Businesses are openly embracing the Cloud in 2017. As previously noted in Tom Pfister’s Cloud First post to this blog, businesses are adopting cloud technologies more than ever before. However, many business people are finding the contracting process for adopting cloud services is slower and more complicated than buying installed software. Why are cloud services harder to buy and what can the buyer’s business team do about it?
Role of Buyer’s Business Team. Everyone involved in buying and selling cloud services—including standard setting organizations—has a role to play in making cloud services easier to buy—good technology doesn’t just sell itself.
Software Licenses. Buying cloud services is not the same as simply buying a license for software that is delivered through the internet. Buying a software license is usually deemed a sale of goods under U.S. law. Selling goods is a well-trod path and software licenses for commercial products are fairly predictable with common market terms. The software is delivered; once accepted, it runs on your equipment for as long as the licensor maintains it or until it is so old and unstable or outdated that it becomes obsolete.
Cloud Services. Under the cloud contract, you are buying: 1) access to the output of one or more software applications, which may or may not include a mix of your transformed data with third-party content, 2) the services of the cloud provider to maintain, support and improve the software, and 3) the maintenance and support of the network system running the software. These activities are sold through a services contract, and because of the mix and variety of services and the different risks associated with all of these services, the contracts do not read like a simple software license.
Names May Not Fit. The initial hurdle is to get the buying team (business, legal and procurement) to understand that, when buying cloud services, the buyer is not buying a software license on a term basis. The buyer is buying services enabled by technology. Unfortunately, even the commonly used term “Software as a Service” misleads some down the path of thinking they are engaged in software licensing. Further adding to the confusion, cloud services contracts are sometimes constrained inside a narrow agreement called a “Hosting Services Agreement.” Many cloud services are often more sophisticated than merely offering to host software for the benefit of the customer. For example, any cloud services offering data analytics are services that do not fit into a contract that is meant to address merely hosting.
Educate. Because cloud services come in such variety, shoe-horning them into a one-size-fits-all contract (the ubiquitous Hosting Services Agreement, for example) adds delay and complexity as the lawyers try to figure out what the parties’ rights and obligations really are. If the buyer’s company insists on using form contracts, the business team should speed up legal and procurement review by preparing and sharing a short summary of the business terms of the proposed deal and a description of the function for which the company will be using the cloud services. It is common for the business team to skip this step, and right away we have added wasted time and money into the contracting process.
Pick your Battles. Help the legal and procurement teams right-size the risk profile of the contract. It simply is not worth anyone’s time or money to try to shift all contract risk to a vendor when the annual subscription fee is $20,000 and the vendor will not be holding personally identifiable information. And if a vendor did accept all the risk in such a deal, that’s a red flag suggesting a new or desperate market entrant.
Remain Flexible. Finally, for those contracts with a high-risk profile, but also a complicated suite of services that do not fit into any form contract your business has developed, consider advocating for the use of modular provisions that can be plugged into the vendor’s contract. The vendor’s contract may be a well thought-out customer contract suitable for its unique services. For example, it is more efficient to add an information security exhibit specific to your company onto a contract from a vendor offering benchmarking data analytics than it is to renegotiate your form contract that claims ownership of all of that benchmarking data, just because your company wants its information security exhibit. Demonstrate some flexibility in the contracting process in order to speed it up.
As everyone becomes more familiar with cloud services, efficiencies in the contracting process will arise. These tips should speed you on your way.
This article is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author and not necessarily those of the law firm’s clients.