ServiceNow is renowned for taking advantage of its dominant position in the IT service management space, displaying aggressive sales behavior, charging premium pricing at renewals for often the exact same functionality, and showing little flexibility in deals. This does not mean, however, that you can’t put yourself in a better position to negotiate with the vendor. For better outcomes with ServiceNow, we’ll take a look at its sales playbook and motivations, then provide tips for demand modeling and building leverage to neutralize its strategy.
The engine behind the vendor’s sales strategy is the twice-yearly release of new product families, which enables ServiceNow to raise customers’ pricing at regular intervals, as outlined in the following illustration:
These releases can come in the form of a brand-new product offering, or an expansion of existing product features, or simply represent a rebrand with new packaging, different licensing, and pricing changes. In addition to this schedule of releases, the vendor is placing new emphasis on ELA-style agreements, as shown in the bundled example below:
This bundle features seven different products under a single SKU and unrestricted licenses for the entire organization (full-time, part-time, contractors, etc.). This type of agreement significantly increases customer lock-in because the bundling makes it difficult to leverage competing solutions for individual products. Also, the four products in the right-hand column are typically not licensed this way: the first two are usually licensed on a named user model, and the bottom two are most often licensed on a per device and per vendor basis, respectively. In short, this broad licensing model provides little transparency into the individual products, costs more for modules that were previously available separately on a per license basis, and features unrestricted licenses on several products not needed by many users.
This is not to say that a ServiceNow enterprise-style agreement is never a good decision: many customers see a significant benefit to a simplified licensing model. However, we recommend this path only for those clients who anticipate future growth, and who thoroughly examine the individual components in the SKU to make certain they align with the needs of the business.
To further complicate deals, ServiceNow has begun forcing big customers to buy into something new called the Impact program, detailed below:
This graphic illustrates what happens to an enterprise client who previously purchased various amounts of the ServiceNow’s three tiers of its Success packages. At renewal time, the pricing tiers are eliminated, and customers are instead billed between 10% and 20% of their total net annual ServiceNow spend. Clients should be wary of the Impact program because, depending on the percentage level that gets negotiated, costs can quickly escalate, and a new layer of risk is added. The program is still in its infancy, but we urge clients to approach renewal engagements with caution as the details and impact (no pun intended) of this new program shake out.
Contract Risk Exposure
The three main areas of contract risk with ServiceNow are (1) renewal caps, (2) price holds, and (3) grandfathered products. It is important to obtain competitive renewal caps from ServiceNow to mitigate large price increases in future deals that lack buyer leverage. We recommend negotiating caps at between 0% to 5%; otherwise, we have seen ServiceNow enforce uplifts as high as 30% at renewal.
Price holds are needed to protect customers when they need additional licenses during the term. We strongly recommend that clients lock in competitive rates for all products in the deal, and stipulate that the price holds are valid even if the product is changed or rebranded. Add-on purchases are often made on an ad hoc basis when there is little time for negotiation or to seek alternative solutions; price holds minimize the risk of unexpected growth situations for the buyer.
Because ServiceNow rebrands and changes functionality in products with such frequency, licensing costs are typically “grandfathered” in for the first renewal term, but after that, customers face price premiums. The vendor justifies the uplifts by claiming that the product is no longer the same as the one originally licensed, and therefore warrants a price adjustment. We recommend that clients negotiate price holds on these products or their suitable replacements.
To reduce the risk of under- or over-purchasing with ServiceNow, clients are advised to take the time for three (frequently overlooked) best practices: assess the impact of product changes, optimize licensing, and create deal alternatives.
Customers who sign a three-year deal with this vendor can expect five or six product changes prior to their renewal. This means a lot of the products and metrics that you sign up for today could be totally rebranded by the time you start planning your next deal. Clients are advised to anticipate these changes and inspect how they will affect their environment.
Further, prior to mapping out any new demand, it’s essential to understand usage and entitlements in the current environment. Customers frequently discover that they are not fully using all the products they’ve deployed during this exercise.
And finally, customers can build significant leverage with ServiceNow by evaluating all the different deal options and financial models available from the vendor. This process signals that you are not willing to simply accept the ServiceNow proposal and licensing models, and forces the vendor to work harder for your renewal.
We recently worked with a client approaching a ServiceNow renewal whose forecast called for no new growth. The graphic below shows their current environment, then, on the right, what ServiceNow proposed:
Two things immediately stick out on the ServiceNow proposal: all the products have different names, and the cost is more than twice the customer’s current environment. While the discount levels in both deals were the same, the ServiceNow deal included considerably more product than the client needed.
We worked with the client to determine which products would sufficiently cover their business requirements. This was a significant departure from the product editions and quantities that ServiceNow proposed, and was important, given the product rebrands that had taken place in the past few years.
This is a common situation for ServiceNow customers -- it’s as if you need a decoder ring to understand and evaluate the value of a renewal. The example underscores the importance of three previously mentioned best practices for working with ServiceNow: you must have a process to determine the impact of the myriad product changes, optimize your licensing, and create multiple deal alternatives.
The next graphic shows the ServiceNow proposal on the left, and on the right, an optimized proposal we devised with the same client:
The difference in these two deals reflects license adjustments (standard version vs. professional in line one), pricing adjustments, and quantity adjustments throughout. There was much to be vetted out of the ServiceNow proposal, but eventually this process yielded a reasonable deal based on the client’s needs with only a modest increase to the bottom line.
Negotiating with ServiceNow
To achieve pricing movement with this vendor, we know that it pays to include competition. ServiceNow will perceive as a threat any viable alternatives to its solutions. Below is a list of suppliers that have been used effectively in ServiceNow engagements.
It is also highly advisable to understand what will motivate your sales rep to provide concessions. Typically, these motivators include a sales compensation plan that is based on year one of a deal’s revenue, the sale of unrestricted licenses for all employees (the most expensive version), and the sale of “weighted” products that the vendor wants to push into the marketplace. These products are often tied to recent acquisitions and rebrands.
Lastly, we encourage clients to take a “mix and match” approach to user licensing, rather than accept the supplier’s demand model. This will require taking a hard look at utilization and functionality needs across the organization to determine exactly what to purchase. To see how this plays out in a typical deal, we offer the following graphic.
We worked with this client and concluded that all employees did not require the Fulfiller version of the product and were able to reduce the deal cost by nearly 20%.
In summary, it takes a considerable amount of time to neutralize the ServiceNow playbook. To help clients through this process, we offer the following list of services:
For more details about building leverage against ServiceNow, download the 30-minute webinar on which this blog is based, or contact one of our ServiceNow experts.
- Dan Beyh is a Senior Analyst, Scott Braverman is a Senior Analyst, and Olivia Sullivan is a Lead Analyst at ClearEdge, which is now a part of Accenture.