Modern businesses buy, manage and renew software on a routine basis, making IT spends one of the biggest in their balance sheets. With an average company managing around 100 SaaS contracts, properly managing software spend is important to ensure optimal spending and better allocation of resources.
Managing hundreds of contracts can go out of hand quickly, which is why negotiating and properly managing SaaS contracts is so important. SaaS vendors might not openly advertise that they are open to negotiation. But this should not stop SMBs from negotiating their contract terms and finding the best value for their IT investment.
The main objective of negotiating a SaaS contract is to maximize value, minimize software underutilization and streamline renewals. Effectively negotiating SaaS contracts can save companies from a lot of hassle down the road. However, the negotiation process should not be treated as “someone wins and the other loses”. It’s more like a joint effort to create a win-win situation for both parties.
Importance of Negotiating SaaS Contracts
SaaS contracts define and establish the relationship between the provider and the customer. It outlines the terms and conditions under which a SaaS product will be delivered. A SaaS contract provides legal protection, establishes mutual understanding of the rights and responsibilities and ensures clarity. There are a number of reasons why understanding and managing SaaS contracts is important, including:
Builds Confidence and Trust
A carefully crafted SaaS contract builds confidence and trust between both parties who know what their rights and obligations are. This allows them to work more effectively as partners, leading to a fruitful and stronger relationship based on common understanding.
Provides Legal Protection
SaaS contracts provide legal protection and serve as legally binding documents, protecting both parties. They reduce the risk of disputes and misunderstandings in the future and include remedies and possible resolutions in case of a contract or SLA breach. It specifies the governing law and jurisdiction under which disputes will be resolved as well as the methods acceptable for dispute resolution, including mediation and arbitration. Clarity about the termination policy, notice periods and conditions under which either party can cancel the contract help establish a clear exit strategy.
Details Pricing and Payment Terms
The pricing structure, payment terms, billing cycles and renewals are an important aspect of SaaS subscriptions and should be clearly defined in a SaaS contract. This ensures that the customer clearly understands the costs involved, making things more predictable and budgeting easier. Clearly detailed pricing and payment terms provides clarity and transparency and allows both parties to optimize cost. Clearly defined provisions addressing additional charges like overage fees help customers avoid hidden costs and manage their budget more effectively, while also making revenue predictable for the provider.
Defines Scope of Service
The scope of service being provided, including functionalities, features and limitations, prevents confusion and ensures that both the vendor and the customer have a common understanding of what’s included and what’s not. The contracts also define under which conditions the customer is allowed to use the software and things such as how many users or locations can use the software. The extent of liabilities clauses provide a cover to both parties in case of any damages, losses or legal claims, while indemnification clauses protect them from liabilities that may arise because of use of the service.
Defines Service Level Expectations
Service Level Agreements are typically part of SaaS contracts and define the performance expectations including uptime, service availability and support response times. An SLA makes it easier to benchmark the services against predefined standards and ensures that users know what to expect from the vendor.
Data Security, Privacy and Compliance
Provisions related to data security, privacy, compliance and intellectual property rights define how data is handled, transmitted, stored and protected, and compliance with data protection standards such as CCPA (California Consumer Privacy Act) and GDPR (General Data Protection Regulation).
Benefits of Negotiating SaaS Contracts
The SaaS contract negotiations have to be based on thoughtful discussions that lead to mutually beneficial, and well-balanced contracts. Effective SaaS contract negotiation and management has many benefits, including the following.
Businesses have different needs depending on the industry they are in and the business environment. Effective negotiations allow businesses to customize the solution according to their own needs and ensure that the solution aligns with business goals and future growth requirements. SaaS solutions are generally standardized in order to serve a broad customer base. However, provisions can be included to tailor them to better align with unique business needs, including user access and permissions, integration capabilities and add-ons, white labeling, custom dashboards, custom development and service customization.
Provides Clarity and Understanding
Both parties know what to expect and their responsibilities, reducing the risk of potential conflicts, disputes and misunderstandings in the future. It promotes transparency and accountability and encourages each party to deliver on its promises. Contract negotiations help mitigate risks by identifying and addressing potential vulnerabilities and risks in the contract. This helps them negotiate a contract that addresses these issues and provides a stable business arrangement.
Helps Optimize Pricing and Control Cost
Customers are more likely to secure favorable pricing and payment terms through effective negotiations. Service providers can also ensure that the new business relationship is profitable and sustainable, while being able to attract and retain customers by offering competitive pricing. Contract negotiation allows both parties to align their financial interests and optimize price. Clear pricing and payment terms ensure transparency, fairness and predictability in the relationship.
Help Build Positive Business Relationships
Successful SaaS contract negotiations promote positive business relationships as both parties feel satisfied with the terms. Such relationships are much more likely to result in constructive collaboration and a partnership that benefits both parties.
Gives a Competitive Advantage
Contract negotiations enable customers to get better terms than the competition, while vendors secure long-term relationships, enhancing the market position of both. A well-balanced and fair SaaS contract increases the likelihood of satisfied and loyal customers that are more likely to stay with the vendor and renew their contracts.
Addresses Future Growth and Scalability
Different businesses have varying scalability requirements and the software should be able to adapt to evolving business needs. Effective contract negotiations can help businesses address their unique future requirements and ensure that the solution can grow with them. Scalability is one of the main reasons behind a growing number of businesses moving to the cloud, and should be properly addressed in the contract.
Secure Better Terms
Negotiating SaaS contracts, especially the Service Level Agreement allow customers to secure higher service standards and better customer support. The SLA sets a benchmark against which performance guarantees are measured, which should be realistic, ensuring the provider can fulfill its promises.
Key Components of a SaaS Contract
Being a legal agreement between the SaaS services provider and the client, SaaS contracts establish the terms and conditions of the relationship. It outlines the rights, limitations, obligations and responsibilities of both parties and forms the foundation of their contractual relationship. A SaaS contract can vary from one industry to another and include different components. The key components of a SaaS contract should include:
- SLA (Service Level Agreement)
- Scope of permitted use
- Customer service and support
- Pricing and payment terms
- User access and licensing
- Data ownership
- Provisions for data security and privacy
- Renewal and termination clauses
- Limitation of liability
- Intellectual property rights
Preparing for Negotiations
Preparation and doing some homework is essential when negotiating SaaS contracts, which involves some key steps, including:
Take Internal Stakeholders Onboard
Businesses need to keep the needs of their stakeholders in mind and include them in the whole process. This not only helps build trust and improve adoption rate, but also enables you to zero in on what they consider as must-haves and identify features they can live without. Internal stakeholders can provide valuable information that can help negotiators strike the right balance between cost and functionality and securing the best deal.
The earlier a contract negotiation starts, the better. If you are planning to switch from one vendor to another, start the negotiations months in advance. The same applies to renewals, which can be leveraged in negotiations. If you want to purchase more licenses for a product, speak to the vendors at least a few months in advance before the renewal date. Auto-renewals have become a norm, but negotiating renewals is a better option unless you’ve already got a great deal.
Thoroughly assessing business needs and determining if the SaaS service aligns with business goals is important before entering into negotiations. Match business requirements with the features, performance guarantees and functionalities the vendor is offering and identify KPIs critical to your business such as uptime and availability.
Note down the terms and conditions most important for your business, including data security, availability, SLAs, scalability, data ownership, pricing, and cancellation policy. Rank them based on the level of importance, allowing you to keep your negotiations efforts focused on what matters the most.
Set a Budget
Businesses have to keep their budget in mind when choosing between different vendors. Take subscription fees as well as other potential fees into account, including integration, training, implementation, and customization costs. Multi-year contracts often lead to better rates and contract terms. If the product is useful for many years, it is better to consider multi-year plans instead of negotiating monthly subscriptions.
Evaluate Different Vendors and Conduct Market Research
A thorough market research can give a fair idea of the prevailing pricing and payment terms, product capabilities and other contract terms. Evaluate offerings from multiple SaaS vendors and shortlist potential vendors and offerings that align with your business objectives, and current and future requirements. Try to find out how much your peers are paying for the same or similar solution, which can help you loosen the vendor up and get a better deal.
Understand different pricing tiers, how you would pay (e.g. based on the number of seats, usage or features), and compare prices of similar solutions. Identify features and support options you can live without for better terms and try negotiating for long-term contracts if the software is potentially useful in the long run. Vendors use different SaaS pricing models to accommodate business needs of different customers, including per-user, pay-as-you-go, flat rate and tiered pricing. Choose one that best aligns with the budget and long-term business goals.
Gather Required Information and Documentation
Collect the relevant information and documentation you might need during the negotiation process, including organizational requirements, security policies, and legal concerns. Having the necessary information ready helps expedite the process and prepare for negotiations.
Develop a Negotiation Strategy and Timeline
Develop a negotiation strategy after determining business needs and evaluating vendor’s offerings. Do you want to negotiate with a focus on getting the best pricing or are more interested in getting the best deal based on improved SLAs or other terms? Also, note down alternative options and concessions that you might want to discuss during the SaaS contract negotiation process. Developing a realistic timeline ensures that the negotiation process completes efficiently without any unnecessary delays.
Develop a Negotiation Team
A skilled negotiation team having members from different departments, including IT, legal, operations and finance can give valuable feedback from different perspectives and help make negotiations more productive. Each team member can play an important role in the negotiation process and should be assigned clear roles and responsibilities during negotiation. The team members should be able to clearly articulate their needs, be well-versed in effective communication, have active listening skills, and be willing and able to understand things from the vendor’s perspective.
Understand the Priorities and Constraints of the Vendor
SaaS contract negotiation is not just about the customer. Businesses also need to consider the priorities and constraints of the vendor, which helps identify key areas of compromise and create win-win solutions that are mutually beneficial. Gaining insights into vendor’s business goals, objectives and limitations helps identify key areas of potential compromise and keeps expectations realistic.
SaaS has become a mainstay in virtually all industries. Today, purchasing SaaS software is just a few clicks away, and such convenience can result in wasted IT spend and underutilization. Businesses need to take SaaS contracts seriously and put effort to maximize the value of their IT spend. Click-through agreements and auto-renewals are fast and convenient, but skip the negotiation process, which can cost a lot in the long run.
Properly planning and preparing for contract negotiations puts businesses in a better position to get a better deal that delivers more value for their IT spend. However, SaaS contract negotiation is not just about price and payment terms. It’s about building long-term, mutually beneficial and win-win relationships, which can help garner trust and make future negotiations even more successful.