Embracing digital transformation has made Software as a Service (SaaS) a pivotal tool for modern businesses. While SaaS contracts offer flexibility, scalability, and efficiency, it’s vital to stay vigilant and aware of potential risks. Poorly negotiated SaaS contracts, whether at the time of purchase or renewal, can strain budgets, disrupt financial plans, and affect profitability. When it comes to SaaS deployments, there are often three major pain points: (1) your pricing increases, at times uncontrolled; (2) you cannot downsize post-deployment or else you lose your bundle discounts; and (3) pivoting to an alternate solution is often not an option due to high switching costs. The end result is that you walk into a multi-million dollar negotiation with little to no leverage.

Here are some approaches to avoid these pain points:

  • Start Early: Avoid rushing into deals. Begin negotiations well in advance to assess competitive solutions and adjust your environment. For example, with a SaaS solution like Salesforce, where multiple products are deployed across multiple departments, simply assessing your usage, rightsizing, and rationalizing your licenses will take at least 6-9 months, perhaps longer. Using your time wisely and considering all the right factors early lays a strong foundation for future renewals.

  • Analyze Pricing: Scrutinize licensing models and pricing structures before signing. Pay attention to future price increase terms and strive for transparency of price adjustments. Uncapped price increases at the time of renewal are common in SaaS contracts. Capped price increases solely based on CPI can be dangerous particularly during inflationary periods. Negotiate price lock-in to ensure stability and predictability for your organization’s financial planning.

  • Think Long-Term: Negotiate longer term contracts for protection against abrupt price hikes that give you a stable cost structure for an extended period. This approach allows for effective financial planning and budget management. Balancing flexibility is key to avoiding unnecessary expenses.
  • Incorporate Flexible Clauses: Embed termination and renegotiation clauses. These allow flexibility for you to exit or modify agreements in cases of unreasonable price increases or erosion of expected value. Ensure robust termination terms, especially for data access and migration. In a SaaS contract we negotiated on behalf of a client, terms were included to enable continued access to data in an agreed format in case of termination. Additionally, resources were designated at pre-negotiated rates to facilitate data migration. It’s essential to establish and formalize these terms during the initial purchase phase.
  • Stay Informed: Monitor market trends, competing products and industry benchmarks to ensure fair pricing. Market intelligence empowers you to negotiate better deals and evaluate alternative options if necessary.
  • Build Vendor Relationships: Cultivate strong ties with SaaS vendors. Communication and regular engagement reveal insights into pricing changes and upcoming plans, aiding budget preparation. These insights help you forecast and prepare for budget changes. In turn, you can offer your preferred partners a strategic view of your IT roadmap, giving them a competitive edge in expanding their business within your ecosystem. In a recent project, our client acquired and deployed a SaaS software that was approaching the end of its lifecycle. Shortly after the deployment, they had to consider a newer, costlier SaaS solution offered by the same vendor, along with the expenses associated with migrating to the vendor’s updated platform. If they had conducted a thorough assessment of their initial purchase and researched the vendor’s future plans, they could have opted to maintain their on-premise system and transitioned to the newer SaaS solution when it became available.

Conclusion

In the dynamic realm of SaaS contracts, mitigating risks from price hikes and shelfware requires proactive management. By starting early, assessing pricing, negotiating wisely, incorporating flexible terms, staying informed, and nurturing vendor relationships, you can safeguard your organization from potential setbacks.

Remember, proactive risk management is the key to ensuring your SaaS contracts remain a valuable asset rather than a financial burden. Contact us to start maximizing your procurement potential today!