Buying Everything as a Service Pierre Mitchell Chief Research - PowerPoint PPT Presentation

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 3 rd party services. This is a better way to “lot” the market basket than Deployment External Internal Procurement External Services Service Delivery Models Internal Demand Demand Service Provision Models Internal Service Partners Transformational Business Processes Consulting • processes (Outcomes and/or • BPO / KPO Resources) • Contingent Transactional / • MSPs operational processes BPaaS Spend Owners… • Subscription- Procurement External Customers Knowledge / analytical based IP Business Units processes Software Applications Information, content, SaaS and community Public • Software • Hybrid Application Platforms Applications • Private (and Networks) Application Platforms & PaaS Vendors in Networks this stack Application may vary by Infrastructure Technology Platform & process and spend Infrastructure IaaS category Source: Spend Matters PRO

Cloud Computing in a Nutshell Internet-based data Internet-based access to low cost Cloud Environment = + access & exchange computing & applications Cloud Environment Usage- On-Demand Internet Pooled Elastic Based Characteristics: Self-Service Accessibility Resources Capacity Billing Cloud Service Models Cloud Deployment Models Software Platform Infrastructure Operated for a single organization (“ASP” was as a Service as a Service as a Service Private the first incarnation of this). Examples: Enrich for Oracle; hubwoo for SAP; any large ITO firm “SaaS” “PaaS” “IaaS” Business operations Deploy customer- Rent storage, Available to the general public or large industry over a network created applications to processing, network Public group, owned by an organization selling cloud a cloud and other computing services (e.g., Ariba Network; Amazon Business) resources Hybrid Combines Private and Public Google Docs, MS Azure, Force.com, Rackspace, Amazon Salesforce.com, Apple IOS, Google App Web Services (AWS) Coupa, Apttus Engine, Oracle PaaS

Simple Example of Procurement migration from on- premise to SaaS Contract Spend Analytics Sourcing & Management RFx Sourcing & RFx) Spend Analytics Contract Management ERP Supplier Operational Collaboration Procurement Supplier Operational Invoicing Invoicing Collaboration Procurement ERP Key Characteristics of the typical procurement 1.0 landscape: Key Characteristics of an evolving procurement 2.0 landscape:  Standalone, single purpose point solutions  Suite oriented solutions  Low to moderate degrees of integration  Tight integration  On-Premise Centric  Open Standards  High T otal C ost of O wnership  Greater accessibility and scalability  Less focused on end user experience  Greater use of On Demand resources  Internal and External Collaboration tools  Oriented towards the end user experience Source: KPMG ¹ Operational procurement includes requisitioning, purchase order, and receiving functions 6

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 Data  Underestimated start-up costs  Data segregation, isolation, encryption  Exit costs  Information security – Pricing  Contract complexity  Master Data Management (Items / Suppliers across systems)  Run-away variable costs Financial Data  Intellectual property protection  Tax Compliance and Planning (Procurement Design / Drawings) Vendor  Vendor lock-in Operational  Service provider reliance Business  Business resiliency disaster recovery Vendor Operational  Performance failure Risks  Service reliability and uptime  Vendor governance  SLA compliance  M&A within Vendors Regulatory Regulatory and Compliance Technology and Technology  Complexity to ensure compliance  Cross-vendor compatibility Compliance  Lack of industry standards and certifications  Customization limitations for cloud providers (PCI/SAS 70/FDA /  Integrations with other backend HIPPA etc.) systems financial systems  Records management/records retention  Regulatory change control, reliant on vendor timeliness  Data privacy 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 “The first year annual • Providers Seeking Sustainable Revenue maintenance pricing shall Beyond an Initial License be calculated at 22% of Payment Licensor’s published Software licensing fee. • Application SW Thereafter, annual Maintenance Fees maintenance pricing shall Increasing from – 15% to 20% Then be negotiated by the – 20% to 22% Now 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