Companies to Overpay for Cloud by $16.5 billion in 2016?

Spend Matters welcomes another guest post from NPI, a spend management consultancy, focused on delivering savings in the areas of IT, telecom, transportation and energy.

A new survey by Visiongain reports that more than 30 percent of responding enterprises are deploying at least one cloud computing solution. In "Cloud: Moving into the Realm of an Essential IT Strategy," Visiongain also estimates that the cloud computing market will be worth $82.9 billion by 2016.

Which leads me to predict that, by 2016, companies will be overpaying cloud vendors a whopping $16.5 billion.

NPI's benchmark data suggests that large enterprises, on average, pay cloud vendors 20 percent more than fair market value. At that rate, $16.5 billion of wasted IT spending is highly possible. In fact, as the cloud services market matures and demand grows, this number could very easily be higher.

So, how can you make sure you won't be one of the millions of companies paying too much for cloud?

  • Get Rid of Minimum Purchase Clauses: This is especially true with SaaS. Buyers should not fall prey to requirements to buy a minimum number of licenses (or have a minimum number of users) over the term of the contract. This will prevent you from reducing the number of users in the event your business needs change. You may easily be locked into pricing that's not aligned with your needs.
  • Validate Vendor's Ability to Ramp Up (and how it will impact your fees): On the flip side, companies should require vendors to specify their ability to ramp up new users/usage quickly. What happens if your company takes on a major client or acquires another company? Or if business demand spikes? Answers and pricing should be specified in the contract -- not just in sales talk.
  • Establish Data Ownership, Return & Protection: Establish data ownership right off the bat. This includes who owns the data as well as the data migration procedures and costs. Data cleansing and migration procedures can add another cost and complexity layer to switching to the cloud. Additionally, because your data will reside remotely and (most likely) within a multi-tenant architecture, your contract should clearly communicate the vendor's disaster recovery, business continuity and data confidentiality commitments.
  • Prevent Renewal Rate Increases: Be sure to address renewal rates in your contract by inserting language that limits or prevents renewal rate increases. Not doing this empowers your vendor to enact unreasonable rate increases once your contract term is up.
  • Specify Termination Costs and Transition Assistance: At some point, you may switch vendors. Specifying termination costs and data transfer guidelines upfront in the contract makes this process far less painful (not to mention less costly).

-- Jeff Muscarella, EVP of IT, NPI

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