Updated: Aug 14, 2020
The three CRM powerhouses – Salesforce, Workday and ServiceNow -- pioneered the SaaS market and now, all the big legacy suppliers are following suit, eager to convert their customers from perpetual licenses to the more profitable subscription-based model. To accelerate customer adoption, these suppliers are basing their sales peoples’ compensation on SaaS deals, paying big bonuses for subscription commitments and offering commission multipliers as high as 3X for cloud deals.
Sales reps are touting the benefits of SaaS, promising customers additional flexibility to scale up and down, lower upfront costs/short terms savings, a reduced need for in-house infrastructure and last but not least, increased speed to market coupled with up-to-the-minute innovation. They are also taking these solutions directly to the business units – HR, marketing, sales departments – providing easier entry by by-passing IT and procurement.
When suppliers do this “end-run” around IT, they let the client try the product, knowing they’ll like it and won’t want to give it up. This practice is wreaking havoc on the enterprise’s ability to manage these solutions and eliminating any ability to drive competitive pricing and terms with a centralized purchase.
After inspecting thousands of SaaS deals, we have identified five common traps that can be found in the typical SaaS contract which, left unchallenged, result in lost leverage, vendor lock-in and high recurring costs. They include:
1. Renewal rights
Renewal language is a key element for SaaS vendors to continually maintain customer annual run rate and consistently enforce price increases over time. The standard renewal price charged by Oracle, for instance, are set at 10%. Microsoft and Adobe provide no renewal language in their contracts, so you won’t know the terms until the renewal happens, resulting in ambiguity and unpredictable spending levels. Salesforce requires you to renew 100% of your licenses to prevent an increased rate – failure to do so can bump up costs by as much as 50%. And finally, ServiceNow releases changes to its products (and pricing) twice a year, resulting in annual increases of up to 30% at renewal time.
2. Product price holds
Product price holds are also negotiable. Before signing any agreement, ask the following four questions:
Can I buy additional licenses at the same price?
Do I know what rate I’ll be charged for new products?
Am I entitled to the same price if the product changes?
Can I keep this price for add-ons after the initial term?
The issue organizations face when it comes to adding licenses “a la carte” is that they don’t have the necessary precautions in place to eliminate premiums inflicted by the vendor. It’s common for customers to add licenses mid-term on an ad-hoc/low volume basis. As a result, the customer typically doesn’t hold enough leverage during these add-on events to combat vendor enforced increases. If your pricing schedule and contract terms covers all four of the above questions, you will set your organization up for success when adding new products and licenses.
Note that price holds and add-on rates should be used when adding one off or small growth of licenses. During a high growth incident, you hold significant leverage over the supplier and have the opportunity to negotiate a brand-new contract with re-priced rates and competitive contract terms. Ultimately, this can lead to additional long-term savings by executing an early renewal.
3. Product demand
Accurately forecasting demand is probably the most difficult area of any software purchase, and SaaS is no different. Under purchasing results in lost leverage, higher costs on additional purchases and the inability to reprice products. Over purchasing results in recurring costs for shelf-ware, the inability to down-size, and a degraded effective discount. To avoid these situations, we encourage clients to use the following checklist when building a demand model:
Get utilization reports from the supplier and examine usage rates to determine need
Assess whether all your users need a full use license; you can get a lower functionality bundle for users that just need the basics
Create deal options by using a minimum and maximum demand
Reduce quantities provided by the supplier, who will always inflate your volumes in their proposals
Consider competitors when possible – are there any other suppliers to bring in for projected growth?
4. Service Level Agreements (SLAs)
There are four key inclusions in your SLA, most of which can be negotiated:
Uptime availability: An agreed uptime percentage will ensure you receive the amount of availability desired. Standard uptime percentages typically fall around 99% availability.
Remedies and credit: Without penalties for failed performance, you can’t hold the supplier accountable. Makes sure remedies provide credit/reimbursement.
Support response: Quick support response is bundled into different product offerings that are typically non-negotiable and charged as a percentage of net license cost.
Termination rights: Include language in the addendum that allows for termination rights for consecutive SLA failure.
5. M&As and divestitures
To mitigate the risks associated with a merger, acquisition, or divestiture, we advise clients to closely examine the contract terms under “Change in Control.” For divestitures, suppliers will try to thwart the customers’ ability to pass off licensing to the respective divested entities. As a result, suppliers “double dip” on costs, requiring a double purchase of licenses by either divested portion of the business. To mitigate this expense, we suggest you negotiate the ability to pass off costs to the divested company proportionally.
To protect your organization in cases of a merger with a non-customer of the supplier, we recommend negotiating price holds in your agreement that allow for assignment of new licenses at current rates. For protection in cases of a merger with an existing customer of the supplier, you will be required to finish the acquired affiliate’s contract before negotiating a new agreement. We advise clients to leverage the increased growth of the combined entity to open both deals up early and achieve unified pricing and terms.
We provide a reality check before clients negotiate new SaaS deals. The promised SaaS benefits (flexibility, low entry cost, reduced infrastructure and speedy, innovative solutions) are often offset by vendor lock-in with no ability to downturn; recurring prices increases; and over time, your reliance on the solution degrades your leverage with the SaaS supplier.
Francis Gagliano is the Marketing Content Manager and a former Analyst II at ClearEdge.
This blog post was inspired by the webinar SaaS Buying Trends: The Evolving Model. You can access the full recording to this webinar below. To learn more about this subject, download our whitepaper or contact your ClearEdge representative.