Controversial two year cloud contracts are causing an industry stir

Derek du Preez Profile picture for user ddpreez March 27, 2014
Summary:
Traditional suppliers are facing an uphill battle and will need to transform their business models to accommodate

Things got a bit feisty at a Think Cloud for Government conference this week in London, much to the entertainment of the audience, where a group of speakers got locked into a debate about the pros and cons of using cloud contracts with a two year call off term as a delivery model. A two year term is becoming increasingly popular on the buyer-side, which has been driven in the UK public sector by it being made a requirement on the G-Cloud (a framework for government to buy pre-approved commodity cloud services). Technology buyers in the public sector cannot sign a contract via the G-Cloud for longer than two years.

The idea behind this being that if you limit yourself to a maximum of two years this gives a buyer leverage and forces suppliers to maintain a high performance throughout the duration of the contract – given the constant threat of exit only 24 months away. It also gives CIOs, or whoever, more room to negotiate lower prices at the end of the contract term.

g-cloud-in-the-sky

The benefits of sticking to two year deals were explained by the National Rail Enquiries' Head of Commercial, Derek Parlour, who said that by moving to a multi-source supplier model, the company is now able to swap out under performing suppliers and make use of smaller, more agile players.

Parlour explained:

“We outsource just about everything. National Rail Enquiries was traditionally a single source organisation, where a big systems integrator delivered a complete service for us. Over the past six or seven years we have begun to move away from that to a multi-source organisation environment. 

“So, something like our website actually has 12 suppliers running it and about another half a dozen that come in and out. That's working very well for us and we see cloud as a catalyst to take that further. We have moved our services on to cloud hosting so that we can now get in much smaller application developers to build that platform. We don't need someone that is going to give us a huge amount of hosting capacity to run the general platform. 

“We have also moved to much shorter contracts, we have a maximum contract commitment to two years. So if a service isn't working, we can just swap that out and get another supplier in. If you are a large SI yes I can see cloud as a threat, if you are a smaller companyI see it as an opportunity.”

Two years, is that really long enough? 

Our very own Stuart Lauchlan recently wrote a piece that addressed this very issue, following an open letter from a bunch of suppliers about how the government needed to improve the G-Cloud. The second item on the letter was about call-off contract terms, where the suppliers placed the onus on the buyer – claiming that it's difficult for them to be engaged in a constant procurement cycle.

The letter said:

“The two year call-off term is often cited by buyers as a reason for not using G-Cloud, as it would force them into a frequent procurement cycle. Whilst this argument does not hold true if a buyer is purchasing a genuine cloud service and using the G-Cloud framework correctly, there is a perception amongst many buyers that “procurement” is onerous and undesirable by default, and to be avoided wherever possible. Continued education (and an increase in case studies) will address this issue in the medium to long term. However, given that a “termination for no cause” clause now exists within the framework, we recommend that GPS increase the maximum contract term to three years. We believe this would encourage the immediate take up of cloud services, allowing buyers to get maximum benefit from the market, without locking them into any given supplier or technology.”

Business man lifting a cloud
Call me sceptical, but this is a lovely bit of spin on the supplier's part. I have spoken to buyers that think two years isn't long enough, but that's largely been because they worry about getting the economies of scale over a shorter period – not because they will constantly be procuring. I think it's far more likely that the suppliers in question would like to see the contract term increased, because this then allows them to spread their costs over a longer term and boost their margins. However, that might not be totally unfair, given that three years still isn't a great length of time compared to traditional outsourcing or managed service agreements.

Dr Katy Ring, research director at analyst house 451 Research, was also at the event in London this week and was one of at the attendees that defended the larger suppliers that are having to make this transition from long outsourcing arrangements, to acting like smaller, agile, innovative new players. She stated that a two year period is a short amount of time to think about transitioning and that companies will typically have a mixed approach to how they procure cloud, where not one rule can be applied to all.

She said:

“I do think we need to get more of a balanced approach – the companies that we work with beyond the public sector that are using cloud to deliver business outcomes use a rich ecosystem of traditional players, new players, large players, small players. I think there is a bit of a danger that the way that we are approaching the use of cloud technology is to typify some vendors as bad, and some vendors as brilliant and new. The world is just not that black and white.

“I think everyone agrees that the large suppliers and the new entrants need to find a different way to interact. But I think in terms of moving the existing state to new footing is going to be difficult with a two year time frame.”

G-Cloud founder response

Chris Chant headed up the original team behind the now two year old G-Cloud framework and was instrumental in the vision for how it should be used to mix-up public sector buying of technology. Although no longer working within the walls of Whitehall as an employee, Chant is still very much tapped into the community and keeps a close eye on the G-Cloud developments. This week he spoke in defence of the two-year call off term, claiming that large suppliers will complain because it's just not what they are used to. They need to change and adapt to engage with business in this new world of technology – although, he isn't holding his breath...

“I think it's a real challenge to be honest. I'm not a fan of very many large organisations at all, whether they are public sector or private sector. In the main that size of organisation doesn't bring the sort of benefits that we need today. In fact, quite the reverse. They know what the market needs and they need to adjust their position to do that.

chris chant
Just in the way that government is this huge lumbering machine trying to change its direction and that's very difficult, exactly those things apply to 300,000+ organisation.

“Are they going to do it? Maybe. If they do, that's great, it's about competition at the end of the day. Do I think they're going to do it? Well, I wouldn't be putting my pension on it.”

And on the issue of short-term contracts, he doesn't believe there is any reason to sign an agreement for a longer term, claiming that multi-year arrangements that last for up to ten years don't save money and aren't beneficial to the business.

“Short term contracts are a key part of this – you don't need to go more than two years. It's just bollocks really telling people that you do, because there's loads of services out there already. I've sat there and been through this, we have watched the arrival of a new contract over ten years, which people told us was the way to get value for money.

“We have watched it not be value for money, we watched it not delivering, watched the excitement at the beginning, then dropping away in the middle, before a mad dash in the last 12 months to be fantastic and do everything. That gives us nothing, long term contracts give us nothing.”

Verdict

I get why suppliers are resisting this and to be honest I'm not surprised. It's a lot harder for them to get a good margin on their deal if it is over a two year timeframe. However, those that are resisting this are missing the point. Just because an organisation signs a deal with a get out clause after two years, it doesn't mean that they will. The only reason that this is in place is to ensure that buyers have more power and are able to continually push for value for money. Suppliers shouldn't go into these agreements looking at the two year period, they should go in and aim for a ten year partnership, but realise that if they don't constantly assess the market every 24 months, try to be innovative, provide a top quality service, be competitive on price and treat the buyer as a long-term partner, then they will lose out to more agile players that get how this works.

Home Office CTO Denise Mcdonagh summed it up perfectly at the event this week - it's about choice. I'll leave her comments to close:

denise
“This two year time frame is a bit of a red herring. I am in the middle of moving huge legacy contracts out and just because I have a two year piece in my contract doesn't mean I have a huge transitional issue. I need to think about transition and I need to think about exit in two years, but I have the choice to move at the end of two years or not.

“I have that choice based on whether the supplier is doing a bloody good job, they have got the opportunity to lower their prices. What it gives me, which I never had before, is choice. The choice to move, the choice to get to rid of someone that is providing absolutely appalling performance. It's far more positive and beneficial than sitting with a supplier arguing about agility and the need to get things done, and not having the leverage.

“It's better for my business, for the end user. Much better for them than not being able to respond to policy changes, changes in legislation, customer experience.”

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