly, a marquee customer of Amazon's Web Services, had decided against expanding its use of the hosted services after the companies failed to agree on liability terms. Some analysts have concluded that Amazon is essentially unwilling to negotiate contract terms and may not be serious about targeting enterprise customers.

Amazon has declined to comment on the specifics of its contract with Eli Lilly, but said that the pharmaceutical company continues to be a customer of Amazon's Web Services and that both companies are pleased with their current relationship. Eli Lilly also confirmed that it continues to employ a variety of Amazon Web Services.

In an interview, the head of Amazon's Web Services said that the company does negotiate contract terms with enterprises and is interested in attracting customers of all sizes. He also said that large companies may need to adjust their expectations when starting to use the cloud.

"We absolutely negotiate enterprise agreements with enterprises who want something more tailored" than the stock customer agreement that Amazon offers on its Web Services sites, said Adam Selipsky, vice president of Amazon Web Services.

While many such negotiations conclude swiftly, a "subset" doesn't, he said. "What's happening is, in some cases customers who are not yet comfortable are coming with very risk-averse profiles and therefore some contractual requests which, frankly, they aren't making with their traditional vendors," he said.

Many enterprise customers are used to buying technology resources under fixed contracts that include substantial up-front investments, he noted. If a company is doing a contract that will cost hundreds of millions of dollars over a decade, "in some cases you'd see significant liability provisions in place," he noted.

"To then move to a world where these IT resources are consumed simply on a pay-as-you-go basis with no up-front commitment, no capital expenditure required ... in situations like that, consumers of these services and vendors need to have liability arrangements that make sense in that environment," Selipsky said. "It's a question of different environments and different arrangements being appropriate given the particulars of each situation."

While Amazon believes that its position on liability and other contractual terms is similar to its competition, it also notes that it's difficult to be sure. Experts say that Amazon is different from its competitors.

"This kind of underscores the weakness of Amazon versus third-party hosting companies who are able to offer rock-solid service agreements," said Phil Shih, an analyst with Tier1 Research. "I feel this is clearly a prime example of the difficulties it will encounter trying to push into the enterprise."

David Snead, a lawyer who negotiates contracts on behalf of hosting providers, said that Amazon Web Services contracts are presented as non-negotiable and almost like an appliance. "You just get their cloud services as they are. They aren't presented as something like enterprise-level hosting where you'd expect it to be presented as a contract and negotiate," he said. "I have a bunch of clients who have enterprise-grade cloud services. They have contracts that are much different than AWS and they expect them to be negotiated."

Amazon, however, says it believes it is in line with competitors. "To the best of our knowledge, we are in the mainstream and doing a good job of reducing friction for customers whenever possible," Selipsky said. "However, it is difficult to know exactly what is in a lot of contracts that are out there in force because people don't generally disclose them."

Even analysts that Amazon talks to have a hard time finding specifics about contracts, he said.

Both Shih and Snead said it was unclear to them if Amazon had decided not to pursue enterprise deals or if it was simply unprepared to negotiate with Eli Lilly for the kind of service it was looking for.

"It may be that they simply don't see the enterprise space as an opportunity to get into," said Shih.

Selipsky said Amazon Web Services is designed to serve customers of all sizes and that many Fortune 500 companies already use it.

The situation points to a larger issue in cloud and hosted computing. "The specifics of legal obligations haven't been figured out and put into best practices," said Michael Cote, an analyst with RedMonk. "This is a stumbling block."

He expects it'll be some time before the industry reaches a sort of consensus on legal terms in contracts. He compares such issues with the early days of open source when legal teams didn't know how to handle legal issues around open-source software, so they often simply forbade employees from using it. "It took 10 or 15 years to iron it out. Now everyone understands how to use it and for the most part there are no problems," he said.

In the meantime, legal issues like liability for failures will likely continue to slow down growth in the cloud. "People I talk with, when I ask them why they aren't using cloud services more, they tell me it's because their company won't let them," Cote said. That's typically because the company isn't sure whether the services comply with company policies around a variety of issues like security and liability.

While Selipsky was uncertain whether a benchmark for cloud agreements might emerge, he does anticipate that contract negotiations will get easier as the market matures. "As everyone gains more comfort with how to operate in the cloud, I think we'll all slowly see more efficiency in the process," he said.

Copyright © 2010 IDG Communications, Inc.

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