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.”
