Buying Everything as a Service

Buying Everything as a Service

Pierre Mitchell

Chief Research Officer Spend Matters

Mark Trowbridge, CPSM, C.P.M., MCIPS

Principal

Strategic Procurement Solutions LLC June, 2015

Session Objectives

• Review XaaS: SaaS, PaaS, IaaS, and BPaaS… and their relevance to Procurement

• Discuss contracting factors and trends to consider: shifting to outcomes/SOWs; TCO factors in SaaS; data confidentiality; service level complexity; ownership and continued use of data; transition services; etc.

• Addressing cost drivers which favor the supplier; including subscription based pricing, term renewals, sustainable

revenues, escalating data storage requirements, etc. • Wrap up and Q&A

Why XaaS? Why the Service Mania?

• Internet (including Mobile/IoT)  Transparency  Unbundling  Outcome Specification  Service

• Digital Business Strategies per above are de rigeur

• Labor-based services are becoming ‘industrialized’ and

productized (e.g., Work Intermediation Platforms for external labor; digitization of BPO services; “SaaP”, etc.)

• The Cloud Computing battle of the titans for owning the Mobile and Enterprise ‘platforms’ of the future

• Procurement needs to be good at understanding services across the full spectrum – for itself and for stakeholders

Procurement is a service provider and also consumes 3rd _party

services. This is a better way to “lot” the market basket than

Source: Spend Matters PRO

Spe nd O wne rs … In te rn al S er vi ce P ar tn er s Ex te rnal Cus to m er s _{Knowledge / analytical} processes Information, content, and community Software Applications Transactional / operational processes Transformational processes

Application Platforms & Networks

Technology Platform & Infrastructure Bu sin ess U ni ts External Services Internal Procurement Service Provision External

Demand Internal Demand

Pr

oc

ur

em

en

t

Service Delivery Models

BPaaS SaaS PaaS IaaS Deployment Models • Consulting • BPO / KPO • Contingent • MSPs • Subscription-based IP • Public • Hybrid • Private Vendors in this stack may vary by process and spend category

Cloud Computing in a Nutshell

Internet-based data

access & exchange

+

=

Resources Capacity Elastic

Usage-Based Billing

Cloud Environment Characteristics:

Cloud Service Models

Software as a Service Business operations over a network Google Docs, Salesforce.com, Coupa, Apttus Platform as a Service Deploy customer-created applications to a cloud MS Azure, Force.com, Apple IOS, Google App Engine, Oracle PaaS

Infrastructure as a Service

Rent storage, processing, network and other computing

resources Rackspace, Amazon Web Services (AWS)

Cloud Deployment Models

Private Operated for a single organization (“ASP” was the first incarnation of this). Examples: Enrich for Oracle; hubwoo for SAP; any large ITO firm

Public Available to the general public or large industry group, owned by an organization selling cloud services (e.g., Ariba Network; Amazon Business)

Hybrid Combines Private and Public

ERP

Simple Example of Procurement migration from

on-premise to SaaS

 Standalone, single purpose point solutions  Low to moderate degrees of integration  On-Premise Centric

 High Total Cost of Ownership

 Less focused on end user experience

Key Characteristics of an evolving procurement 2.0 landscape:

 Suite oriented solutions  Tight integration

 Open Standards

 Greater accessibility and scalability  Greater use of On Demand resources  Internal and External Collaboration tools  Oriented towards the end user experience

¹ Operational procurement includes requisitioning, purchase order, and receiving functions

Sourcing & RFx Invoicing Operational Procurement Supplier Collaboration Spend Analytics Contract Management Source: KPMG

The Future: Evolution to hybrid clouds that combine best of public and private cloud…

Key Cloud Risks - Discussion

Financial

 Underestimated start-up costs  Exit costs

 Contract complexity  Run-away variable costs  Tax Compliance and Planning

Business Risks Financial Vendor Data Regulatory and Compliance Technology Operational Data

 Data segregation, isolation, encryption  Information security – Pricing

 Master Data Management (Items /

Suppliers across systems)

 Intellectual property protection

(Procurement Design / Drawings)

Vendor

 Vendor lock-in

 Service provider reliance  Performance failure  Vendor governance  M&A within Vendors

Regulatory and Compliance

 Complexity to ensure compliance

 Lack of industry standards and certifications

for cloud providers (PCI/SAS 70/FDA / HIPPA etc.)

 Records management/records retention  Regulatory change control, reliant on vendor

timeliness

 Data privacy

Operational

 Business resiliency disaster recovery  Service reliability and uptime

 SLA compliance

Technology

 Cross-vendor compatibility  Customization limitations  Integrations with other backend

systems financial systems

BPO and Technology Pricing is Changing

•

License Fees Being

Forced Lower by

Competition and

Segment Consolidation

•

Providers Seeking

Sustainable Revenue

•

Software Providers

Dramatically-Changing

Pricing Models

Initial Maintenance Pricing is Increasing

• Providers Seeking

Sustainable Revenue

Beyond an Initial License Payment • Application SW Maintenance Fees Increasing from – 15% to 20% Then – 20% to 22% Now

“The first year annual

maintenance pricing shall

be calculated at 22% of

Licensor’s published

Software licensing fee.

Thereafter, annual

maintenance pricing shall

be negotiated by the

parties, but shall not

increase more than 10%

per renewal period.”

Future Supplier Revenue Points

Towards Term Licensing)

2. Software as a Service (SaaS),

Infrastructure as a Service (IaaS), Platform as a Service (PaaS) ALL PROVIDE Sustained Revenue Over Time

3. New Fees for Other Systems

Accessing a Supplier’s Systems (Note – Barrier to Big Data)

4. Increased Maintenance Fees for Licensed Solutions

Actual Supplier Proposal Language

• “Following the third year of the agreement, the annual software

service fee will increase by an amount to be negotiated by the parties, but under no circumstances increasing by more than 20% per renewal period.” [Note: Compounded over 5 years, a $100,000 annual fee

would become $207,360 ]

• “Following the Initial Term, service pricing fees for each successive

Renewal Term will be negotiated by the Parties, but will not increase by more than 3% above the net percentage movement in the US

Department of Labor’s Bureau of Labor Statistics Consumer’s Price

Index XXXX for Professional & Technology Services in the San Francisco Bay area during the preceding 12 month period.”

SaaS: What’s the Big Deal?

Gartner: “Although SaaS solutions often cost less initially and may have lower switching costs, they often include hidden

costs and risks and require different kinds of contracting protections from traditional licensing arrangements.”

SaaS: The License

• Cloud Subscriptions are Time

Restricted, “Non-Perpetual”

– Different from traditional software licenses

– No residual usage rights when the contract expires

• Traditional perpetual software license – Worst case, can continue running the version of the software you had when the maintenance ended (no maintenance support, though)

SaaS: When the contract expires you have nothing (and the provider often has you over a barrel)

SaaS is Really a Rental Agreement

When you ‘buy’ SaaS you aren’t ‘buying’ anything…

• “Renting” some other company’s software and I.T. services

• Source and object code always remains in the possession of the software provider (except for Apps or small Downloads)

• At the end of the contract, you own nothing

•

Maybe not even your own data!

SaaS – End of Life Instructions…

• Typically, you will be obligated to return all proprietary software, documentation, etc…and access to the subscribed SW is eliminated. • Important to get to keep

functionality tools so that you can read or otherwise deal with the

data that is yours and that you have a legal right to retain at the end of the agreement.

• A flat file without ability to read or interpret it does no good.

SaaS Caution Spots

• Setup & Integration Costs

• Uptime guarantees and penalties

• Locked in or escalating fees for

additional functions, users or data storage

• Data Security & Ownership

• Business continuity protection

• Tailoring/Customization Fees

• Training Fees

SaaS: Have an Exit Strategy

Whenever you sign a SaaS

contract you must have an

exit strategy BEFORE your

pen ever hits the dotted

line.

i.e. What are we

when the relationship with this provider ends?

SaaS - Up-time Guarantees

• Make sure these are in the contract

• Reasonable = 99.5% to 99.9% up-time guarantee

– 99.5% up-time = 3.5 hrs down-time per month

– 99.9% up-time = 45 minutes down-time per month

• Gartner considers 45 minutes per month (= 9 hours per year) to be

best-in-class availability.

SaaS - Suspension of Service

• Many supplier “boilerplates” say

that they may suspend service if payments are more than 30 days overdue.

• Make sure you negotiate for

continuation of service in the event of a delayed payment or dispute.

– Suppliers will be reluctant to do

this…but insist.

– Otherwise supplier will have too

much leverage in the event of a dispute over payment.

Example of Key Cloud Clauses

• Ownership of Intellectual Property (IP) Rights

• Ownership and Return of Data (Provided or Produced)

• Confidentiality

• Location of Primary Data Processing and Backup/Contingency Data

• Contingency Plan

• Provider Reporting of Financial Stability

• Harmful Code/Malware

• Cyber Liability Insurance (Example to Follow) • Transition Services (Example to Follow)

Cyber Liability Insurance

Cyber Liability Insurance with limits of liability of not less than $1,000,000 (or $5,000,000 depending on size of company) per incident, including but

not limited to Loss of Digital Assets, Non-Physical Business Interruption and Extra Expense, Cyber Extortion Threat, Security Event Costs, Network

Security and Privacy Liability Coverage, Employee Privacy Liability Coverage, Electronic Media Liability Coverage, Cyber Terrorism Coverage, Customer Notification Expenses, and Public Relations Expenses.

Transition Support

Upon expiration or termination of this Agreement, Provider shall provide the following transition support to Company:

A. As requested by Company, Provider shall save all of Company’s data recorded into the Software onto media in a machine readable format

which will enable Company to (i) access, view, read, and process the data without the use of the Software or Documentation; and (ii) transfer the data into another software product without being limited by constraints in the format of the data.

B. Provider shall provide the foregoing media to Company’s stated

Representative on or before the effective date of expiration or termination of this Agreement.

C. Upon request by Company, and at Company’s expense using pro-rated fees set forth in this Agreement, Provider shall continue to provide the Software and Services beyond scheduled expiration or termination of this Agreement until such time that Company or a replacement provider is prepared to activate a replacement software product using the

Improving Contract Portfolio Performance

• Make Contracts Longer Term.

• Leverage Strategic Sourcing to Reduce Supplier Base and Increase Contract Value.

• Utilize Evergreen Renewals in XaaS

Agreements.

• Use Term Rider Amendments to Execute

Supplier Documentation

• Consolidate Contingent Staffing

Activities through a MSA Program

• Relentlessly Schedule & Manage Down

The Starting Point

Acquisition Type Ours Theirs

Software as a Service (SaaS) Software License (Shelfware) Major Software Application

Major Software Application, With Customization Software Development Hardware Purchase Consulting Services General Services Purchase Agreement

Non Disclosure Agreement

Likelihood of Medium Sized Company Having a Medium or Large Supplier Sign Their Documents

Drafting Principles for XaaS Agreements

• Shorter and More Concise (Less

is More)

• Business English Rather than

Legalese

• ‘Rule of Ten’ Numbering

• Modular Exhibits (Simplifies

Amendment Management)

• Recognition that Agreement Will

Change

• Branded Corporate “Look &

Contact

Pierre Mitchell

Chief Research Officer, Spend Matters [email protected]

617.281.6185

Mark Trowbridge, CPSM, C.P.M., MCIPS

Principal, Strategic Procurement Solutions, LLC www.StrategicProcurementSolutions.com

[email protected] 209.419.1699