Software as a Service (SaaS) has become a go-to solution for companies looking to improve their operations without the need for extensive hardware or software installations. For companies, selecting the right SaaS solution is crucial, as it directly impacts efficiency, scalability, and overall business performance. But how can you ensure you choose the right SaaS and negotiate contract terms to maximize its value? Below is a step-by-step checklist to guide you through the process of efficiently negotiating SaaS contracts.
What is SaaS and why choose it?
SaaS refers to cloud-based software services that are delivered over the internet, offering businesses a flexible, scalable, and cost-effective alternative to traditional software installations.
One of the key reasons for the rise of SaaS is the significant reduction in deployment times. Unlike traditional on-premise solutions, SaaS applications are pre-configured and ready for immediate use. Additionally, SaaS solutions provide ongoing feature updates and innovations without requiring manual intervention.
The subscription model includes updates and maintenance, which reduces the total cost of ownership (TCO) by eliminating the need for maintenance, upgrades, or hardware investments. Moreover, this model allows businesses to pay only for what they use and easily adjust their usage based on their needs.
However, choosing the right SaaS solution involves more than just understanding its benefits. It requires a strategic approach to negotiating contracts that align with the company’s specific requirements.
We’ve outlined key tips to help you secure the best SaaS contract terms for your business.
1. Precisely define internal needs
Before diving into negotiations, it's crucial to clearly define what your team needs from the software. SaaS solutions often come with a wide range of features, some of which may be bundled into different pricing packages. Therefore, it's essential to discuss with your team which features are mandatory and which are optional.
Example: If your company only operates within one country, there's no need to pay for a worldwide license, which would be significantly more expensive. Opting for a national license can help reduce costs.
2. Choose the right SaaS licensing option
Licensing models for SaaS solutions vary greatly, and selecting the right one is essential to pay the fair price and to avoid unforeseen costs. Familiarize yourself with different licensing options such as:
Named user models: This model charges a fee for each individual user who will access the software. It's a straightforward approach but can become expensive if you have many users who need access.
Pay-as-you-Use models: In this model, you only pay for the actual usage of the software. It's ideal for teams that use the software sporadically or have varying levels of usage, as it ensures you only pay for what you actually use.
Concurrent licenses: This model allows a certain number of users to access the software simultaneously. It can be cost-effective for larger teams where not all members need to use the software at the same time.
Example: If you have a small team that only uses the software intermittently, a pay-as-you-use model might be more cost-effective than a named user model, which charges per individual user. For a team that shares access, concurrent licenses might be a better option, ensuring that the software is available to those who need it without paying for each individual user.
3. Anticipate growth or decline in licenses: ramp-up and ramp-down scenarios
Anticipate changes in the number of licenses you will need throughout the contract period. If you foresee an increase in licenses, this can give you leverage during negotiations to lower the price per license. Additionally, it helps you understand the cost implications if subsidiaries also ask for a license and are added to the contract.
However, be careful not to be too optimistic on the number of licenses at the start of a contract. Don’t forget that it’s always easier to increase the number of licenses during the contract period than to reduce them. Often, reductions can only be made at specific times, such as on the contract anniversary or at the end of the contract.
4. Negotiate renewal pricing
Discuss and set renewal prices upfront, whether the contract is for one, three, or five years.
Controlling the percentage increase in renewal prices (e.g., capping it at 5%) helps manage your budget and prevents unexpected cost increases. Suppliers indeed often offer an enticing initial price to secure the contract, but once your organization becomes dependent on the tool, they may significantly increase the price during renewal.
Also be cautious with flat rate agreements, as they often result in substantial price hikes when the contract is up for renewal.
5. Negotiate customization costs
Some software solutions are standardized for all clients, while others offer the possibility of customization tailored to your company’s specific needs.
If customization is possible, negotiate the costs based on whether the development will benefit only your company or if it can be reused by the vendor for other clients.
Example: If a customization will only benefit your company, negotiate the development cost. However, if the customization can be resold to other clients, leverage this to negotiate a reduced price.
6. Negotiate Service Level Agreements (SLAs)
The service level agreement defines the minimum level of service and the vendor's responsibilities. Pay attention to the details, as vendors often try to limit their liability and therefore, potential compensations.
A common tactic is for suppliers to propose Service Level Objectives (SLOs) instead of binding SLAs. Unlike SLAs, which are enforceable commitments, SLOs are merely goals or objectives that the vendor aims to achieve but are not legally binding.
Aim for SLAs that guarantee resolution times rather than just assignment times:
- TTO (Time to Own): Only guarantees a certain timeframe for assigning the issue and opening a ticket when a problem occurs.
- TTR (Time to Resolve): Guarantees a specific timeframe for resolving the issue, ensuring that problems are not just acknowledged but also fixed within a set period.
Ensure the SLA includes penalties for non-compliance and provisions for early contract termination without penalties if the vendor fails to meet the SLAs consistently.
7. Negotiate a reversibility plan
Plan for the end of the contract by negotiating an exit strategy that ensures a smooth transition to another vendor.
This includes the time required and associated costs, as well as the process and cost for transferring your data. Clarify the terms for data transfer, ensuring you know how and at what cost you can retrieve your data from the vendor at the end of the contract.
By following this checklist, you can ensure that you are well-prepared for negotiating your SaaS purchases, aligning the software's features and costs with your company's actual needs, and securing favorable terms for both the contract duration and beyond.
If you need help to determine your needs, draft an RFP or select the right partner, or negotiate a contract, our procurement consultants will be happy to support you!
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