The easiest way out of an unprofitable and expensive business relationship is to terminate it. But what happens if the termination of a contract is not easily possible? Or it may cause greater economic damage than a continuation of the cooperation?
This is precisely the problem facing companies that have adapted their IT infrastructure too closely to the specifications of their hosting provider or IT service provider. They are in a vendor lock-in. What are the ways out of such a lock-in and how can a company avoid this situation right from the start and still use a modern cloud solution?
What exactly is Vendor Lock-In?
First of all: a vendor lock-in is not an exclusive phenomenon of the cloud. Even with on-premises solutions in-house, companies can be bound to a supplier or manufacturer by hardware specifications.
In general, the definition is as follows: With a Proprietary Lock-In or Customer Lock-In, a customer is dependent on one supplier for products and services and cannot use any other supplier without significant conversion costs.
Vendor Lock-In: Risk Factors
In order to understand how to avoid a vendor lock-in, it is helpful to be aware of the individual factors that lead to costs: change of providers, contract terms, (IT) skills or specific technological requirements. Fortunately, all factors rarely apply, but one or two are often enough to create a vendor lock-in.
The most obvious reason is the potentially high cost of changing providers. Even if the costs seem bearable at first, the total sum can add up quickly, as a large number of areas can be affected: System migration, training, consultants, legal review and/or temporary loss of productivity.
Even if these costs are amortized over time through a lower final price from the alternative provider, high initial investment costs are a deterrent for many companies, especially in times of crisis..
A good example is switching from a server provider to a cloud hosting provider. Switching from an on-premises server system to an externally managed cloud hosting solution may save a lot of money in the long term during ongoing operations, but it initially causes additional time and costs: employees have to be trained, the system has to be moved and possibly contracts regarding data storage in third countries have to be adjusted. Depending on the volume, these investments can cause a vendor lock-in for cost reasons alone.
Certain contract constellations or conditions can also lead to a vendor lock-in. One example is long contract terms, which are particularly common in the “old” hosting world, as well as in classic IT outsourcing. Customers are sometimes bound to the provider for a long time – in the case of IT outsourcing often at least three to five years. In addition, individual contract components and outsourcing services often have different contract terms, which must be harmonized accordingly when changing providers. This is usually a very extensive and complicated undertaking.
Another case is related to the price models of the providers, where the difference between modern cloud hosting and “old” on-premises data centers is particularly clear. In contrast to many cloud hosting providers, who offer a flexible consumption-based pricing model without basic costs, there are other examples that create a certain degree of utilization and an associated fixed price. If a company falls below this level of utilization, it may still pay the fixed price. The only option here is often to terminate the entire contract, which is not always easy due to the contract terms
Various providers rely on technologies and solutions developed in-house. Logically! However, special knowledge is necessary for the management of the systems, even if a completely managed solution is used. At least one employee in the own company must be familiar with the technology as the contact person of the provider.
This situation leads to a vendor lock-in if it is not possible to recruit a technically competent employee for this task when changing providers. Especially for systems in the high-tech and innovation sector, skilled employees are often scarce. The company willing to change simply lacks personnel.
Here is another example: large international hyper scalers often make several dozen changes to their systems, technologies and applications per week. Only those who stay up to date have a chance to achieve a high degree of efficiency. At the same time, enormous opportunity costs are incurred for adjustments.
One of the key reasons for a vendor lock-in in the cloud and hosting industry is of course the technology itself. Proprietary technologies are not bad per se, as they often represent the core product and the real USP of a company. If all providers offered the same product, there would be no market, no further development, and of course no vendor lock-in.
There are two prerequisites that should be considered if a vendor lock-in is to be avoided. Interestingly enough, there is one for the customer and one for the vendor.
- The customers have to design their processes to be agile and flexible. As soon as the company’s IT or applications only run on a specific system, the company has a big problem. It has gotten itself into a vendor lock-in through its own fault. In the past, this has been particularly noticeable in long-term and very close partnerships. There is also the problem that agile and constantly evolving systems require a high degree of energy, creativity and also investment. At first glance, a proprietary solution may seem less expensive, but only as long as one does not want to change the provider.
- Suppliers can also design their product in such a way that they force a vendor lock-in. For example, by not using open source technology and by setting specific requirements for their product. The provider then knows that its customer cannot migrate and thus continuously increases its maintenance and renewal costs. Of course, this is not particularly customer-friendly. But there are now enough examples of open systems that make a changeover possible without any problems. A product rarely has to be exclusive.
How can a vendor lock-in be avoided?
Now that you know what the causes of a vendor lock-in in the cloud or hosting can be, we would like to give you further concrete support and tips on how to avoid such situations. We don’t think Vendor Lock-In is cool either!
Technological agility and openness
On a technological basis, you can ensure that you do not become too dependent on the technology of the provider. Often there is an OpenSource alternative for many applications. In the case of your own IT product, such as a SaaS application, you should ensure a flexible open source approach from the outset.
Get out of the subscription trap
As in all other areas, the same applies to the hosting industry: Keep an eye on the contract and pricing! In the fast-moving (cloud) hosting industry, companies should take care not to rely on long-term contractual commitments. Nor should one fall for an automatic extension of the contract term. Even if the running costs seem to increase and you subjectively make the “worse” deal, you retain your flexibility and avoid a contractual vendor lock-in.
Ideally, the vendor should provide support for a possible migration and define exit clauses and responsibilities in the SLAs. Too often, contract partners react extremely passively to an impending change, leaving the company out in the cold.
The regular look beyond the end of the nose
Found the right partner? Perfectly! Then you can check off the topic and forget it. This attitude is the best way into a Vendor Lock-In. If you don’t keep an eye on market developments, you run the risk of missing a better solution or even missing the connection altogether. Of course, this does not mean that you should jump from one partner to another when things are not going well. But it never hurts to stay informed and keep your eyes open. Ideally, you already have a backup partner up your sleeve.
The exit strategy in the drawer
Which brings us to the last important aspect: the exit strategy. Many companies react with uncertainty when a change of provider is imminent and are not aware of processes, schedules or budgets. This is where a sophisticated exit strategy for individual components or the entire system helps. This prevents uncertainties and unpleasant surprises and ensures a smoother change of provider.