Are multiyear cloud agreements a good idea?

Discounts or better service may come with big strings attached. Losing the ability to chase innovations or adjust to market changes may not be worth it.

According to the surveys of enterprise cloud spending trends, 2022 was the year of shockingly high cloud bills. As a result, enterprises are implementing finops programs to control and manage cloud spending. They are also turning to the cloud providers and asking for discounts.

Providers are happy to offer discounts, but they want something in return—namely, a multiyear commitment that looks like a cell phone contract. Do these longer-term cloud commitments make sense for enterprises looking for cheaper cloud services? Or will they play out like many of our cell phone contracts that left us with an out-of-date phone and service that didn’t meet expectations?

Let’s look at the pros and cons of these contracts.

The pros of multiyear agreements

Cost savings and predictability. These are the major advantages. Multiyear agreements often come with significant cost savings and discounts compared to pay-as-you-go pricing models. This allows for better budgeting and financial planning, especially for businesses with stable workloads and long-term cloud usage requirements.

Better service-level agreements (SLAs). Organizations can negotiate higher service levels with a longer-term contract, ensuring consistent performance and responsiveness. Multiyear agreements typically offer enhanced SLAs that include more substantial uptime, availability, and support. This means more value for mission-critical applications and workloads that demand stringent SLA requirements. At least, that’s what is promised.

The cons of multiyear agreements

More vendor lock-in. This limits an organization’s ability to switch providers or adapt to changing business needs. Technological advancements, evolving market dynamics, or shifts in business strategies may render the chosen cloud provider less suitable over time. Lock-in and loss of flexibility become the worst effects of these types of agreements. Organizations must carefully assess their long-term requirements and evaluate the trade-offs before committing to a multiyear agreement. In other words, you’ll be stuck, but at least your cloud bill will be cheaper.

Market volatility and innovation. The cloud market is highly dynamic, with new technologies and services continually emerging. Multiyear agreements may restrict an organization’s ability to capitalize on these innovations or switch to more cutting-edge solutions. Committing to a long-term contract may impede the adoption of newer and potentially more promising technologies.

What to do?

Unfortunately, there’s a reason most consultants say, “It depends.” In this case, it mostly depends on the industry you’re in. The faster change and innovation occur in your industry, the more likely multiyear agreements will hurt you at some point. On the other hand, they will be a relatively safe bet if you’re in an industry or a business that does not change much over time.

However, both types of businesses may find that a technology comes along that they need to leverage, and it’s not provided by the cloud with the multiyear agreement. They may end up spending more money to get out of their agreements or just suffer with technology they no longer need but still must pay for. If you’ve ever read these agreements, they are of course written in favor of the cloud provider and not the enterprise.

My default is not to use these types of agreements but to understand that in some cases there are reasons to do so. I would think long and hard about committing to any technology provider, even cloud providers. I’ve heard too many stories where long-term contracts didn’t end well for the enterprise, especially if they made the decision based solely on short-term cost savings.

Ultimately, the suitability of multiyear agreements will vary based on individual organizational needs and circumstances. Before you sign on the dotted line, work closely with cloud providers, seek legal counsel, and evaluate potential exit strategies. By carefully weighing the pros and cons, organizations can make informed decisions that more closely align with their cloud strategies, business objectives, and risk profiles. However, there are no guarantees that today’s great contract will fit the same in two or three years. In other words, be careful.