The games we play: negotiating with public cloud vendors
Cloud business model is different from traditional software but sales techniques are depressingly familiar
Published 10:39, 02 July 12
I was trapped on the only available seat on the train and forced to listen to him rattle on about the ways that his staff should extract software licensing revenue from prospects, mostly by playing off of ambiguity and complexity in licensing terms and agreements.
The games that he and his team were playing are among the oldest around. All of us have been sold to at some point, and probably recognise that the job of a sales person is to sell us the goods for as much as he or she can and make us feel like we got a "once in a lifetime deal". In fact, if we are talking about software here, the deal was probably so good, you had to sign a non-disclosure agreement so that no one else ever finds out how little you paid (it was probably 80%-90% off of the list license, whatever that is).
But, wait a minute here you may be reading this and thinking, "this is the Cloud Computing Blog. You're talking about the way that traditional software is sold. Cloud is different." Yes, the Cloud business model is much different from the perpetual license business model, and sales approaches are different too.
Selling big perpetual license deals is the forte of the "hunter-type" sales person, while the subscription approach of Cloud offerings requires more of a "gatherer-type", someone who will build a relationship with the customer and grow the footprint of the subscription from department to organisation and eventually to enterprise.
However, I've been fielding more calls lately from organisations that are negotiating with Public Cloud providers, and finding that while some things are different-for example, don't expect an 80% discount-the game still seems to be the same.
The footprint of many Cloud services has gotten large enough at organisations that the people responsible for sourcing Cloud software are the same people who buy traditional software. In part, they are looking to pigeon-hole Cloud with a traditional software procurement lens. Along the same vein, many of the sales executives at the Cloud firms have had years of experience selling software at traditional firms. So, here is my advice for companies that are negotiating with public Cloud firms:
Ambiguity is not your friend. Many of the calls that I have with people that are in Cloud software negotiations start by them asking same question- what exactly is Cloud? This is a very good question to be asking, because when a term takes on iconic industry buzzword status in the way that Cloud has, it's easy to find several ways of defining it. IDC has a definition, which I often share. However, it is more important to understand how your organisation defines Cloud, and furthermore, how each Cloud software provider that you are talking with defines Cloud. Just as with traditional software, if you submit an RFP with inconsistent or vague definitions for key elements like Cloud, the sales executive sees an opportunity to educate you (and dollar signs.) This can easily occur if you are trying to shop the same RFP to multiple Cloud firms.
You pay for flexibility. Just as with on-premise software, the more flexibility you ask for, the more it will cost. This could include flexibility in the length of your arrangement- a month-to-month contract will cost more than an annual contract, which will cost more than a three-year contract. Or, in the type of metric and utilisation rate-pay-per-use costs more per unit than named user, as an example. You will also pay more if you want an arrangement that is outside of the standard offering either functionality- or service-wise.
You can't expect 80%-90% discounts. That is one thing that does happen in the on-premise world that doesn't happen in Cloud. Part of the reason is the bundled subscription nature of Cloud pricing, which means that the right-to-use portion of what you pay (the license, although they don't sell you license) is not separated from the upgrades/updates portion of what you pay (the maintenance, although they don't sell you maintenance.) In the on-premises world, it's the license that is heavily discounted. In the Cloud world, there are volume discounts, and there are discounts for different levels of term commitments. An annual contract is the baseline, with contracts for multiple years typically resulting in a discounted rate. Increasingly, there are discounts for enterprise agreements, but none of these will add up to the kind of level of discount you've seen with on-premises software.
The Cloud software provider wants to sign up your enterprise. More often, you should expect Cloud providers to try to sell you an enterprise deal. The mechanics of these agreements are pretty similar to that of on-premises software vendors. There is the lure of larger discounts and the opportunity to build a closer relationship with the provider as a preferred customer, in exchange for volume commitments. These deals can be quite attractive and advantageous to customers in the right situations. Just be careful-- as with the on-premises world, once you go into these types of arrangements, it's really hard to scale down.
You can expect to play some of the same games. This includes limited time offerings, as well as a real or perceived lack of granularity in pricing-an "old-school" tactic that makes it difficult for you to take out stuff that you don't think you need. Many Cloud providers do publish their pricing on the web, which is a refreshing change from the lack of transparency in most of the on-premises world. The challenge is that many enterprises don't buy in exactly the same way that the Cloud provider has "packaged" their standard offerings. This is an exciting situation for the sales representative, because it is an opportunity for them to put together a custom arrangement just for you, and charge you more money.
These are just a few of the key points I've jotted down from my discussions with Cloud software buyers in the last few months. What are you experiencing or hearing?
Posted by Amy Konary, IDC VP, Software Licensing and Provisioning