ClearEdge has found that roughly half of new Workday customers routinely over-purchase on licensing. This is especially problematic considering the recurring cost model that is used with Workday’s SaaS licensing. When you over-purchase with a SaaS vendor, the excess costs spent on shelf-ware will accrue year-over-year and are often very difficult to remove.
Reason #1: Workday’s Custom Licensing Metric
The vendor created a unique licensing model that calculates costs based on a user metric called Full-Service Equivalency or FSE. The model is the number one reason customers over-spend: many people don’t understand it.
The vendor calculates total FSEs by dividing a customers’ workers into different worker categories based on their estimated usage of the platform (Full Time Salaried Worker, Hourly, PT, Contingent, Seasonal and Former Worker with Access). Workday applies a “percentage” to each worker in a category (from 100% to 2.5%) and multiplies it by the total number of workers in that category to obtain the FSE count. The FSE percentages and worker category definitions are non-negotiable and standard across all customers, although we have seen instances where larger customers with unique workforces have added new worker categories and definitions.
Workday’s custom FSE licensing metric shifts buying power towards the supplier because many customers are unaware of the specifics that go into the FSE calculation or are inexperienced in negotiating with Workday. This provides the opportunity for Workday to make general assumptions on FSE counts, which can significantly inflate your spend.
The only way around this situation is to gain an understanding of the FSE, and do not rely on Workday’s “assumptions”.
Reason #2: Workday's "One-Size" Model
The second way customers over-spend is through what we refer to as a “One-Size”
Model. This occurs when the FSE counts for each module are all equal but may not align with the actual employee use case. The risk presented here is like the bundling example shown later in this blog, where the over-purchase behavior is due to assigning too much functionality to those that do not need it. The difference in a One-Size Model compared to a bundled deal is that the customer can assign different FSE counts to different modules. This step is often overlooked because customers typically rely on Workday to assist in calculating the FSE counts per product module, given that FSE is a unique metric that many organizations do not have experience estimating on their own. Workday will apply the One-Size Model out of convenience for tracking FSE counts and to maximize deal costs.
Reason #3: Bundling
One of Workday’s main sales strategies is to bundle all products purchased under one price point. Though this simplifies the agreement costs, it poses a significant risk in validating competitive unit rates and minimizing expansion costs. When using product module bundles in your agreement, your total FSE count is applied to every module in that bundle. In rare cases, a customer’s entire workforce will use all the modules in the platform equally, but it’s more common that different groups of FSEs require different levels of functionality. With bundling, buyers forfeit the ability to accurately add-on volumes of specific modules for different groups of FSE users and incur larger total expansion costs. This issue can be avoided when the individual unit prices per module are provided.
Reason #4: Ramped vs. Non-Ramped Cost Roll-out
The Workday solution can take up to two years to fully implement, but Workday assumes that the customer will be fully deployed on day one. It is common for new Workday customers to fall into this trap because they have no prior history with Workday to judge how quickly the solution will be implemented. This results in customers paying for 100% of the functionality when they only have limited access to the solution until the implementation is complete.
To combat this cost risk, customers need to use a “ramped” or “phased” cost model to scale costs proportionally to the solution implementation time. Workday will argue against providing a ramped cost model, but ClearEdge has seen many instances where the vendor agrees to one if the customer able to generate enough negotiating leverage. If you can determine the phased rollout of the solution, you can negotiate for costs to scale with the estimated percentage of rollout completed per year.
Reason #5: Commitment to Future Employee Growth
Workday customers often try to use forecasted employee growth within the term of an agreement as a bargaining chip to achieve better discounting. Though this is a popular strategy with many SaaS vendors, using it with Workday typically yields over-commitment in entitled licensing due its custom licensing metrics. Since Workday’s volume calculation is based on their FSE count, and the entire current employee population is typically accounted for, forecasting growth with Workday would include general assumptions on the customer’s actual employee growth, which is less accurate than forecasting “users” or “software seats.”
If a customer does over-purchase due to forecasting future growth, then tries to right size their FSE counts at renewal, Workday will argue that the pricing the customer received was achieved due to the additional committed employee growth. This would result in Workday increasing the price of the right-sized FSE counts to where total annual costs would equal the same previous run rate as the over-committed growth, presenting the risk of annual cost lock-in.
Workday agreements usually feature price holds during the term of the agreement for customers to purchase additional FSEs. Employee growth for most customers will almost always be conservative, organic growth, which can be covered under the price holds in the agreement. As a result, it is better to not forecast organic year-over-year employee growth, because customers will probably end up over-purchasing, negating any benefits of the “better pricing” achieved.
This blog is based on a high-level summary of ClearEdge’s “Rightsizing Your Workday Spend” Deal Guide. To learn more about the risks highlighted in this blog and get in-depth consultative advice on how to mitigate them through further examples and case studies, download the Workday Guide here.