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Monday, 25 January 2016 01:34

Revealed the hidden costs of cloud contracts and how you can reduce them

Posted By  Deborah Saunby

Deborah Saunby offers some practical advice on how you can reign in and take control of the hidden contracts that in one UK insurance business totalled £500,000 a year.

In my experience employees, workgroups and departments are the ones currently driving cloud service purchases. Bring Your Own Cloud - open and above board, controlled by policy and with the guidance of IT - empowers employees to select their own cloud services increasing satisfaction at work, staff productivity and reducing burden on IT and other teams. Cloud services can transform businesses.

However, more often the case, employees are using ease of access to the cloud as a reason to circumnavigate tight budgets, IT, procurement and legal teams; and are downloading their own cloud services. This is creating a ‘ticking time bomb’ of hidden contracts in the business.

I’m singling out shadowy cloud purchases to make a point, but even legitimate cloud, software and IT purchases authorised by department leaders and even senior management can be signed and executed without the knowledge and ongoing control of procurement and legal teams.

I visited a large insurance company recently which – it painfully discovered after an amnesty – had over £500k of software contracts which had been signed by employees throughout the business over a number of years. For the company, worse was to come, the contracts were nearly all ‘evergreen’, auto renewing every 12-months and significant sums of money were being wasted annually right under the noses of those in procurement.

Similarly, I also met with another insurance company this year that had just been audited by the Financial Services Authority; the audit showed a lack of contract visibility, i.e. the company simply had no visibility of its supplier contracts or renewal dates.    

Lack of contract visibility like this directly affects a company’s ability to remain compliant, which can be a costly oversight. Cloud services, traditional software and other IT will have restrictions in place, for example, limiting usage to only a certain number of people or countries. There could be upgrade fees, notice periods and service uptime promises to be monitored. Putting it bluntly, if the service or software has been bought by an employee or department without visibility by the procurement team, how do you know if the business is staying compliant?       

Risky business

There are also risks attached to any contract – the risk of pricing changes, timeframes, requirements and processes. Managing these contract risks means identifying and controlling factors and potential threats that may have an impact on contract deliverables and the overall business. I’m sure you’ll agree managing, and reporting on, contract risk is an essential function of any legal or procurement team, but without visibility, how is this possible?

Going back to the cloud specifically, from a financial perspective, I think its safe to assume many employees will have simply put cloud service purchases onto their staff expense claims or company credit cards. Often the monthly recurring fees are so small they can easily slip under the ‘procurement radar’.

For traditional software or other more substantial IT services, employees may have asked the supplier to submit invoices through to the finance team. In this scenario, I strongly suspect that many finance teams will simply be paying supplier invoices for services either monthly or annually without really understanding or cross-checking the terms of the contract. The manual reconciliation of invoices against contracts can prove to be a very challenging and time-consuming task!

Taking control

The answer to all these challenges is openness, centralisation and policy:

  • Firstly, as painful as the results may be, hold an amnesty to help reveal all contracts [hidden and legitimate] in the business. Only with true visibility is a business protected.
  • Second, choose a secure online contract management system, quick to deploy, simple to configure and easy to use. This is essential for the centralisation of contracts. Do not use filing cabinets – the contents are all too easily destroyed and damaged in the unfortunate event of a fire of other disaster; nor are they particularly efficient. Do not get dragged into cumbersome ERP systems that you don’t have the time to deploy.
  • Lastly, set up new policies that ensure the ongoing involvement of procurement and legal teams in the purchasing of new items. Work with department leaders to ensure your ongoing involvement. There has to be a culture of openness where legal teams are seen to be serving the employees and departments within the business. Be aware though, once you’ve created a central repository, you will be hit by many, many inbound questions from employees asking when contracts are due, renewal dates, SLAs, etc. Not all contracts require the same level of resources, but your contract management system will need have the capability and automation functionality to help you manage these queries efficiently and effectively, responding in a timely efficient fashion, otherwise you run the risk of aiding the proliferation of unwanted employee driven purchases.

About the author

Deborah Saunby is a Director at Software Europe, where she is responsible for planning and implementing sales and marketing activities in order to meet company targets for growth and profitability.

Deborah joined Software Europe in 1999, having started as a sales executive before progressing to business development and then sales management over the past 15 years.  Deborah has a wealth of knowledge in sales, marketing and advertising. 

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