Are SaaS/Cloud Computing Vendors Offering Questionable Contracts?

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ALSO SEE: Is SaaS Working for You? Survey by Datamation/THINKstrategies

AND: 85 Cloud Computing Vendors Shaping the Emerging Cloud

Today’s cloud-based alternatives to traditional, on-premise, legacy applications are gaining customer adoption because of their rapid-time-to-value and limited risks. However, as this web-based business model matures, some of its business practices are beginning to resemble those of its predecessors – and that isn’t necessarily a good thing.

Of particular concern is the way in which some of the cloud computing vendors contract for their services. Although Amazon’s EC2 has revolutionized the way raw computing power is priced and delivered as a highly elastic resource – procurable in very small increments – many Software-as-a-Service (SaaS) vendors offer less flexible options.

They might promise ‘on-demand’ services and promote ‘pay-as-you-go’ subscription pricing, but the reality is that you often have to go through a series of steps to get their SaaS apps up and running, and typically have to pay in an advance to use the apps.

While most of today’s SaaS solutions are still far more cost-effective and flexible than their legacy ancestors, they are still fall short of fulfilling the promise the industry has established for itself.

Part of the problem is a practical one. It isn’t realistic to roll-out an enterprise application for brief time increments. It takes a lot of preparation, integration and training to deploy and generate meaningful value over time. This means that the user organization and SaaS vendor alike have to make a sufficient time commitment to implement the ‘on-demand’ application in order to ensure its success.

There are also provisioning issues which still need to be resolved. Surprisingly, many SaaS vendors offering enterprise applications don’t have a sophisticated provisioning engine to permit instantaneous on-boarding of new users. Not all have consistent access control mechanisms for terminating users when their subscription subsides or when corporate customers make job cuts.

And, of course, many SaaS vendors have been well-served by locking their customers into long-term contracts to ensure reliable revenue streams.

Any customer frustration which may have arisen in response to these SaaS vendor shortcomings hasn’t slowed the growth of the industry, or its ability to inspire new forms of web-based services, such as Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS).

Last week, RightNow decided the time had come to shine a light on these questionable contracting practices. It issued a “Cloud Challenge” in a classic “Emperor has no clothes” fashion. It took aim at incumbent software vendors (ISVs) trying to pawn off their hosted services as true SaaS, and at SaaS vendors failing to fulfill the promise of truly on-demand, subscription services.

RightNow challenged the SaaS industry to provide greater visibility and predictability in the contracting process. It put its ‘money where its mouth is’ by publishing its new Cloud Services Agreement (CSA), which includes:

• Annual Usage Alignment Up or Down

• Three-Year Price Commitment, Plus Three-Year Renewal Price Cap

• Annual Termination for Convenience

• Annual Pools of Capacity

• Cash Service Level Credits

• Unlimited Capacity for 90-Day Pilots

RightNow’s challenge and CSA will make it even more difficult for legacy ISVs to match today’s SaaS/cloud computing leaders. RightNow is also trying to reset the competitive playing field within the SaaS/cloud computing industry by shifting some of the focus away from the industry’s marketing hype to more practical contracting practices which must fulfill the promise.

It will be interesting to see if RightNow’s efforts strike a nerve and spark latent customer frustration with SaaS industry contracting practices. What’s your opinion: will RightNow’s challenge change the way IT and business decision-makers evaluate and select their SaaS and cloud computing vendors? Comment below.

(Disclosure: I did a whitepaper project for RightNow in 2005.)

Kaplan is Managing Director of THINKstrategies (www.thinkstrategies.com), an independent consulting firm focused on the business implications of the on-demand services movement. He is also the founder of the SaaS Showplace (www.saas-showplace.com) and Managed Services Showplace (www.msp-showplace.com). He can be reached at jkaplan@thinkstrategies.com.