Managing shadow spend in cloud services

In an effort to tackle the pervasive issue of shadow spend in cloud procurement, Vendr and Art of Procurement joined forces to present a compelling webinar titled "Stop Shadow Spend in Its Tracks With Improved Data Visibility."

Emily Campbell, Vendr's Director of Product Design & Research, and Nick Pinkman, Sr. Cloud Manager, shared their expertise and insights on the topic, while Philip Ideson and Kelly Barner moderated the conversation.

This thought-provoking session explored practical strategies to overcome the challenges of shadow spending in cloud procurement and provided valuable insights for procurement professionals seeking to optimize their procurement processes.

When it comes to cloud procurement services, shadow spend can be especially problematic. This term refers to purchases made without proper tracking or approval, and can lead to significant financial losses and compliance issues. In fact, unauthorized cloud purchases can have severe consequences, including security breaches and regulatory violations.

The panelists discussed how shadow spend can impact the procurement of cloud services and urged companies to reconsider the potential implications on their overall spending. They also shared practical tactics for assessing and managing shadow spend, which is critical to ensure financial transparency and compliance in cloud procurement services.

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What does it mean to procure cloud services?

Cloud procurement requires negotiations with suppliers like Amazon Web Services, Microsoft Azure, Google Cloud Platform, Oracle, and IBM. The services offered include virtual servers, data storage, application hosting, email services, and productivity tools.

Negotiating cloud software contracts requires careful consideration of pricing, service level agreements (SLAs), data security, and compliance. Having a dedicated procurement representative with category expertise during negotiations is vital to ensure that the agreement is structured to benefit both parties. By building partnerships and fostering long-term relationships with cloud service providers, companies can achieve their procurement goals while creating value.

It is essential to approach negotiations in cloud procurement with a deep understanding of the services being procured and their impact on the business. By considering factors such as pricing, SLAs, data security, and compliance, procurement professionals can ensure that their company's needs are met while establishing a strong working relationship with their cloud service provider. Successful cloud procurement negotiations can result in long-term value for all parties involved.

Managing shadow spend in your cloud service procurement

Overcoming procurement challenges in the rapidly evolving cloud IaaS landscape

The Art of Procurement community conducted a poll on the primary challenges procurement faces when attempting to deliver savings on cloud software purchases. The responses varied, from poor negotiating leverage to users signing up independently.

Emily and Nick both emphasize the need for organizations to adapt quickly to changes in the software landscape.

“I think what [the poll results] show is how hard it is to react to rapid change,” says Emily.

"We've experienced rapid changes in software expansion, including how it's sold and delivered. Organizations are now bombarded with software options. It's crucial to adapt quickly to ensure our company gets the best deal to meet our business needs."

Nick stresses the importance of understanding your company's leverage when it comes to purchasing cloud solutions.

As Nick puts it, "these are some of the biggest companies in the world and cloud infrastructure spend is typically the largest cost center for most companies."

This realization can be daunting, especially for those who may feel they lack the necessary leverage to negotiate effectively. However, Nick is quick to emphasize that it is possible to overcome these challenges. By staying up-to-date with changes in the software landscape and identifying where the leverage lies, companies can implement effective purchasing strategies that enable them to make informed decisions and avoid the pitfalls of shadow spend in cloud procurement.

As Nick concludes, "It’s quite an intimidating thing, but there’s a lot that you can do to overcome it."

Managing shadow spend with cloud governance

Could-based SaaS and cloud provider marketplaces have made it even easier for end-users to make purchases without procurement's knowledge, causing this issue to be prevalent in the SaaS and cloud environment.

According to Emily, shadow spending goes beyond just spending and cost but also affects data storage, access, and tools.

“Of course, it doesn’t just affect expenditure,” Emily explains.

“Shadow spending affects where data is stored and who has access to it. You have conflicting tools that could do the same thing. Tools can store information in multiple places. Cost is a part of it, but this issue with shadow IT and shadow spend also manifests in other ways.”

Nick added that creating a cloud center of excellence with stakeholders such as procurement, finance, product teams, engineering, and C-level executives can help bring together different groups and create a governance model for cloud spending.

“The best way to do it is to try and leverage as many stakeholder conversations as possible,” explains Nick.

"Many large enterprises create a 'cloud center of excellence,' which acts as a steering committee for their cloud business, ensuring that everyone is aligned and moving in the right direction."

However, such governance structures vary based on the organization's level of maturity in cloud technology. If such governance is not in place, it presents an opportunity for procurement to lead the charge in gathering stakeholders together.

As Nick stated, leveraging stakeholder conversations can help organizations move in the right direction and ensure everyone is on the same page, working towards the same goals.

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How procurement teams are involved in cloud purchases

Nick highlights the two types of customers when deploying infrastructure in the cloud: those who give their developers autonomy to deploy quickly and those with governance policies to ensure cost-consciousness.

He also mentions that procurement becomes heavily involved in anything that touches the actual AWS or Google Cloud spend and for solutions that customers need.

These contracts are treated as separate and difficult to deploy, leading to more procurement involvement. The conversation also touches on shadow spend and how organizations can balance allowing independence and bringing in governance processes.

Understanding cloud service providers and negotiating their contracts

Philip asks Nick and Emily for tips and advice on preparing for cloud software negotiations.

Nick stresses the value of preparation, saying that at least 70 percent of the effort in these negotiations stem from preparation alone. He suggests leveraging technical teams to gain access to billing consoles and tools for better visibility.

According to Nick, there are many sources of truth, and deciphering AWS invoices can be challenging due to their extreme detail, which can be over 50 pages long. He highlights the importance of having the right tools to understand costs, stating, "A lot of people find that valuable, but – to folks like myself – it can get pretty hard to decipher and figure out where all the costs are going."

A clear understanding of cloud service providers' invoices is crucial to reducing cost and ensuring that procurement teams spend on necessary resources effectively. In addition, by leveraging technical teams and utilizing the right tools, companies can gain better visibility into their cloud spending and make informed decisions during negotiations.

They also discuss the challenge of managing costs in this space, which often competes with demand management and internal priorities, and the need to make it a priority for the organization before negotiating with cloud providers. Finally, they touch on the fear of poking the bear with large cloud providers and the importance of practical types of procurement strategies and best practices for successful negotiations.

Common misconceptions in cloud provider negotiations

According to Nick, one of the main misconceptions in cloud provider negotiations is that companies will receive the same level of SaaS discounts as they do on their cloud bill. Unfortunately, this is not the case, and Nick advises against going into negotiations expecting the same level of discounts that you are used to achieving on other SaaS tools.

He further highlights the misconception that spending millions allows companies to leverage negotiations when many cloud providers have numerous million-dollar customers.

To combat these misconceptions, Nick suggests that companies engage stakeholders across the organization, have buy-in from finance and technical teams, and be data-oriented in conversations.

Nick emphasizes the importance of coming to negotiations with data projections and a straightforward story of where the spending will end up.

By being data-oriented during negotiations, companies can ensure a successful outcome without disclosing their tactical plans or where to take their organization’s relationship with the provider. While cloud providers may have access to some information, companies can maintain their privacy by focusing on the data they have at hand. Especially when partnering with a cloud resource, this approach allows for an informed negotiation that benefits both parties.

"I would say coming with your own data and using the data to tell the story of where your spend will end up in an ideal world is the best way to do it," says Nick.

Negotiating cloud contracts: critical differences between SaaS and non-SaaS platforms

Regarding cloud services, Is negotiating for a SaaS usage license different from negotiating for a non-SaaS platform?

Nick responds with valuable insight, pointing out that cloud contracts have two main aspects: annual spending commitment and term length. However, he emphasizes that cloud contracts' most crucial and time-consuming part is nailing down annual commitments and accurately forecasting.

"That's usually the most time-consuming part, but it's the most important," he says.

Key takeaways for effective cloud procurement

To succeed in cloud procurement, prioritize:

• Understanding the risks of your company’s shadow spend on expenditure, security and compliance
• Building strong relationships with cloud providers in order to build leverage for purchasing
• Prioritizing preparation and data-oriented conversations in negotiations
• Establishing governance structures for cloud spending

By following these key takeaways, companies can effectively procure cloud services while avoiding financial losses and compliance issues.

This, combined with creating governance structures, such as a cloud center of excellence with stakeholders, can align everyone and create a governance model for cloud spending. If such structures aren't in place, procurement can lead the charge in gathering stakeholders together.

How Vendr can help expose and mitigate your shadow spend

If you're looking for a partner to help mitigate cloud shadow spend and optimize your cloud procurement processes, Vendr can help. Vendr is a leading provider of cloud procurement services, with deep expertise in identifying and managing shadow spend. Vendr can help you build strong relationships with cloud providers, prepare for negotiations, and establish governance structures for effective cloud spending. Contact Vendr today to learn how they can help you optimize your cloud procurement strategy and achieve your procurement goals.

Note: Some quotes have been edited for clarity.

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