We have already looked at what cloud computing is and at some benefits and risks of adopting it as part of a business IT policy.

Cloud-computing contracts are service contracts rather than software licences. Therefore the payment terms in cloud computing contracts aim at a small fee and long-term use (by customers) and revenue (for the providers) rather than upfront licence fees.

This is of course facilitated by the low set-up costs for new customers and the ease of deployment through the internet. I understand that some service providers also support themselves by allowing advertising on their sites and this can even lead to some offering their basic packages free of charge. If the model of low cost – long term is to be viable however, most cloud computing contracts will require a minimum duration to enable the service provider to recoup their investment and make some profits and may offer further discounts to encourage customers to sign up for longer periods in order to secure long-term revenue streams.

From the customers point of view the potential danger of long term investment with one service provider may evolve into an arrangement that could cease to meet their changing business needs.  Some other charge arrangements may include some initial set-up costs for new customers, although this. There may also be an initial licence fee payment for the software even though the customer will not actually acquire a copy of the software as such. 

The service providers may also look to recover some costs associated with the purchase of items such as hardware and transmission links when setting up a new customer. These initial set-up costs undermine the supposed benefits of cloud computing so most service providers look to avoid charging them, but this can make the cost and risk of setting up a cloud-computing system prohibitive.

This has led larger operators, such as Salesforce, Google, Amazon and Microsoft, to provide software developers with the necessary web tools and hardware platform on a rental basis. Thus reducing the upfront cost of developing and deploying cloud-computing solutions and removing the need to require any initial set-up charges from customers. 

With cloud computing providers offering a service, things like service levels agreements and support become much more important than software licence terms. However, the software industry that has traditionally licensed products rather than services, can be reluctant to accept service-level regimes which outline expected service standards.  It is understood that the pricing arrangements for ongoing cloud-computing services follow one of two models:

·         Periodic charging which involves a set subscription fee based on the number of users and an overall or per-user storage limit. This fee may be payable monthly, quarterly or yearly. This offers a degree of certainty and the basic package is often sold cheap, with service providers making most of their profit from upselling add-ons and premium packages; and

·         Usage-based charging where charges are paid according to the amount of usage of the service by the customer. This can be attractive to customers, particularly where their policies and practices enable them to make best use of the service and minimise wasted charges. However this model makes charging less predictable and more unattractive to the service provider, since the charges it receives will fluctuate from one charging period to the next on a basis that is beyond its control.

Additional services and charges

Price increases

The cloud computing contract must be quite clear as to the extent to which price increases may be possible. This is very important especially in view of the fact that very often in order for service provider to establish their market, they may offer a heavily discounted first year subscription.   Where the parties have agreed an advantageous initial price, the customer needs an assurance that this will not escalate inordinately over the term of the contract. Similarly, a customer will not want to find that, where a short-term contract has been agreed, the service provider is only willing to enter into a new contract at the end of the term if the charges are increased significantly. 

Cloud computing agreements should contain some kind of mechanism restricting or controlling price increases. Increases can be capped either by reference to a fixed percentage of the charges paid in the preceding year, to an indexation mechanism such as the retail price index or to IT-specific indices which track remuneration in the IT industry and are therefore likely to outstrip the retail price index and are  relatively favourable to the service provider. For short-term contracts, customers may seek to negotiate options to renew for a single term or further terms. The charges payable during the renewal terms should be capped, although the customer is always entitled in theory to move to a different vendor if the charges escalate excessively. 

All articles are for general purposes and guidance only and do not constitute legal or professional advice. Copyright 2010 Anassutzi & Co Limited. All rights reserved. Information may be shared or reproduced only if accompanied by the author’s name and bio.