We are in the early stages of the Cloud outsourcing phenomenon. Therefore, there are few (if any) contract protection and vendor evaluation best practices developed in this area. However, it appears that there are some major differences between the Cloud and traditional outsourcing contracts. Some of the differences include:
- Cloud contracts are smaller in value.
- Cloud contracts are shorter in duration.
- Cloud contracts appear to cover individual services (multiple agreements) versus an all-inclusive traditional outsourcing contract.
- Due to the network centric nature of Cloud products and services, greater emphasis should be placed on security, content, and intellectual property protection, and infrastructure back-up, redundancy and contingency planning.
- Insurance coverage should include – business disruption, Cloud vendor stability, and liability.
As a result, your company should take extra precautions with its initial Cloud contracts and watch for both precedents that are favorable to your own position, or on the other hand, that might bind you into unfavorable situations at a later time.
Key Contract Topics and Considerations
Since there are a wide range of Cloud and outsourcing services, the following topics should be addressed in all outsourcing contracts. Some topics will apply specifically to Cloud. As part of the research, we have noticed that instead of writing one large, all inclusive Cloud outsourcing agreement, a growing number of companies are writing smaller, service specific agreements, covering a growing number of Cloud products and services, but on an individual agreement basis for each service. This gives companies the flexibility to deal with either one or multiple Cloud vendors for different products and/or services. It also gives companies the ability to negotiate different terms for different services and pilot various Cloud products and services.
As an example, some companies have separate Cloud outsourcing agreements covering each of the following services:
- Hosting Services – covers the licensing of software products both on the vendor’s and customer’s location (client/ server arrangement) leased from third parties.
- Internet Access Service – defines type, speed and costs of service.
- Virtual Private Network Service – covers extranets, and intranets.
- Security services – covers firewall and other security services.
- Professional Services – covers labor intensive technical services, such as help desk, programming, systems design, network management, and Web design.
Cloud/outsourcing contract topics to be covered include (this is not intended to be an all inclusive list):
- Description of product, service, and/or deliverables (sometimes, it may be useful to identify exclusions to the agreement).
- Responsibilities of both parties.
- Contract term, renewal and termination conditions.
- Ownership of hardware, software, network, content and facilities.
- Pricing, rates, financing options, penalties and rewards.
- Performance, warrantees, and service level guarantees (vary by type of product or service).
- Governance, issues management and reporting, dispute resolution, escalation, recourse and remedies.
- Back-up, disaster recovery, contingency and insurance coverage.
- Change management process, approvals and triggers.
- Termination triggers and process.
- Confidentiality, non-disclosure, security.
- Intellectual property and content protection.
- Maintenance and service – remote and on-site.
- Software license treatment (also, consider renting initially with a right to buy over some period of time).
- Rights of customer if vendor goes out of business.
- Single point of contact.
Figure 1: Outsourcing Vendor Selection and Evaluation
Develop a plan and business case |
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Manage an RFP process |
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Screen on three principal criteria |
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Institutionalize methods | Establish methods for ongoing performance and contract management. |
Review | Periodically review transition plan and exit arrangements. |
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