Cloud services promise to revolutionise how outsourced IT services are offered and consumed, while delivering significant cost reductions and increased flexibility. However, the cloud market is complex, fragmented and confusing – this can mean potential cloud customers fail to realise the benefits and end up returning to their old providers to renew traditional, long-term and inflexible contracts.

To secure the advantages of cloud they need to develop a better understanding of the key factors. The first of these is to recognise that cloud is not about new technology but is a new way of contracting for technologies and services that have, in the main, been in the market for years.

The second key factor is that it is very difficult to compare the different supplier offerings as they are not presented on a like-for-like basis. This makes it hard to develop a business case for moving to the cloud. It is therefore important for companies to make use of products that are emerging which allow them to make accurate comparisons between providers.

A further important consideration is the need to understand how the supplier is securing value for themselves. Enterprise-grade cloud providers invest in the most modern technologies and share these resources (from data centres to the individual server) among all clients, to maximise the use of expensive assets. However, they must pass on the savings enabled by these new technologies and economies of scale. So companies need to make sure that they are contracting for the computing resources they will actually use.

For example, if ten companies currently only need one unit of storage each but all allocate ten to accommodate growth, a cloud supplier needs to provide only ten units plus a small margin for growth. Yet many suppliers charge for all 100 reserved units instead of the ten units in use. By understanding these drivers of suppliers’ business models, customers can negotiate a better deal.

Contract negotiation

Customers also need to acquire the expertise to secure a suitable contract. They should model it against potential future scenarios and minimum service standards. It is worth spending the time and effort to get this right as bad contracts inhibit change and growth and mean that the company fails to secure the advantages of moving to cloud in the first place.

It is also vital to make a realistic assessment of the costs of migration. These costs vary significantly by supplier and some do not even offer this service. So provision needs to be made for how applications and their data are moved to the cloud, as well as for backups and security. This means that customers need to understand their existing infrastructure before approaching a cloud provider. This will help reduce the risk premium that suppliers will charge for migrating applications.

Finally, it is important to consider exit arrangements as there is evidence that suppliers are proving reluctant to offer flexible commercial arrangements. A recent PA survey of cloud customers and suppliers shows that just 50 per cent of customers thought it acceptable for suppliers to impose exit penalties, as opposed to 90 per cent of suppliers. This is a reflection of the immaturity of the cloud market, where cloud providers are finding it hard to accept the risk for funding asset purchases without a contract in place guaranteeing revenues. As a result, there are very few offerings in the market that explicitly offer large-scale cloud customers opportunities to exit.

Companies that undertake a careful consideration of these issues will be able to enter into cloud discussions with their eyes open, and ensure that they realise its benefits rather than entering into what could prove to be an old-fashioned IT outsourcing contract with the associated old-fashioned disadvantages.

Jan Timmerman is a shared services and outsourcing expert at IT and management advisory firm PA Consulting