Negotiating SaaS Contracts? Here Are Some Key Tips

By NPI
December 12, 2022
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IT

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One of the pitfalls of SaaS purchasing is that enterprise customers don’t always invest the time and effort they should into preparation and strategy for negotiating SaaS contracts. That’s not a dig at IT procurement. It’s an acknowledgement of how unwieldy SaaS management has become amid a growing list of priorities and responsibilities handled by the IT sourcing function.

Making the job infinitely more difficult is shadow IT spend. You can’t improve SaaS contract negotiation outcomes if you don’t know when and where all spend is happening across the organization. Gartner estimates shadow IT spending accounts for 30 to 40% of total IT spend in large enterprises. At the departmental level, unsanctioned SaaS spend is rampant, which it makes it tough (if not impossible) to manage licenses and spend. The responsibility is often distributed across multiple departments/business units and admins, and license management standards and best practices are not always applied consistently. There is also a common assumption that SaaS contracts aren’t all that negotiable to begin with – an assumption which couldn’t be further from the truth.

To keep SaaS spend in check, enterprises must first have processes and protocols in place that ensure SaaS purchases and renewals go through IT procurement. This centralization will likely reveal low-hanging fruit for savings (e.g. consolidating multiple agreements with the same vendor, etc.). But what steps can companies take during the actual SaaS contract negotiation process to improve negotiation outcomes? Here are some suggestions:

Negotiating SaaS Contracts: Know Your Leverage

There are several levers enterprises can use to improve the outcome of SaaS contract negotiations. The trick is understanding which ones will deliver the biggest impact to spend. Here are three to consider:

Pricing – Am I Paying a Fair Price?

While vendors have attempted to harden pricing as their SaaS offerings have evolved, the reality is most pricing is negotiable. The key is market data and being able to validate if the vendor is charging pricing that’s within fair market value range. At NPI, we review thousands of SaaS purchases and renewals annually. Through IT price benchmark analysis, our clients can determine if they’re paying a best-in-class price for their purchase compared to peer purchases. If they’re not, we arm them with pricing targets and negotiation guidance. Note: Across $17 billion in spend analyzed last year by NPI for our clients, over 85% of vendor quotes were above fair market value!

Renewals – Automatic or Not?

Another SaaS spend management offender is autopilot renewals. “Set it and forget it” bypasses any real SaaS contract negotiations. It’s a straight path to paying more than you should for a number of reasons (e.g. unjustified annual cost increases, changes to online product terms or usage rights that have serious cost implications, paying for unused/underused licenses, etc.). SaaS vendors will push hard for automatic renewals but consider pushing back. Approaching each renewal with a fresh eye will likely reveal material savings and license optimization opportunities.

Support & SLAs – Is Your Vendor Meeting Your Requirements?

Depending on the vendor, your service level and support agreement may require additional negotiation.  This includes negotiated commitments for service availability, system response times and helpdesk response times. Service credits – as well as the option to terminate/pursue recourse for serious service failures – should also be negotiated in SaaS contracts. Customers should also right-size support options based on their unique requirements. In some cases, a customer may need dedicated support staff. On the flipside, not every SaaS application requires a top-tier level of support. Removing the risk of over-buying or under-buying support translates into long-term SaaS contract savings.

Tactics for SaaS Contract Negotiations

We’ve written at length about how to save on SaaS and get more out of SaaS spend on this blog. Here are three proven tactics that will almost always lead to more favorable SaaS contract negotiation outcomes (read: savings!).

Start the Contract Conversation Early

Large SaaS purchases and renewals require a lengthy runway – at least 6 months in advance for some vendors, and 9+ months for others (Microsoft). Many factors should be analyzed as part of the pre-negotiation process. These include:

  • Size and scope of purchase
  • Your IT roadmap and short-term and long-term usage requirements
  • Current spend with vendor
  • Vendor’s footprint within your organization
  • Current vendor sales focus – which SKUs are they highly motivated to sell? How does this align with your IT roadmap?
  • Competitive landscape
  • Purchase timing and commitment duration

Before renewal negotiations, perform a license optimization assessment on large SaaS estates.

For many companies, the norm is to renew what they’ve already bought without validating if/how licenses are being used. This is a costly misstep. Establishing a fact-based demand baseline is a best practice that measurably cuts SaaS renewal costs. A license optimization assessment helps you uncover opportunities to reclaim, reduce and realign licenses. Assessments typically reveal savings opportunities of 10 to 30%. Common savings scenarios include:

  • Customers discover they’re purchasing overpowered licenses for too many users when only a subset of users need the most robust license option
  • The customer is licensing inactive users – ex-employees, contractors, users who do not use the application
  • No-pulse users (e.g. printers, conference rooms, etc.) are consuming licenses that could otherwise be reallocated

NPI recommends that SaaS license optimization assessments be performed six months prior to the renewal date to give you plenty of runway to remediate toxic spend and define the cost-optimized licensing strategy for the renewal.

Know What Your Peers are Paying for Similarly Scoped Purchases and Renewals

Fact: Companies overpay for more than 85% of their IT purchases, including SaaS. Why? SaaS pricing isn’t as transparent as some vendors would have us believe. Companies need to perform IT price benchmark analysis to ensure they are receiving best-in-class pricing, discounts and business terms. NPI’s IT price benchmark analysis service analyzes vendor pricing in the context of a company’s specific purchase requirements and compares it to that of similarly scoped purchases that have received best-in-class pricing and discounts. From there, we define a recommended pricing target that companies can align the buying team and establish a negotiation strategy around.

Questions to Ask While Negotiating a SaaS Contract

When negotiating SaaS contracts, IT buyers should consider asking the following questions to ensure they get the best deal and avoid common pitfalls:

Preparation and Strategy

  • What is the total spend on SaaS across the organization?
    • Understanding the overall expenditure helps in identifying areas for cost savings and better negotiation leverage.
  • Are there any existing shadow IT expenditures?
    • Identifying unsanctioned SaaS spending can help centralize procurement and avoid redundant costs.
  • What is our current usage and license optimization status?
    • Conducting a license optimization assessment can reveal unused or underused licenses and potential savings.

Negotiation Levers

  • Am I paying a fair price?
    • Use market data to compare the vendor’s pricing with fair market value and ensure you’re getting the best rate.
  • What pricing benchmarks exist for similar purchases?
    • Knowing what your peers are paying for similar services can give you a target for negotiations.
  • Are there any volume discounts or long-term commitment discounts available?
    • Inquire about potential discounts for larger purchases or longer contract terms.

Contract Terms

  • What are the terms for renewal?
    • Avoid automatic renewals that bypass negotiation opportunities and lock in unjustified price increases.
  • Can we negotiate service level agreements (SLAs)?
    • Ensure SLAs meet your requirements for service availability, response times, and support levels, and include penalties for non-compliance.
  • What are the options for scaling up or down?
    • Ensure the contract allows for flexible scaling based on changing needs without significant penalties.

Support and Vendor Relations

  • What level of support is included?
    • Determine if the support level is appropriate for your needs and if there are options to adjust it.
  • What are the exit terms and conditions?
    • Understand the terms for terminating the contract and any associated penalties.

Usage and Optimization

  • How can we optimize our license usage?
    • Regularly assess and adjust licenses to ensure they match actual usage and avoid overpaying.
  • What is the process for reclaiming licenses from inactive users?
    • Establish procedures for reclaiming and reassigning licenses from employees who no longer use them.

Vendor-Specific Considerations

  • What is the vendor’s current sales focus?
    • Align your negotiation strategy with the vendor’s priorities, such as promoting certain SKUs.
  • How does the vendor’s product roadmap align with our IT strategy?
    • Ensure the vendor’s future developments support your long-term IT goals.

Timing and Competitive Landscape

  • When should we start the negotiation process?
    • Begin negotiations well in advance (6-9 months) of the renewal date to allow sufficient time for thorough preparation.
  • What are the competitive alternatives?
    • Evaluate other vendors and solutions to strengthen your bargaining position.

By asking these questions, IT buyers can better prepare for negotiations, avoid common pitfalls, and secure more favorable terms for their SaaS contracts.

 

If you’re looking for SaaS contract negotiation guidance, NPI can help. Contact us today.

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