Mastering digital transformation contract discussions with cloud hyperscalers – an introduction

Demystifying the hyperscaler concept and associated challenges

Most of you will have heard about cloud hyperscalers, often known simply as hyperscalers. They’re companies offering expansive cloud computing services on a global scale, boasting vast data centres filled with servers, storage systems, and networking equipment. They typically provide a diverse but highly standardised array of public cloud services, including Infrastructure as a Service (IaaS), Storage as a Service, Software as a Service (SaaS), and Platform as a Service (PaaS).

In the past most large IT or outsourcing projects only involved one IT service provider taking responsibility for the full spectrum of IT services. But nowadays organisations are increasingly choosing hybrid solutions and delivery models. And cloud services provided by a hyperscaler are nearly always part of the puzzle.

More traditional IT service providers or system integrators are typically more flexible in terms of the sourcing process and contract negotiations. But a sourcing trajectory involving hyperscalers comes with a number of specific structural challenges. They can include relative bargaining strengths, technical and organizational inflexibility on the side of the hyperscaler, low(er) cost models with limited bandwidth for negotiations, a high level of contract standardization with a low-level focus on “the legals”. The result is that, in many cases, there appears to be a lot less negotiation than you might be used to. But that doesn’t mean there’s no room for discussion at all and that there are no levers that can be used. Typical levers include a significant (committed) spend and new opportunities for the cloud vendor (eg a new market/country/sector).

In this blogpost we’ll introduce some of the things you should consider when engaging with hyperscalers.

Build your deal team

When sourcing IT solutions, companies often set up different workstreams (eg commercial, operational/technical and legal), each operating in parallel within their domain of expertise.

But engaging with hyperscalers will demand another, more holistic approach. The procurement, technical and legal teams will need to work closely together and in a more integrated way. To be successful, it will be critical to make sure to combine the different worksteams and discuss the different elements in one go, given the strong interdependencies between the different deal components. For example, the expected deal value will inevitably affect the legal discussions.

Understand the contract set-up

When reviewing a hyperscaler contract, one of the first challenges you might face is understanding the structure of the applicable contractual framework. A hyperscaler contract typically consists of a master services agreement (or one or more sets of overarching terms and conditions), one or more order forms and different sets of operational terms (eg relating to service levels, service descriptions, acceptable use policies and product terms), which are often only available online.

Constructing a diagram can be a helpful way to track the main documents and ensure that aspects that need to be amended are identified and captured during discussions. Don’t shy away from asking clarifications from the provider in this respect, as the structure can be quite complex and may change over time.

Leverage the commercials

When discussing the commercials of a hyperscaler deal it’s important to focus on key topics, like the applicable usage metrics, discounts, price protection mechanisms, impact of over-usage, divestment provisions and minimum revenue commitments (eg what products and services are covered, what exclusions apply and what happens in case the agreed thresholds are exceeded).

Another point to consider is the impact of the commercials on the hyperscalers’ flexibility in relation to the discussion of legal terms. If the customer is willing to commit to larger volumes, this will be an important leverage for the legal discussions.

Ensure regulatory compliance

When your organisation is operating in a regulated sector, you need to consider whether the proposed offering and contract terms allow you to comply with your regulatory obligations. The standard offering of hyperscalers often involves global teams and your organisation’s data potentially being processed or accessed from delivery locations anywhere in the world.

Hyperscalers’ terms of typically don’t comply with sector-specific requirements. But some of them do have specific contract addenda to incorporate sector-specific requirements (eg applicable in the financial or public sector) that they share upon request.

The EU legislator is also increasingly regulating the offering of technology (such as cloud and AI) on the EU market. That legislation (e.g. the Data Act and Digital Markets Act) is likely to affect the terms and offerings of hyperscalers.

Furthermore, we also observe an increased focus by public policy on ESG.

Pick your battles

The flexibility demonstrated by hyperscalers will be more limited compared to what you may be used to. This also implies that you should focus your efforts on the key topics that are relevant to you. We’ve selected some clauses that are often scrutinised (but this is in no way to be considered as exhaustive!):

• Suspension rights – Hyperscalers typically have broad suspension rights. If a suspension of the service delivery could have a major impact on your organisation’s operations, it’s a good idea to review the conditions for a suspension.
• Unilateral modifications – Hyperscaler contracts often foresee a broad right for the hyperscaler to unilaterally change both the modalities of the service delivery and the contract terms. Verify whether these rights are accompanied with the necessary safeguards; for example, in terms of the type of modifications that are (not) allowed and the notification terms that are to be respected.
• Data protection – Protection of personal and non-personal data is becoming more and more important. Always thoroughly scrutinise the commitments proposed by the hyperscaler before migrating vast amounts of data to the public cloud.
• Warranties and liability – Warranties offered by hyperscaler are typically limited and often accompanied with remedies that are qualified as a customer’s sole and exclusive remedy. Liability provisions are also often rather beneficial to the hyperscaler. Always map your risks in case of a hyperscaler failure and analyse whether the risks are appropriately covered or whether the risks are acceptable and can be mitigated internally.
• Governing law – Check the governing law and the competent courts.

Although certain negotiation points that are typically addressed may not be open for discussion with hyperscalers, many clients choose to create an audit trail. This practice enables senior management to make informed, risk-based decisions when signing hyperscaler agreements, even considering the associated exposure. As a legal counsel, the last thing you would want is senior management in the framework of an incident challenging a provision that was accepted during negotiations due to inflexibility from the cloud supplier.

 

Conclusion

Contract discussions with cloud hyperscalers are simply set different than most other contract discussions you’re used to. Considering how hyperscalers work, it’s of the utmost importance to simultaneously leverage all commercial, technical, and legal resources to be able to secure a good outcome for your organisation. You shouldn’t merely focus on the key legal requirements, but also properly understand and cover the key commercial and operational aspects and ensure all stakeholders are aligned at all times.

Over the coming weeks, we will therefore publish a series of more in-depth blog post focusing on key topics that you need to understand in order to fully master digital transformation contract discussions with cloud hyperscalers.