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Contracts & The Cloud

November 9, 2009

Recent reports suggest there is rapid growth in ‘cloud computing’ and all the indicators are that it will indeed become a massive business very quickly.

But as so often, we seem to be learning about many of the business implications only as problems arise during negotiations or implementations – and it is of course these business issues that drive contractual terms and considerations.

A short blog by Chris Cummings highlights some of these concerns. He rightly points out that the elements that make up the ‘cloud’ come from a variety of sources. The reliability of individual elements is likely to be varied. To the extent that inter-operability matters, it most likely will not be there. And of course, as happened in the early days of every past technology innovation, no one will accept responsibility for failures – it will always be a matter of pointing fingers elesewhere.

The compelling value proposition for cloud computing is the ability to scrap traditional equipment and facilities and to move towards a true pay-for-what-you use model. However, there will be real advantages in having someone accountable for the overall quality and reliability of service, as well as ensuring the provision is at low cost (which means drawing on the service at cost-efficient times and volumes). Hence the emergence of managed service providers / integrators. But the real question related to those service providers is the extent of the liability they will acept.

I highlighted an example of this recently in a link to a blog by Larry Walsh, ‘Penalties For Cloud Computing Breaches’. The continued interest by the US Government over standards of software assurance is also likely to impact the liability of software developers for the integrity and security of their product. However, ‘clouds’ are by their nature intangible and forever changing their shape.  Threfore the question of who really has responsibility for the conenections within and between clouds and for the standards of relaibility and performance is likely to be a key battleground for contract developers and negotiators over the next few years.

And for those who wish to offer integrated services, the secrets of competitive advantage could well be locked into their contracting capabilities. For example, they need to develop superior commitment capabilities that promise their customers greater reliability and continuous innovation. And they will only be able to make those commitments if they have successfully negotiated back-to-back arrangements with the underlying application providers and if they continue to oversee and upgrade their relationships with those providers.

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