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A Guide for Smarter SaaS Procurement

For Software as a Service (SaaS) offerings, companies will spend an estimated $273.5 billion in 2023 and over $900 billion by 2030. Unfortunately, most will overpay at a staggering rate. Within large enterprises, 30% or more of total SaaS spending goes to unused licenses and features. Even when customers buy only what they need, they’re often paying prices that are above best-in-class rates.

There is a critical need to improve enterprise SaaS procurement. This includes proper governance, consistent application of best practices, and access to current pricing and licensing intel. Without these things, SaaS procurement will continue to be a hotspot for cost and contractual risk. On the flipside, those enterprises that embrace a strategic approach to SaaS procurement and governance will be able to materially reduce costs while accelerating key business objectives.

What is SaaS Procurement?

SaaS procurement is the process of choosing the right SaaS vendors, solutions, and SKUs to meet current- and future-state business and technical requirements. The goal is to pay only for what you need without overspending with optimized contractual business terms.

It sounds simple enough, but it’s challenging in practice. We share more later in this post on common SaaS procurement challenges.

The Need for SaaS Procurement

 It is crucial for enterprises to have effective SaaS procurement best practices and processes in place. These processes must be efficient and optimized for best-in-class vendor negotiation outcomes. The technology-driven market demands that every team utilize software to achieve effective results.

Before Software as a Service (SaaS) became prevalent, procurement teams were the primary authorities on evaluating purchasing processes and reporting findings to internal stakeholders. However, the process to get there was typically long. Today’s business landscape requires more agile purchasing processes – particularly around SaaS, which has become the de facto software delivery model and one that is easily accessible to more departments, users, and stakeholders. The decentralization of IT spending (e.g. shadow IT spend) can be directly attributed to SaaS purchasers bypassing traditional IT procurement channels in the name of efficiency. 

Now, with an abundance of tools, subscriptions, and suppliers, buyers must be focused on procuring SaaS in a way that eliminates cost and supplier risk while also being efficient enough to move at the speed of business, market, and technology evolution. 

The SaaS Procurement Process

The SaaS procurement process requires a step-by-step framework and a coordinated effort across an organization. With governance policies in place, the SaaS procurement process typically follows these seven steps:

1. Identify Business Requirements: Document the specific business needs the SaaS application should address.
2. Research Options: Research the vendor landscape and collect demos and quotes for solutions that may meet the requirements.
3. Choose a Vendor: Select the vendor that best fits the defined business, functional, and budgetary needs.
4. Negotiate the Agreement: Negotiate favorable contractual terms, pricing, and service levels by leveraging benchmarks and market data.
5. Finalize the Contract: Finalize the agreement by codifying all technical, functional, and commercial details into the appropriate contract vehicle.
6. Implement the Software: Onboard the SaaS solution through activating services, migrating data, and rolling out to end users alongside training.
7. Monitor Usage: Continuously monitor usage, spending, and performance to optimize value delivery over time.

Benefits of SaaS Procurement

Effective SaaS procurement has many benefits that have immediate and long-term impacts on IT readiness and SaaS costs. They include:

• Ensure the business is buying the right SaaS solutions to meet predefined business requirements. Additionally, it supports the organization’s need to stay competitive, agile, and innovative as the business environment and market landscape evolve.
• Choose vendors that are financially sound and meet the buyer’s technical, security, and budget requirements. 
• Leverage pre-existing vendor relationships that could lead to better SaaS procurement negotiation outcomes.
• Eliminate the risk of overbuying by purchasing best-fit licensing and subscription types in the right quantities. 
• Negotiate prices and contractual business terms that are best in class. This means paying a price that is at or below fair market value and negotiating contractual business terms that are flexible enough to support current and future state needs.
• Make sure all renewals are based upon baseline requirements that are current and accurately defined.

Best Practices for Smarter SaaS Procurement

Applying these best practices can result in smarter SaaS procurement:

Look Forward

Smarter SaaS procurement requires a thorough understanding of how the solution will fit into your current tech stack, and how it will be rolled out and utilized over time.. A comprehensive IT roadmap for scaling is crucial to optimizing licensing, pricing, and contractual business terms from the onset of the SaaS customer agreement, including fee structures that match your roll-out plans.

Avoid Overbuying

Your SaaS provider will likely promote the most powerful and comprehensive license types.. But not every user needs the most expensive, full-featured options. Categorizing users based on actual usage requirements can yield significant savings.

Leverage Existing Relationships

When evaluating new solutions, explore your options with your current IT vendors to see if they offer similar or overlapping products. You may be able to leverage existing relationships to get better pricing, discounts, or incentives.

Understand Vendor Motivations

SaaS sales teams are often incentivized to sell certain products. When you understand your vendor’s motivations, you will be positioned to negotiate better deals that create a win-win for all parties at the deal table.

Perform IT Price Benchmarking

In most SaaS procurement negotiations, there’s a significant imbalance when it comes to information. Your vendor’s sales rep has been formally trained not only on the solutions but also on selling skills – across all spend categories, the IT marketplace has one of the most well-trained sales armies. Your rep has probably had hundreds of “at bats” at the negotiation table. They have complex pricing schemas at their disposal that ensure enterprise customers pay as much as possible. There is no pricing transparency, and discounting is wildly inconsistent across similar purchases. On the other hand, SaaS procurement teams may have purchased from this particular vendor once or twice, or maybe never before. So, how do you know if you’re paying a best-in-class price?

IT price benchmarking helps eliminate toxic spend by helping companies determine if they’re paying a fair price – and, if not, provides data-defined pricing targets that are either at or better than fair market value. In 2022, 89% of the IT purchases NPI analyzed were priced above fair market value and this number is holding steady in 2023. Vendors are trying to maximize revenue as they navigate economic volatility, so SaaS buyers must be armed with market data that defines best-in-class pricing and allows them to negotiate a world-class deal outcome.

Reconsider Renewals

Auto-renewals may be easier, but they prevent the opportunity to renegotiate. A lot can change within your organization and industry between renewal periods. Your needs may evolve and competitors may offer better solutions. By approaching each renewal cycle with a fresh set of eyes, you can often uncover material savings and an opportunity to lower your SaaS IT spend.

There are also other levers in software renewals besides cost. You will want to examine contractual business terms more carefully to determine whether there are other ways to build flexibility to meet evolving business requirements.

Note: IT vendors will push for auto-renewals. Push back!

Choose Right-Sized Support

Depending on the vendor and your business needs, SLAs may also require some negotiation. Negotiate service commitments, credits, and termination rights while avoiding overspending on unneeded premium support.

Optimize Licenses

Usage levels and needs change over time. It’s important to perform ongoing SaaS license optimization assessments of your estate. Look for unused licenses you can reclaim and reassign and areas where lower-price licensing tiers can be substituted.

Common SaaS Procurement Challenges

In order to optimize SaaS negotiation outcomes, there are several SaaS procurement challenges that must be addressed:

• Shorter purchasing cycles: IT procurement is under pressure to purchase SaaS solutions more quickly to support a more agile business environment. Procurement resources often don’t have the time to fully optimize SaaS purchases.
• Decentralized IT spending: Shadow IT spend is still a major problem within large enterprises as SaaS procurement often happens at the departmental level without any centralized procurement oversight. As much as 30% to 40% of total IT spending in enterprise companies falls in this category. This leads to missed leverage and negotiation opportunities that can cost companies millions over time.
• Rampant pricing disparity: What one SaaS vendor charges one enterprise may be materially more or less than what they charge another customer with similar requirements. IT procurement teams typically lack deep internal pricing intelligence required to identify what constitutes best-in-class pricing.
• Increasingly complex licensing/subscription models: Strong SaaS procurement requires a deep and up-to-the-minute understanding of vendors’ changing licensing/subscription programs. IT procurement teams often lack an understanding of the different options available to them leading them to purchase overpowered SKUs or bundles that offer more functionality than required.

8 Common SaaS Procurement Mistakes

Companies often make several mistakes when purchasing and renewing SaaS solutions. These lead to overspending, elevated supplier risk, and erosion of vendor negotiation leverage. Here are the top offenders:

1. Taking a one-size-fits-all approach to licensing. Companies often purchase overpowered license types for their entire organization instead of defining and purchasing according to specific usage profiles.
2. Renewing on autopilot. Approaching SaaS renewals on autopilot forces buyers to inherit pricing, discounts, contractual business terms, and licensing quantities that may be suboptimal.
3. Failing to run purchases and renewals through IT procurement. Decentralized IT purchasing only benefits the vendor. Centralized IT procurement ensures the buyer is following best practices that lead to world-class deal outcomes.
4. Paying prices that are above fair market value. Without IT price benchmark analysis, companies overpay for 89% of IT purchases and renewals. This is a byproduct of poor vendor pricing transparency. 
5. Not knowing what motivates the vendor. Vendor motivations change frequently depending on incentives, quotas, market pressures, and competitive landscape. Knowing what motivates your vendor is the first step in establishing negotiation leverage.
6. Failure to align stakeholders. Loose lips sink ships, and that certainly applies to IT buying teams. These teams are typically comprised of multiple business and IT stakeholders, and vendors are adept at extracting information from each of them that will increase their leverage at the negotiation table. Vendor communication should be limited, organized, and monitored.
7. Assuming certain contractual business terms are non-negotiable. Price isn’t the only thing up for negotiation during the SaaS procurement process. Contractual business terms should be negotiated for flexibility and incentives that provide soft-dollar savings.
8. Making purchases without visibility into future-state usage requirements. Understanding your future-state requirements will allow you to negotiate a world-class deal outcome that maximizes savings in future renewal events.

Why You Should Bring in Outside SaaS Procurement Expertise

To avoid overspending, IT procurement teams need to have deep vendor-specific internal expertise in SaaS licensing, pricing and negotiation. Since it’s impossible to be an expert in every vendor, most enterprises relay on external subject matter experts. Without access to this expertise, it’s challenging to negotiate a world-class deal or even know if you are overpaying (if you don’t know, you probably are!).

NPI’s IT procurement analysts analyze thousands of SaaS purchases and renewals each year. This experience gives us a deep understanding of up-to-the-minute SaaS pricing and licensing for thousands of SaaS vendors. This allows our clients to accelerate purchasing cycles, eliminate overspending risk, and make SaaS procurement decisions with confidence. 119 of the Fortune 500 use NPI’s services – and for good reason. Of the $25 billion in IT spending NPI assessed in 2022, more than 89% of vendor quotes were above fair market value.

By understanding market dynamics, negotiation levers, and negotiation tactics, NPI’s SaaS procurement experts can help you drive significant savings while ensuring you get the SaaS products you need to run your business productively and competitively You get the independent guidance you need with an intense focus on negotiation strategies and outcomes.

Transaction-specific pricing analysis and negotiation intelligence can help you make best-in-class SaaS purchases. Contact NPI today to learn more.

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