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Private cloud termination agreement: What CIOs need to know

Relationships between companies and their cloud providers can be fleeting. Knowing this, it's important for CIOs to think about exit strategies before they sign that cloud contract. David Rutchik, a partner at Pace Harmon LLC, offers advice.

When two people get married, they typically don't think about getting divorced during the wedding. The same it seems goes for many companies as they venture into a relationship with a private cloud provider. Not planning for the end of that relationship as the contract is being inked, however, can be a huge mistake that puts companies at risk, according to David Rutchik, a partner at Pace Harmon LLC, a management consulting firm that provides IT consulting and advisory services to Fortune 500 and middle-market companies.

When it comes to private cloud contracts, "termination for cause, for convenience, for supplier financial conditions, for change in control -- there are a lot of things that if not really, really well-determined and articulated -- contractually as well as operationally -- inherently present a significant risk," Rutchik said.

The need for a well-developed, clear termination agreement with a private cloud provider even extends to companies that intend to stay with the same provider but are changing their cloud services, in order to lay the groundwork for a smooth transition, he said.

David RutchikDavid Rutchik

Companies' relationships with private cloud providers "are not forever agreements," Rutchik said. Uncertainties abound on the provider side, due to a fast-moving marketplace and rapidly evolving cloud technologies. There is also uncertainty on the customer side. "At the end of the day, you need flexibility because you can't predict what the business needs are going to be."

Here are three aspects of a private cloud termination agreement that should be paid close attention to:

Private cloud provider termination

Terminating services with a private cloud provider and transitioning to a new provider can be much trickier and stickier than many anticipate -- largely because private cloud providers offer much more in the way of traditional service levels than one can expect from public cloud services, Rutchik said.

"With more commercial protections, with more service-level commitments, more personnel commitments -- all important items -- the vendors also impose more encumbrances," he said.

In other words, the private cloud provider has more interest in a company's data because so much effort is being dedicated to manage it -- "and therefore you need to make sure your termination rights are very clear," Rutchik said.

Specifics need to be ironed out, "[for example], what happens to the software tools? And are you able to use them when you separate from the provider?" he said.

Companies should use clear language and work out the details of what will happen if and when they decide to terminate and move to another provider before signing a cloud contract.

Termination for convenience rights

Establishing termination for "convenience" rights is critical with cloud contracts, Rutchik said. A company might assume that if the cloud vendor repeatedly fails to meet terms of the contract -- for example, agreed-upon service levels -- it has the right to terminate the contract. But demonstrating "cause" for termination is very difficult -- even if a provider is letting a company down.

With a termination for convenience clause in place, however, the company doesn't have to show cause, Rutchik said. This gives CIOs "optimal flexibility when services aren't meeting your expectations."

Rutchik also advised that termination for convenience costs be nailed down during negotiations so vendors can't up the price later.

Don't expect help from a provider at exit time

Once a company decides to terminate its relationship with its cloud provider, the provider usually has little involvement when it comes to transitioning away and migrating the data.

This makes sense, Rutchik said. "Logically if somebody's going to be terminated they're going to be less likely to want to be as helpful and comprehensive in their support."

This is another reason companies need to be very specific in their termination agreements about what role the provider will play, how the two parties will operate and interact during that period of transition, and how the company will be able to extract its data and in what format, Rutchik said.

Next Steps

Read more about cloud contracts:

A cloud contract checklist.

Learn how to develop a clear cloud contract.

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