Growing Pains: Sourcing Risks Arise When Old Guard Enterprise IT Vendors Transition to the Cloud

Spend Matters welcomes another guest post by Jeff Muscarella, Partner, IT and Telecommunications at NPI, a spend management consultancy, focused on eliminating overspending on IT, telecom and shipping.

Among the numerous IT sourcing risks inherent in cloud purchases are those that arise from doing business with established vendors that are transitioning to cloud-first strategies. It’s a costly transition, and despite all-out wars on cloud pricing, customers are picking up the tab one way or another.

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As old guard enterprise IT vendors like Microsoft, Oracle, Cisco and others turn their focus to the cloud, the pressure is on these organizations to expand their cloud success as well as maintain revenues and profits in their traditional lines of business. This has caused more than a little upheaval. While Microsoft reported that its commercial cloud businesses grew 106% year-over-year last quarter, overall revenue growth for the company was in the single digits (CNET’s Nick Statt summed it up best: “Microsoft's plan for the future is still costing it profit today.”).

Meanwhile, Oracle recently announced its plan to offer 95% of its products through the cloud as early as this October, which is ambitious given the revenue disparity between its cloud and on-premise software businesses (30% growth versus 7 percent contraction, respectively). Finally, Cisco CEO John Chambers just announced he will end his 20-year run at a time when the company faces many innovation challenges, including its cloud strategy.

Even for the new generation cloud vendor elite, the business climate is getting tougher. So, what does this mean for customers who are looking to leverage their largest, most established IT vendors for cloud services? First and foremost, they should be aware of how these vendors’ “growing pains” translate into cost optimization risks during the sourcing process. They include:

Pricing instability. The price war between Microsoft and its biggest cloud competitors rages on for certain cloud services and new subscription programs and pricing are coming to market. That’s good news for customers who know how to find the bottom and maximize discounts. Buyers should beware though – vendors are under pressure to grow revenues and profitability regardless of any pricing cuts. Companies should ask themselves, “Where will they find it in my business?”

Contractual inflexibility. Standardized service-level agreements are one way that vendors are reducing their costs to serve customers. Understanding how this will impact a client’s IT operations is key, as “simplified” SLAs can translate into other expenses down the line.

Support. Large enterprises have typically turned to vendor support services to help keep their infrastructure up and running. The cloud has shifted this dynamic, which is great for enterprises that can perform their own support services. But for businesses that don’t have in-house support capabilities, enterprise-level vendor support in a cloud-based scenario can be costly. Combine that with the scoping down and standardization of service-level terms and outage issues, and some enterprises may find themselves lacking the caliber and cost of support resources to which they’ve grown accustomed.

Inflated pricing for on-premise purchases. Revenues from on-premise solutions are shrinking among the top-tier enterprise IT vendors. Until their cloud reality catches up with shareholder expectations, customers should expect continued changes to licensing programs, pricing, product use rights and support programs – all of which will be designed to extract more revenue from customers, sometimes in the form of penalties or inflated pricing for traditional on-premise licensing and support services.

The cloud is an exciting area of IT innovation and growth right now. But, it’s also the Wild West when it comes to sourcing best practices. As the old guard finds its wings in the cloud, and as the new guard evolves its enterprise strategies, the only thing certain is that customers will face new sourcing challenges. Having access to fair market pricing validation and contract optimization intelligence is key in reducing risk and protecting the business from overspending as the cloud marketplace evolves.

First Voice

  1. James Forte:

    Being an “old-school” old guy in his late 40s and in college, poses its own challenges; Believe me! I am in a Management Information Systems class, online through Rose State College. My grades are high in that class out of 3 courses online. I like to research what I am to discuss on the Discussion Board so I know what exactly it is that I’m studying and discussing with my classmates.

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