The most common SaaS contract negotiation pitfalls(..and how you can avoid them)

Negotiating Software as a Service(SaaS) deals can be a daunting labyrinth to make your way out of. The lines between optimal investment and potential pitfalls become blurred as you go through the works of evaluating, negotiating, and eventually procuring SaaS can be blurred. 

This blog discusses common negotiation pitfalls for companies, and it also features the key takeaways from ‘Decoding the SaaS Vendor Puzzle’, a panel discussion from Spendflo’s Optimize Summit, in November 2023–a conversation you can check out here.

1. Unveiling the Total Cost of Ownership (TCO) Equation

“Software cost is just one line item. What’s the cost of implementation? What is the cost of truly managing the software? Understanding the total cost of ownership is important.“ Omar Ghani, VP of Procurement, CURO

It is often the introductory pricing of SaaS that attracts users. However, this initial allure can blur the vision into what it actually costs to own and operate a tool, leading to an inadequate assessment of the total cost of ownership (TCO). 

Hidden costs, such as additional user licenses, data storage, or customization fees, can substantially impact budgets over the contract's lifespan. 

Finance and procurement teams need to unravel the TCO equation. A comprehensive analysis, projecting the financial implications over the contract period, is imperative to align the budget with the true cost and prevent financial surprises.

Clueless about how much your SaaS actually costs? Click here to understand!

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Omar’s pro tip: “Do not sign the software package until you really understand any 3rd party service costs and other costs to manage the software.“

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2. Navigating Contract Flexibility

“If you are having a vendor conversation and they are not talking about scalability and flexibility, you need to bring it up. Getting those terms on the contract is imperative” - Jimmy Hallsworth, VP of Procurement, Spendflo

Today's business environment is fast-paced and requires agility. Yet, many organizations face stiff restrictions due to rigid SaaS contracts. 

The inability to modify subscription levels, add or remove licenses, or adjust usage thresholds can hinder the organization's ability to respond to evolving needs. 

Procurement teams must prioritize contract flexibility and negotiating clauses that enable the organization to align the chosen SaaS solution with its dynamic requirements. A flexible contract not only future-proofs the investment but also minimizes the perception gap between promised value and realized benefits.

We detail a list of tactics on our blog here.

3. The Perception Gap between Expected Value and Actual Value

“You are not just paying for a company’s innovation, but for your company to innovate with the tool. Looking for ways to make the vendor accountable for what they are selling and staying right-sized is important “, Jimmy Hallsworth, VP  Procurement Strategy, Spendflo

The perception gap is a serious problem resulting from misunderstandings, insufficient knowledge, and a dearth of reliable evaluation procedures. The vendor's alluring value proposition may attract organizations, only for them to find that the benefits do not entirely manifest. 

This imbalance might result in frustration, underutilization of the SaaS solution, and potential financial losses. To address this, organizations must implement rigorous evaluation frameworks that consider not only the initial promises but also the long-term value proposition. 

Clear communication between procurement teams, finance leaders, and end-users is crucial to ensure that the actual value aligns with the organization's expectations, bridging the perception gap.

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Omar’s pro tip: “Set up pre-intake workflows to have complete alignment between all the stakeholders” 

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4. Vendors overestimating the Buying Capacity of the Customer:

In some cases, vendors cannot accurately determine the customer's purchasing power and unique needs. This may lead to a product that is out of step with the organization's operational or financial needs. 

Businesses must effectively express their budgetary restrictions, growth plans, and particular demands during the negotiation process. 

A transparent and collaborative approach ensures the vendor tailors their proposal to match the customer's buying capacity while maximizing the value delivered. A successful vendor-customer partnership requires a deep understanding of the organization's financial landscape and strategic objectives, which can be achieved through open dialogue and thorough needs assessment.

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5. Elevating Vendor Relationships beyond Transactional Dynamics

“Vendor needs to have skin in the game so if things don’t go well, we get a refund“ Omar Ghani, VP of Procurement, CURO

SaaS negotiations should transcend transactional interactions. Establishing a strategic and collaborative vendor relationship enhances the overall value derived from the SaaS investment.

Beyond evaluating the product features and pricing, procurement teams must assess the vendor's track record in providing ongoing support, responsiveness to issues, and commitment to product improvement because vendors do prioritize and invest. This proactive approach ensures the vendor becomes a true partner, invested in the organization's success. 

6. Not harnessing the Power of Industry Benchmarks

Benchmarking SaaS agreements against industry standards and competitor offerings is a powerful strategy to validate the negotiated terms. This approach arms procurement teams and finance leaders with invaluable insights into the market landscape, pricing structures, and emerging trends. 

By benchmarking, organizations gain a competitive advantage in negotiations. It facilitates evidence-based decision-making, identifies areas for negotiation optimization, and ensures that the organization's expectations align with industry norms. 

Leveraging industry benchmarks substantiates the value the vendor promises and empowers the organization with negotiation prowess.

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7. The Lack of Time and Skill

In the fast-paced corporate landscape, time is a precious commodity. Procurement teams, finance leaders, and other key stakeholders often grapple with multiple responsibilities, leaving limited time for in-depth analysis and negotiation. 

Furthermore, negotiating SaaS contracts requires a unique skill set that combines financial acumen, legal understanding, technical insights, and vendor management prowess. 

The shortage of these specialized skills compounds the challenge, leading to hasty decisions and missed opportunities. 

To close

In short, many of the problems listed above are a by-product of the lack of time and skill. Organizations must recognize this constraint and invest in upskilling their teams or seeking external expertise to navigate the intricate SaaS negotiation landscape effectively.

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