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

Spen

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Inte

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Ser

vice

Par

tner

s

Exte

rnal

Cus

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ers Knowledge / analytical

processes

Information, content, and community

Software Applications

Transactional / operational processes

Transformational processes

Application Platforms & Networks

Technology Platform & Infrastructure

Busin

ess U

nits

External Services Internal Procurement

Service Provision External Demand Internal Demand

Proc

urem

ent

Business Processes (Outcomes and/or

Resources)

Software Applications

Application Platforms (and Networks)

Application Infrastructure

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

Internet-based access to low cost computing & applications + Cloud

Environment =

On-Demand Self-Service

Internet Accessibility

Pooled Resources

Elastic

Capacity

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

“SaaS” “PaaS” “IaaS”

ERP

Simple Example of Procurement migration from on-premise to SaaS

6

Contract Management

Spend Analytics Sourcing & RFx)

Operational Procurement

Supplier Collaboration

Invoicing

ERP

Key Characteristics of the typical procurement 1.0 landscape: 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…

Source: KPMG

Congratulations – you are now a Cloud Expert

Top 10 Challenges to Adopting 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

Source: KPMG

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

1. Fewer Perpetual Licenses (Migration 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

5. Service Oriented Architecture (SOA)

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! • Watch carefully for this in your contract

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

• Exit Strategy

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 going to do 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.

• Make sure Contract includes Penalties for failure to meet

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.

24

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 foregoing data.

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 Expirations

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 &

Feel”

Contact

Pierre Mitchell Chief Research Officer, Spend Matters pierre@spendmatters.com 617.281.6185 Mark Trowbridge, CPSM, C.P.M., MCIPS Principal, Strategic Procurement Solutions, LLC www.StrategicProcurementSolutions.com MTrowbridge@StrategicProcurementSolutions.com 209.419.1699