According to Gartner, the global SaaS market is expected to reach nearly $482 BN USD in 2022 and shows no signs of slowing down. In fact, with the recent lockdowns and rotation to remote and hybrid workforces, the need for SaaS-based software is even greater. With the proliferation of SaaS-based software comes the challenge for procurement professionals to negotiate SaaS contracts that help reduce risk to the enterprise. Below are some considerations and recommendations when negotiating SaaS agreements.
1. Create a Subscription Order For
A software subscription order form should be created for each subscription with the supplier, particularly if you plan on subscribing to multiple licenses from a single source. Individual order forms will help track license entitlements, subscription expiration dates and other information pertinent to that subscription. We recommend getting detailed descriptions of exactly which licenses are being purchased. Be cautious of bundles or groups of software that may change when the subscription renews.
2. License at Metric Level
By licensing at the metric level (i.e., using structures such as user, each, document throughput, processor, etc.), procurement and business stakeholders can accurately predict what costs will be in a volume-based subscription or if additional licenses will be needed during the term of the subscription. Be sure to document what future pricing will be available if volumes increase.
3. Annual vs. Multi Year Subscriptions
Subscriptions terms are typically agreed as annual or multi-year. While annual subscriptions are renewed yearly, multi-year subscriptions are typically renewed after 3-5 years. The term of the subscription is negotiated in tandem with the price adjustment mechanism. Consider the following:
Utilize a multi-year subscription term when you are confident that the application will be critical to your business and that you will see long-term benefit from said application.
Utilize an annual term approach for software subscriptions where confidence is not as high or in instances where the software can be easily substituted with a similar software from another supplier.
If multi-year, 3-year terms are most common and recommended as the going-in position
Multi-year subscriptions will yield more aggressive pricing than annual terms
4. Specify What Is (And Is Not) Included in the Subscription
The following should be included as part of the subscription payment and not in addition to it:
Non-production software environments such as QA, Pre-Production, training and/or Sandbox/Development environments
Environment setup costs
A customer success manager or other dedicated account resource who will be your primary point of contact at the software provider
Service levels including uptime and incident management
End user training, including training the trainer
All one-time charges (actions or items that will not be of a recurring nature) should be detailed in the order form.
5. Identify Overages and True-Up Process
For volume-based software subscriptions, clearly spell out what constitutes the true-up process (e.g., how will the true-up process work? When will the true-up process occur? How will license or volume data be shared during the term?).
Negotiate a monthly average with a buffer of +20% to allow for spikes or upward fluctuations. So long as the volumes remain below the 20% upper limit during any subsequent true-up, you will incur no additional subscription fees or costs.
6. Establish Price Adjustment Mechanisms
We recommend the following measures to mitigate large price increases:
7. Security and Data Privacy
Suppliers can provide solutions to customers in a private tenant or multi-tenant scenario. Depending on the type of data contained, customers should understand how their data will be stored with the SaaS provider. Some questions to ask the supplier:
Where will the data be stored? In the U.S. or outside the U.S.? Where are backups stored?
What Security policies are in place with the supplier to protect your data?
If there is a data breach, how and when will the customer be notified?
8. Early Termination Provisions & Exit clauses
Early termination provisions may be used in multi-year subscriptions. Admittedly, these are uncommon. However, to take advantage of better pricing yet have the flexibility to exit the subscription for convenience, negotiate an early termination provision. We recommend the following:
Negotiate a termination after one year but in return pay a lump-sum amount equal to the discount provided on the subscription costs and applied to the remaining amount on the subscription. For example, if your subscription was 3 years for $300,000 (or $100,000 per year) and pricing was discounted at 50% off list price, then the lump-sum payment after year 1 would be $100,000 ($200,000 remaining subscription costs * 50%)
If the supplier doesn’t agree with a lump-sum payment, then another approach is to negotiate a termination penalty scale. This approach will provide a payment to the supplier after the terminating year. As an example, if you terminate after year 1, then you owe $X dollars. If you terminate after year 2 then you owe a smaller payment of $Y dollars.
Ensure there is an exit clause that details how the supplier will assist with delivering the data from their product. Suppliers should provide reasonable efforts in a timely manner to deliver all data to the customer.
By applying a thoughtful and innovative mindset to negotiating SaaS contracts, procurement teams can minimize risk and make contracts more predictable.
Reach out to us today to discuss how we can help support these negotiations!
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