DoD ESI White Paper

Best Practices for Negotiating

Cloud-Based Software Contracts
Guidance on the differences between purchasing
perpetual software and renting Software as a Service

www.esi.mil

About DoD ESI

The DoD ESI was formed in 1998 by Chief
Information Officers at the DoD. To save time
and money on commercial software, a joint
team of experts was formed to consolidate
requirements and negotiate with commercial
software companies, resulting in a unified
contracting and vendor management
strategy across the entire department.
Today, DoD ESIs mission extends across the
entire commercial IT life-cycle to include IT
hardware products and services. DoD ESI
has established DoD-wide agreements for
thousands of products and services.
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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts

Executive Summary
As the utilization of cloud computing grows
within the Information Technology (IT) arena, it
is challenging organizations to think differently
about IT procurement. This paper addresses the key
contractual concepts to focus on when negotiating
a public cloud, Software-as-a-Service (SaaS) delivery
model versus a traditional on-premises software
delivery model. Under both models, use rights are
still granted, but there are variations of the software
use terms and conditions, especially in areas such as
licensing and costs.

critical for a successful relationship to deliver all

anticipated benefits. All aspects of the relationship
need to be negotiated upfront, including:
Ability to request customizations, enhancements, data
base queries, new reports and the negotiated costs
Ownership of any software customizations
or enhancements
Data rights and responsibilities throughout data lifecycles
Information security and confidentiality
Cost and pricing metrics

From an overall contractual perspective, most

terms and conditions remain the same between a
traditional on-premises software perpetual licensing
contract and a SaaS contract, since the same software
and functionality are being supplied by the software
provider. However, there are differences, such as
Grant of a Software License and Payment Terms.

Additional user provisioning and usage metering

Uptime and performance guarantees
Issue response and resolution times
Maintenance and support, including system
administration, application of patches, fixes, and upgrades
Disaster recovery and business continuity

When deciding to use a SaaS provider, the focus

shifts from buying, implementing and managing the
software application to establishing and managing
the SaaS vendor relationship. The SaaS Subscription
Agreement and Service Level Agreement (SLA) are

Contract termination conditions

Knowing what to include in your contracts with

SaaS providers will both maximize and protect your
organizations cloud investments.

Table of Contents
Cloud Computing Introduction and Background...................................................................................................................................... 4
Why Organizations Move to the Cloud........................................................................................................................................................ 6
Contract Differences: Traditional Delivery Model versus the Cloud................................................................................................... 7
Rights to Use the Software....................................................................................................................................................................... 7
Payment Terms............................................................................................................................................................................................ 8
Key Points When Negotiating a SaaS Contract.......................................................................................................................................... 9
Underlying SaaS Agreement.................................................................................................................................................................... 9
SaaS Service Level Agreement (SLA)...................................................................................................................................................... 11
Conclusion......................................................................................................................................................................................................... 13

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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts

Cloud Computing
Introduction and Background
The term cloud computing is becoming
mainstream in the IT world and has been gaining
momentum within recent years. Some believe
that the concept of cloud computing has been
around since the beginning of the IT outsourcing
industry in the 1960s when Ross Perot rented idle
computing power from one company to carry out
the processing needs of another (mostly during the
night). The company that owned the computers
monetized its down time, and the organization
that needed the computing power did not have to
outlay capital for equipment, thus creating a winwin situation.1 This bartering of computing power
would soon become a commodity, made possible
via the Internet (the cloud) and would not only
focus on using idle computing power, but now also,
creating computing power for the sole purpose of
providing a service to another company.
As the utilization of cloud computing is increasing,
its definition is expanding too. A broad definition is
that cloud computing is the scalable provisioning of
IT as a service using the Internet or a network. Some
of the IT capabilities contributing to scalability and
elasticity include virtualization and service-oriented
architecture, which have helped to create various
cloud models. The three main cloud computing
models are Infrastructure as a Service (IaaS),
Platform as a Service (PaaS), and Software
as a Service (SaaS):
IaaS is a provisioning model in which an
organization outsources the equipment used to
support operations, including storage, hardware,
servers and networking components. The service
provider owns the equipment and is responsible
for housing, running and maintaining it. The client
typically pays on a per-use basis.

PaaS is a way to rent hardware, operating systems,

storage and network capacity over the Internet.
The service delivery model allows the customer to
rent virtualized servers and associated services for
running existing applications or developing and
testing new ones. It adds vendor management of
the operating system, middleware and runtime
data base to the IaaS offering. PaaS is often used
by developers to build applications on top of
the computing infrastructure. This might include
developer tools that are offered as a service
to build services, or data access and database
services, or billing services. 2
SaaSIn a pure SaaS model, the provider
delivers software based on a single set of
common code and data definitions that are
consumed in a one-to-many model by all
contracted organizations anytime, on a payfor-use basis, or as a subscription based on use
metrics.3 It essentially adds data management and
application management to a PaaS environment.
All you have to do is connect via the Internet and
use it. Some software vendors are now offering or
are thinking of offering some form of SaaS model
to deliver their software. SaaS is being adopted in
multiple industries, such as Customer Relationship
Management (CRM), human resources for talent
acquisition and procurement.

In addition to the three cloud models identified

above, clouds can also be private, community,
public or hybrid:
Private Cloud is operated solely for a single
organization, whether managed internally or by a
third-party and hosted on or off premises.4 Private
clouds are usually virtualized cloud data centers
inside an organizations firewall, or they may be a
private space dedicated to an organization within
a cloud providers data center. 5 Nevertheless, in
private cloud computing, access to the cloud is
limited to internal users. Also, in private cloud
computing, users still have to purchase the
internal hardware and software, implement and
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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts
manage the solution and thus do not benefit from
lower upfront capital costs and less hands-on
management. Of course, these costs can still be
mitigated somewhat by creating more efficient
environments through virtualization or by taking
the off premises route to private clouds by asking
the vendor to provide dedicated resources for
critical data or applications.
Community cloud is provisioned for exclusive
use by a specific community of consumers
from organizations that have shared concerns
(e.g. mission, security, policy, and compliance
considerations). It may be owned, managed, and
operated by one or more of the organizations in
the community, a third party, or some combination
of them, and it may exist on or off premises.
Public Cloud is the delivery of cloud services
(e.g. software applications) over the Internet by
a third-party provider to the general public. It
exists on the premises of the cloud provider and
usually includes virtualization for more efficient
deployment of shared resources.
Hybrid Cloud is any combination of external
public cloud services and internal resources to
create a solution. Hybrid cloud computing implies
significant integration or coordination between
the internal and external environments. Hybrid
cloud computing can take a number of forms,
including cloud bursting, where an application
is dynamically extended from a private cloud
platform to an external public cloud service, based
on the need for additional resources. 6 It may exist
on or off premises. In the completely off-premises
hybrid model, a provider can supply a shared
virtual environment along with private, dedicated,
data storage space all on the providers premises.

For the purpose of this paper, cloud is used to

refer to the architecture setup of how software is
delivered as a service via the Internet (SaaS via a
public cloud). Under this delivery model, software
is hosted by the software provider or a third party
hosting provider off-premises from a users facilities.

This paper addresses the key contractual concepts

to focus on when negotiating a public cloud SaaS
delivery model versus a traditional on-premises
software delivery model. Under both models,
software use rights are still granted, but there are
variations of licensing terms and conditions, especially
in areas such as usage rights and licensing costs.
Interestingly, shortly before the publication of this
paper, The National Defense Authorization Act for
Fiscal Year 2012 (H.R. 1540) changed the DoDs
November 2011 statement regarding a DISA First
approach to Cloud Computing. Section 2867,
subsection b, paragraphs 2B (ii) II through IV of this
bill stipulates a Department-wide strategy for:
(II) Transitioning to cloud computing.
(III) Migration of Defense data and governmentprovided services from Department-owned and
operated data centers to cloud computing services
generally available within the private sector that
provide a better capability at a lower cost with the
same or greater degree of security.
(IV) Utilization of private sector-managed security
services for data centers and cloud computing.7
In response to the 2012 NDAA, DoD cloud
computing strategies and policies will address
use of commercial cloud services. This is further
evidence that cloud computing is a significant
topic for DoD.
It is clear that cloud computing is becoming
mainstream. This is evident when nonprofit
organizations such as the Open Networking
Foundation (ONF) are being created. ONF was
formed in March 2011 by Deutsche Telekom,
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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts

Facebook, Google, Microsoft, Verizon, and Yahoo!,

ONF hopes to promote a new approach to
networking called Software-Defined Networking
(SDN). SDN hopes to create technology standards
that can be leveraged for cloud computing purposes
by creating the switching mechanism to support the
OpenFlow interface. OpenFlow enables networks
to evolve by giving a remote controller the power
to modify the behavior of network devices, through
a well-defined forwarding instruction set. This
growing OpenFlow frontier includes routers,
switches, virtual switches, and access points from a
range of providers.8
Cloud computing advances via OpenFlow and other
new emerging technologies are examples of the
shift that organizations will need to make in order
to align their resource requirements to manage
cloud providers. Skill sets for these roles will include
individuals with strong IT vendor management and
quasi-technical skills. These resources will serve as
critical liaisons between IT, the business and the
cloud provider.

Why Organizations
Move to the Cloud
The number of organizations currently leveraging or
thinking about leveraging the cloud continues to grow.
The following statistics are indicative of reported trends:
28% of US organizations are using
cloud computing.9
21% average annual savings for applications moved
to the cloud.10
By year-end 2016, more than 50% of Global 1000
companies will have stored customer-sensitive data
in the public cloud.11

The following paragraphs list the most common

benefits for choosing a cloud delivery model over a
traditional delivery model.
Cost Reduction: The governments plan to migrate
large amounts of IT services and IT assets to the
cloud is expected to help the government save
millions of dollars and reduce its infrastructure
footprint by more than a third by 2015.12
By choosing a cloud delivery model for your needs,
you save the cost of building and maintaining
your own infrastructure to run the software, just as
Ross Perots customers did many years ago. Since
renting the right to use software as a service can
be less expensive in the short term than buying a
perpetual software license outright, you save money
on the cost of the initial investment by only paying
for what you actually use and not paying for what
you may use in the future. Therefore, your total cost
of ownership (TCO) may be reduced depending
on the discounted upfront costs, lower operational
costs by not having to implement and maintain
software in-house, and other benefits realized by
choosing a cloud delivery model.
Note: See Appendix 1 for a basic costing model to
compare various deployment models. A detailed
examination of cost-benefit will be provided in a
future White Paper.
However, it is important to mention that each
organizations specific use scenario should be
analyzed on an individual basis. Whether or not
a cloud delivery model offers a cost avoidance
over perpetual software in the long run must be
determined. The cost analysis will differ depending
on an organizations preferred return-on-investment
(ROI) timeframe (e.g. 3 year ROI vs. 5 year ROI, etc.)
and TCO determinants.
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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts

Speed and Flexibility: Many of todays information

technology teams are plagued by having too few
resources to keep up with constantly evolving
internal demands. With cloud computing,
organizations are realizing the benefit of having
flexible solutions, where they can scale the software
service up and down as needed within a much
quicker timeframe. The initial deployment of software
via the cloud or adding more users to an existing SaaS
delivery model can be faster and less expensive than
traditional non-cloud models due to the reduction
of complex procurement and deployment cycles
(e.g. not needing to obtain and install a new license
key for additional users). Additionally, many SaaS
providers include self-service provisioning for adding
functionality and new users.
Greater Connectivity and Mobility: By using cloud
services, you can access your software and inherent
data from any device that has access to the Internet
(assuming your chosen software also has a mobile
device interface or native application).
Heightened Security: Leading cloud providers often
have cutting-edge, secure, and traceable data access
trails.13 Most cloud servers will be hosted in physically
secure data centers with strict access control for their
own staff and no access for unauthorized personnel.
At the same time, it is interesting to note that 43% of
CFOs whose organizations are implementing hybrid
and private clouds are less than somewhat open
to moving business-critical applications into those
environments, because they are concerned with
reliability, security, availability and performance.14
Overall, cloud service providers can provide heightened
security, but it is important to confirm where and how
your information is being stored to ensure you are really
achieving a greater level of security.

Easier Collaboration and Integration: Cloud

computing provides quicker speeds in which we can
interact with each other and more efficient ways for
completing collaborative tasks. SaaS opens up the
Internet to be used for more than obtaining research
information or checking email. SaaS providers
are now creating pre-established application
programming interfaces with popular applications
that their services interact with for many of their
clients. This collaborative approach for sharing
information and driving business results is the way
of the future. The push to deliver information,
websites and web-based application functionality
as composable Web services is a key catalyst that is
driving the delivery of everything as a service. 15

Contract Differences:
Traditional Delivery Model
versus the Cloud
From solely an overall contractual perspective, most
terms and conditions remain the same between a
traditional on-premises perpetual licensing contract
and a SaaS contract (e.g Limitation of Liability,
Indemnification, etc.), since the same software and
functionality are being supplied by the software
provider. However, a few key differences are Grant of a
Software License and Payment Terms.

Rights to Use the Software

Within the cloud delivery model, software use rights
are subscription-based (you are renting the right
to use the software as a service for a specific term).
You pay on a monthly or annual basis for usage. This
subscription fee or cost includes right to use the
software, plus any software assurance/maintenance
which is provided by the cloud service provider.

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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts

For a traditional software purchase, the right

to use the software is normally purchased in
perpetuity (you are buying a license to use the
software forever). You pay one lump sum upfront
and, depending on the software, maintenance
fees for technical support and functionality
upgrades. (The buyer gets basic warranty
service for a specific period of time. Additional
support beyond the warranty must be separately
purchased under a separate software assurance or
maintenance agreement.)
It is important to understand that sometimes
traditional on-premises software is also provided via
a subscription or finite term where you do not own
the right to use the software in perpetuity.
Perpetual Licensing: The perpetual licensing
model is more common for traditional on-premises
software. When purchasing the right to use
software in perpetuity, the full license rights may
depend upon how payment terms are structured.
Additionally, you may not own all of the code,
since the software provider may only allow you
to modify, if at all, only a particular layer of the
code (object code vs. source code). This licensing
model is not offered as an option for public
cloud SaaS delivery models. Whether or not this
licensing model would be readily utilized for a
private or hybrid cloud delivery model is yet to be
seen (depending on the ability to move existing
applications into a private cloud instance).
Subscription Use: The subscription model only
allows the right to use the software service while the
subscription is valid (i.e. paid up-to-date). This is the
most common model for public cloud solutions. This
grant of usage model may be possible for hybrid cloud
solutions where you can negotiate terms such as:

Pay a maximum subscription fee over a specific

term and then you have the right to use the
software in perpetuity or have the option to use
in perpetuity for an incremental pre-negotiated
licensing fee; or
Break out the hosting fees versus the software
licensing fees so the two are not intermingled.

Payment Terms
The payment terms between the cloud and a
traditional software delivery model can vary greatly.
The most pronounced difference is that under a
traditional model you may be able to withhold a
portion of the software license fees until after the
Go-Live Date or Acceptance Date of your software
product. Additionally, you may defer maintenance
payments until after the Go-Live date.
Alternatively, cloud-based solutions sometimes
bundle together hosting, software licensing/use
rights and maintenance fees into one monthly or
annual fee. Thus, you are required to start paying
for the service as soon as you authorize the cloud
provider to turn it on, even though you may not be
using it in production yet. For instance, you may
need time to setup data integration or implement
other items such as single sign-on capabilities, but
the SaaS provider may still charge full usage price.
Therefore, be careful to only commit to the number
of users that you need upfront and ramp up your
usage thereafter as demand warrants.
To mitigate this practice by SaaS providers (making
your organization pay for software before your
users even have a chance to login into the system),
see if the SaaS provider has a sandbox or proof-ofconcept environment where your associates can
become familiar with the software at little to no
charge before signing a contract for a specific term
and number of users.
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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts

Key Points When Negotiating

a SaaS Contract
When organizations move to a public cloud
delivery model, its like an outsourcing engagement
to a certain degree, where you rely upon the
management and expertise of another party. In
order to help build trust with an organization
considering outsourcing, Ross Perot would remind
them that his company was the IT expert by stating,
You are familiar with designing, manufacturing
and selling furniture, but were familiar with
managing information technology. We can sell
you the information technology you need...16
Feeling comfortable that a SaaS provider is the
expert in hosting your data and managing your
software application takes time. SaaS is relatively
young compared to conventional outsourcing
arrangements, but there are transferable concepts
that can be leveraged.
Much like a conventional outsourcing engagement,
when deciding to use a SaaS provider, your
organization is no longer focusing on managing
the technical software application. Instead, it
must shift its attention to managing the SaaS
vendor relationship. This is where heavy IT contract
negotiation, contract management and vendor
management skills come into play. All rights
and responsibilities that are associated with
the relationship should be memorialized in an
enforceable contract and effectively managed until
the relationship has been terminated.17
The specific risks to be addressed in your contract with
a SaaS provider will depend upon a number of factors:
The application you are using (e.g. what use
purpose does it support?)

How critical the application is to your business to

help determine the necessary availability levels
that will be demanded (e.g. is it customer facing
and/or does it provide a key business function?)
The data that will be exchanged, stored and
maintained by the SaaS provider (e.g. how
sensitive is the data, where will it will be stored and
who will have access to it?)

These risks can be mitigated by careful review of the

SaaS providers system setup and by the terms and
conditions of your SaaS contract.
The remainder of this section will cover the key
negotiating points for two critical contract areas: the
underlying SaaS Agreement and the Service Level
Agreement (SLA). These paragraphs assume that
standard software licensing terms will be included
in the contract, such as intellectual property rights,
indemnification, limitation of liability, warranty and
cure period, etc.

Underlying SaaS Agreement

Ensure that the right to use the software is clear
and that there are no hidden fees. For example, if
the pricing metric for the service is determined by
the number of users, is the metric per unique/seat
users, concurrent, or only active users? Does the
provider also charge for technical support users
who are not really using the software application,
but need ad hoc access to it?
Clearly identify all of the functionality you are
paying for from the provider to ensure they do
not degrade this functionality over time. One
good way to memorialize this in the contract is
to attach a functionality matrix with screenshots
of the software application as an appendix to the
contract. Also, be sure to list all additional and
optional fees in the contract, such as additional
storage fees, custom reports, etc.

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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts

Ownership of Customizations or Enhancements

Clearly identify who owns any customizations or
enhancements, especially if your organization pays
for them as work product developed solely for
your organization (e.g. an individual branch of the
providers standard base code that is unique to
your organization and for which you paid for the
development effort).

Data Rights and Responsibilities

Include language that states who owns data
during all of its lifecycle, including when data is
transferred or exchanged (data in transit) and
during storage (data at rest).
Aso include language regarding who bears the risk
for loss of data in transit. Depending on the nature
of your data and how it is processed, you may need
to negotiate language to affirm your organizations
ownership of the results of any processing of its
data that occurs on the cloud providers systems.18
Define and confirm a process with your provider
that allows for regular backup of your data on
your premises. This safeguard is important as SaaS
providers can, in fact, lose data.19 However, the
need for on-premises data backup is situational,
depending on the criticality and comfort level of
your organization with each SaaS engagement.
Possibly no on-premises backup is needed, but
this should be considered. Contracts cannot totally
safeguard against the risk of data loss, but they can
offer additional layers of protection related to your
data rights within the cloud.
Define what the providers responsibilities are in
the event of 1) a security breach (e.g. ensure they
provide an immediate notice if your data may be
compromised); 2) an outage; and 3) termination
(e.g. ensure the provider will cooperate with
the return of your data in a format and manner
previously agreed, and with no additional fees for
the return of data).

10

Heightened Confidentiality, Security

and Disaster Recovery
Confidentiality language is found in all contracts,
but SaaS contracts should contain heightened
confidentiality language relative to the DoD and
the Federal Information Security Management
Act (FISMA).
Obtain detailed information about the service
providers security processes and procedures,
including data flow diagrams. One way to obtain
this information is to leverage a questionnaire
approach. The Cloud Security Alliances Consensus
Assessments Initiative Questionnaire serves as
one good example that can be leveraged to build
your own questionnaire.20 Draft these minimum
security conditions into the contract and obligate
the provider to maintain them throughout the
term of the agreement.
Ensure that the DoD is involved in reviewing
and determining what data will be stored by the
provider and what layers of security need to be
in place. This includes making sure all applicable
Information Assurance (IA) Policy and regulatory
documentation is made part of the agreement
reference list.
Confirm how data access will be limited, including
review of the different user permission roles
offered, the various accessibility parameters for
each role, and the administrators access rights (e.g.
ensure all users actions can be tracked).
Ensure your organization has the right to audit
the providers facilities and documentation to
verify that minimum security levels are in place
and being enforced, including confirmation that
your data is located where it should be and not
being sent to a third party or being intermingled
with other clients data.
Ask for third-party reports regarding penetration
and vulnerability results for providers hosting
environment.

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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts
Include language confirming what the providers
data storage period and data destruction policy are.
Include language confirming the providers
business continuity plan, specifying redundancy
requirements to include, at a minimum, data
backup and recovery methods/infrastructure/
processes. Also, have the provider certify that
they will participate with you in disaster recovery
testing at specific time intervals (e.g. once every
two years) without charge.

Termination
Even though providers may lock your organization
in for a specific contract term and minimum
number of users, ensure the ability to terminate
for cause, including a continued lack of uptime
specific criteria should be identified in the SLA (see
SaaS Service Level Agreements below).
Ensure payment terms are clear and confirm that
the provider cannot immediately shut off services
for late or disputed invoices.

SaaS Service Level Agreement (SLA)

The key components of any solid SLA should contain
specific, measurable and enforceable terms and
conditions that the SaaS provider must adhere to
for each component of the service provided. If the
provider fails to meet an obligation under the SLA,
the SLA must have the teeth to help mitigate such
failure from happening again. The teeth to SLAs are
the specific remedies that apply when the providers
obligations are not met. The remedies usually take
the form of monetary damages that are pre-agreed
between the parties for specific failures and/or
credits for future services.
The key components to include in a SaaS SLA,
as described in the following paragraphs, are
contact information, issue response and resolution
times, uptime and data throughput performance
guarantees, and maintenance and support.

11

Key Contact Information

List all account management and technical
support contact information, including mobile
phone numbers. This information will change over
time, but it is a good practice to include it in the
SLA. The information should be reviewed several
times during the year to ensure it is up to date.
Identify the providers regular hours of operation
and support, and identify where their support
centers are located. This is useful to know,
especially if their support centers are off-shore.
Ask the provider to define their escalation process
and draft it into the SLA, so other persons within
your organization will know whom to contact.
This helps to provide information to others
who will need to carry on vendor management
responsibilities after the initial project team.

Response and Resolution Times

Include a matrix that identifies 1) the priority levels
for different software modules and the diverse
technical issues that can arise; 2) the providers
response times; and 3) the providers expected
resolution times for each. (Resolution times may
not be guaranteed by the provider, but response
times should be).
Have the service provider contractually commit to
at least a monthly call or meeting to review service
performance, SLA metrics and any service issues.
Also, keep an independent issues log to match up
against the providers ticketing system in case there
are discrepancies.
Ensure your organization has the final say in
determining the severity level for each potential issue.

Uptime and Performance Guarantees

Identify the guaranteed uptime and application
performance metrics needed for each software
service component.

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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts
Ensure uptime and performance calculations
are listed in the SLA and that they can be
objectively and easily measured on a rolling
basis (not per calendar month).
Quantify the downtime allowed in terms of hours
or days so you can truly understand the impact of
downtime business needs. (For example, a 99.7%
uptime would mean that there is approximately
11 allowable days of unplanned downtime in
one year. A recommended approach would be to
negotiate at least a 99.9% uptime, allowing for less
than four days of downtime in one year.)
NOTE: Even if organizations are willing to pay
extra for an extremely secure environment
with a guaranteed 100% uptime, it may be cost
prohibitive and just not possible.
Hold the provider accountable for things within
their control. For instance, a SaaS provider
cannot control the public network, the Internet,
but they should be able to provide you with
reports regarding the time it takes your data to
be processed and actionable steps on their side
for the specific service you are using affected
by unplanned downtime. Also, they can share
risk with their counterparts and ensure that
the network providers they choose also have
contingency plans in place to ensure uptime.
Identify the providers standard
maintenance windows.
Define what planned maintenance means and
confirm that the provider will provide at least
48 hours notice for downtime to be considered
planned maintenance.
Define the calculations to be used for credits if
uptime or application performance guarantees
are not met. An example of an uptime formula is
the following (this is not meant to be a suggested
formula to be used, but only as an example).

12

Service Level Uptime:

Service Level is 99.96%.
Uptime Percentage is calculated for any rolling 30
calendar days as follows:

Uptime Percentage =
Total number of
expected uptime
minutes

Total number

Minus

in any 30 days

of minutes of
unplanned downtime
in any 30 days

Total number of expected

uptime minutes in a given 30 days

Service Credits: Should the Service Level fall below

99.96% for any consecutive 30 day period, the
service provider will provide a credit (based upon the
applicable months charges for the period in which
the Service Level failed) as noted in the chart below:

Uptime Percentage

Credit

< 99.96%

50%

< 99.90%

75%

< 99.50%

100%

Explain the process to obtain a credit, including

the notice period needed for requesting
the compensation and when and how the
compensation will be provided.
Confirm what type of software application
service monitoring and alerts are available. Some
providers now have websites that publish this
information on an ongoing basis.
Include the ability to terminate the entire
agreement without further liability if uptime fails
over a particular period of time (e.g. if uptime
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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts
drops x amount over x number of rolling days).
Most cloud providers will want you to commit to
at least a year of service (usually paid monthly).
However, what if you sign a one-year deal and the
service is down for five days straight upon the start
date? Do you still want to be committed to that
provider for the next 360 days?

Maintenance and Custom Support

Identify how many major and minor versions of the
software are allowable compared to the providers
most recent generally available (GA) version.
Ask about the frequency of releases and upgrades
(both minor and major) upgrades upfront. Codify
the notification process for releases and ensure
that you can opt out of releases or upgrades
(assuming that your instance is not too many
versions behind their most recent generally
available version).
Identify the ongoing support expectations for any
customizations and enhancements. This includes
identification of turnaround times if custom
reports that you cannot create on your own are
needed (e.g. reports that require the providers
help or third-party professional services).

13

Conclusion
Today, cloud computing is another new approach to
solving persistent, old IT problems, such as doing more
with less, providing ultimate flexibility at very low cost
and being first to market with new products. Just as the
initial concerns and resistance to off-shoring gave way
to intelligently governed outsourcing models, a similar
trend will emerge on the cloud front.21
One of the key challenges for cloud computing customers
is to ensure contracts include the provisions needed
to guarantee appropriate use rights, services, resource
availability, infrastructure capability, security, system
and environment support, maintenance, SLAs and other
matters important to your end users and their mission.
Todays buyers of these services now have to be
proficient not only in matching technology to
requirements, but also managing contracts and vendor
relationships. Skill sets for these roles will include
individuals with strong IT vendor management and
quasi-technical skills. These resources will serve as critical
liaisons between IT, the business and the cloud provider.
They will have to ensure that cloud contracts include
language that is easily understood and enforceable while
not over contracting. They will also need to ensure that
expected savings and efficiencies are actually achieved.

About the Author

Gretchen Kwashnik currently serves as the IT Supplier Management Team Leader at ING DIRECT, USA in
Wilmington, DE. Her responsibilities include technology acquisition, IT contract management, IT supplier
management, and the integration and management of IT project contractors. Gretchen began her ING
DIRECT career in the Procurement department, drafting and negotiating IT and Marketing contracts. In
2008, she transitioned to the IT department, where she has since concentrated on technology acquisition,
the software development life cycle, and the facilitation of IT projects. Gretchen has a Bachelor of Science
in International Business from Kings College and a Juris Doctorate from Widener University Law School.

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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts

14

Appendix 1 Costing Model for Cloud versus Traditional Models

Perpetual OnPremises Model

Perpetual
Hosted Model

Subscription
PaaS Model

SaaS Model

Applications
Data
Runtime
Middleware
O/S
Virtualization
Servers
Storage
Networking
Application Personnel
Data base Admin
Networking Engineers
Hardware Engineers

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DoD ESI White Paper | Best Practices for Negotiating Cloud-Based Software Contracts

15

Article, Cloud ComputingBeen There, Done That by Raj G. Asava. Found at: http://www.perotsystems.com/CountrySites/UnitedKingdom/MediaRoom/

WhitePapers/Cloud_Computing.

Book, Cloud Computing For Dummies by Judith Hurwitz, Robin Bloor, Marcia Kaufman, Fern Halper. Published November 16, 2009 by Wiley Publishing, Inc.
Excerpts found at: http://www.dummies.com/how-to/content/cloud-computing-cheat-sheet.html.

Article, Key Issues for Software as a Service, 2011by Robert P. Desisto and Ben Pring. Published March 24, 2011 by Gartner, Inc.

Article, The NIST Definition of Cloud Computing by Peter Mell and Timothy Grance. Published September 2011 by the National Institute of Science and Tech-

nology (Special Publication 800-145).

Book, Cloud Computing For Dummies by Judith Hurwitz, Robin Bloor, Marcia Kaufman, Fern Halper. Published November 16, 2009 by Wiley Publishing, Inc.

Excerpts found at: http://www.dummies.com/how-to/content/cloud-computing-cheat-sheet.html.

Article, Key Issues for Cloud Computing, 2011 by David Mitchell Smith. Published April 1, 2011 by Gartner, Inc.

National Defense Authorization Act for Fiscal Year 2012, H.R. 1540, 112th Congress of the United States

Open Networking Foundations website and press release on March 21, 2011 found at: https://www.opennetworking.org/about (as of September 24, 2011).

CDW 2011 CLOUD COMPUTING TRACKING POLL

CDW 2011 CLOUD COMPUTING TRACKING POLL

Article, Gartners Top Predictions for IT Organizations and Users, 2012 and Beyond: Control Slips Away excerpt by Gavin Tay. Published November 23, 2011 by

10

11

Gartner, Inc.

12

Article, Amazon cloud crash endangers federal websites by Joseph Marks. Published on April 21, 2011 by National Journal Group, Inc. Found at: http://www.
nextgov.com/nextgov/ng_20110421_7729.php.

13

Article, The Healthcare Cloud Confusion: 3 Reasons Why You Should or Shouldnt Adopt the Cloud by Karin Ratchinsky. Published on September 8, 2011
by Level 3 Communications Beyond Bandwidth blog. Found at: http://blog.level3.com/2011/09/08/the-healthcare-cloud-confusion-3-reasons-why-youshould-shouldnt-adopt-the-cloud/.

14

Symnatecs 2011 Virtualization and Evolution to the Cloud Survey. Found at: https://www4.symantec.com/mktginfo/whitepaper/Virt_and_Evolution_Cloud_
Survey_060811.pdf.

Article, Key Issues for Cloud Computing, 2011 by David Mitchell Smith. Published April 1, 2011 by Gartner, Inc.

Article, Tips to Make An Outsourcing Project Successful. Published on April 23, 2011 by Outsourcing Smartly. Found at: http://outsourcingsmartly.com/tag/

15

16

ross-perot/.

17

See Wikipedia, Cloud Computing, http://en.wikipedia.org/wiki/Cloud_computing (describing the history and application of Cloud Computing) (as of September 24, 2011).

18

Article, If Its in the Cloud, Get It on Paper: Cloud Computing Contract Issues by Thomas J. Trappler. Published in EDUCAUSE Quarterly Magazine, Volume 33,
Number 2, 2010. Found at: http://www.educause.edu/EDUCAUSE+Quarterly/EDUCAUSEQuarterlyMagazineVolum/IfItsintheCloudGetItonPaperClo/206532.

19

Article, Amazons cloud crash destroyed many customers data by Henry Blodget. Found at: http://technolog.msnbc.msn.com/_news/2011/04/28/6549775- amazons-cloud-crash-destroyed-many-customers-data (as of September 24, 2011).

20

Article, Open source fuels growth of cloud computing, software-as-a-service by Jon Brodkin. Published July 28, 2008 by Network World, Inc. Found at: http://
www.networkworld.com/news/2008/072808-open-source-cloud-computing.html.

21

Article, Cloud ComputingBeen There, Done That by Raj G. Asava. Found at: http://www.perotsystems.com/CountrySites/UnitedKingdom/MediaRoom/
WhitePapers/Cloud_Computing.

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