How cloud deals can fall at the final hurdle

24th March 2016

How cloud deals can fall at the final hurdle

  • a surprisingly large number of cloud sales deals break down at contract negotiation stage

  • agreement around key terms and conditions proves tricky for some suppliers and customers

  • security, liability and regulatory compliance are three of the most significant trigger points for potential deal break down

A significant number of cloud sales deals break down at the contract negotiation stage, according to new research from Eversheds and The Lawyer. Despite showing an increased appetite for cloud services, the Spotlight on the Cloud report shows mismatched expectations between suppliers and customers at the contract negotiation stage is hampering deals.

The research, which canvassed the views of 350 cloud providers, purchasers and industry advisors worldwide, found more than half (57%) of cloud suppliers had seen deals fail at the eleventh hour. Of the businesses surveyed more than a quarter (27%) walked away late in the negotiation process, while a further 10% had come close to abandoning the deal.

Charlotte Walker-Osborn, Technology & Outsourcing Partner at Eversheds and Head of the firm’s Technology, Media and Telecoms Sector Group, said:
“The number of deals breaking down at the last minute is unnecessarily high given that customers and suppliers have typically reached agreement, at least in principle, before deals get to contract negotiation. In cloud negotiations, issues which are both legal and commercial in nature tend to come out during contractual discussions because this is when both parties take an in-depth look at the agreed parameters around the deal. Only then, can it become apparent that differing views may be shared on certain key areas such as data privacy and related security issues.”
More than half (51%) of cloud services providers believe price is the key factor in deals breaking down, while customers cite other issues. Almost two thirds (60%) of customers who have walked away from a deal cite the inability to reach agreement on terms and conditions as the reason, with data protection provision being the most contentious area. One in three said a deal had broken down due to uncertainty around data residency, while 28% cited insufficient visibility of subcontractors who deliver parts of the service.

Commenting on the findings, Paula Barrett, Global Head of Privacy and Information Law at Eversheds, said:
“Cloud purchasers are anxious about where data is hosted for two reasons. The first is regulatory. Data protection and privacy regulations vary across jurisdictions, but most countries require companies to know where their data is hosted and being processed. Conscientious suppliers will ensure relevant regulatory requirements are covered by the contractual terms. However, some suppliers still fail to include fairly mandatory terms that the law requires their clients to have in place. The second reason is because government authorities in some jurisdictions have the right to access personal data, so it is natural that businesses are concerned about where their data will reside.

“Recent high profile security breaches are top of mind for businesses and it is unsurprising that companies pull out of cloud deals when the provider fails to make adequate provision for security breach reporting. This is a complex area for businesses to get to grips with as regulations not only vary across jurisdictions, but are also undergoing significant change.”
Concerns around data privacy were closely followed by difficulties defining the service levels required. Around a third of customers who had abandoned a deal during final negotiations did so because of an inability to define suitable service levels.

Charlotte Walker-Osborn concludes:
“There must be clarity around the bargain being struck between the customer and supplier around service level agreements (SLAs). There may be reasons why customers will accept service levels targets rather than guarantees but it is clear that customers want clear and strong service levels as part of their cloud offerings unless there is a commercial imperative not to. This is one of a number of difficult issues - other reasons cited by customers included liability for data loss and inadequate exit provisions. Eversheds’ view is that more engagement around difficult issues at the outset would reduce deal failures significantly.

“This research builds a picture that there is a clear need for education on both sides in relation to what the deal needs to achieve for success, with many purchasers admitting they feel out of their depth when it comes to procuring cloud solutions and a need for providers to keep up with the pace of regulatory change in order to allow customer compliance. Vendors who work with their customers in the areas mentioned are able to use the terms and conditions as a deal enabler, not a deal breaker.”

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Executive Summary
To ensure more success and a ‘win, win’ for all parties it is important that difficult issues are dealt with at the outset. The top five areas to consider are:

  1. What does the customer need to achieve in terms of regulatory compliance / concerns and can the supplier help the customer achieve this? This can include data privacy and data residency issues but can include other regulatory obligations – for example for the Financial Services and Pharma sectors.

  2. Are the levels of security and any customer ambitions to audit and penetration test able to be offered by the supplier through their current model or, for hybrid and private cloud, agreed changes?

  3. Are the sales promises capable of being documented in the contract?

  4. Is there agreement as what service and assistance will be offered upon exit, including as to data transfer? 5. Can the parties reach agreement around liability in the contract, recognising that cloud isn’t an insurance policy but that customers demand sufficient comfort in this area?

In summary, there needs to be full transparency as to what is and is not included in the proposed contract. Involving advisers at the beginning of discussions can help ensure these difficult issues are aired in the right way

Key Findings

Uptake of Cloud – Who, What and Why?

  • 77% of purchasers expect to increase their level of spend on cloud services during the next 18 months.

  • The greatest demand for cloud services across Europe and the US is coming from the Telecoms, Media & Technology (TMT) sector (35% and 29% respectively). Whilst secondary adopters were: Professional Services (20% in Europe) and Pharmaceuticals (18% in the US). The Financial Services sector is also becoming a strong adopter of cloud, with recent FCA guidance in the UK around this area giving customers some comfort.

  • A third of cloud service providers believe scalability is the most important benefit offered to customers, whereas the most common benefit identified by purchasers was the increased delivery agility to support its business.

  • The most common functions that businesses have adopted cloud functions for are customer-facing websites and portals, email and established SaaS applications.

  • Businesses are more reluctant to use cloud services for external payment services.

  • Businesses feel more comfortable with private or hybrid cloud solutions. 33% of purchasers said they will never adopt public cloud. US customers are much more comfortable with public cloud.

Negotiating cloud contracts – the final hurdle, but a major one

  • 27% of purchasers have walked away from at least one deal once it got to the contract negotiation stage.

  • 60% of those purchasers cite the inability to reach agreement on terms and conditions as the reason for the deal failing, with data protection terms being the most contentious area.

  • A third of purchasers who had walked away from a deal said it was because they weren’t informed where their data would be hosted, while 28% said it was due to a lack of adequate security breach reporting.

  • Cloud providers also realise the contract stage is problematic – 57% have lost deals at this stage.

  • More than half (51%) of cloud services providers believe deals break down due to price or political/cultural/regulatory restrictions.

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