Negotiating SaaS agreements: guiding principles to make better SaaS purchases
Businesses often find themselves stuck with a one-time purchase of SaaS applications they no longer need. Sometimes they get roped into signing a year-long agreement for a software that's needed for a few months and find out it is not budget-friendly in the annual plan. Negotiating a robust Software-as-a-Service (SaaS) agreement is elusive for modern hyper-growth businesses. This article aims to guide you through the solid fundamentals of what to look for in your upcoming SaaS agreements.
As per the State of ITAM 2022 report, 29% of SaaS software spend is wasted or not utilized properly. That is a significant chunk of your budget. As a user with a budget, you understand the importance of getting the best deal for the SaaS tool you need - so here’s an in-depth guide on SaaS agreements and how to negotiate to get the best possible price. Let’s start with getting into the basics.
What is a SaaS agreement?
A SaaS solution is a subscription-based model which is flexible, convenient, and value for money. To access and use the paid features of a software, a SaaS agreement is signed between the service/software provider and the customer or end-users. This is a legally binding agreement. The provider provides the software "as-a-service," meaning that the customer only pays for the software, and not for the hardware on which it is run.
While this convenience of SaaS is great, it comes with a price. SaaS contracts are usually one-sided, with service providers having all the power. To get your fair share, it's important to know your requirements. So, your agreements must cover multiple aspects such as subscription tier, service level agreements, renewal details, security details, warranties, and support details.
Components of a SaaS contract
A SaaS agreement needs to clarify the exact scope and provide transparency to users (you). Ensure that all of the following are covered in your agreement.
- License scope: Each SaaS license has limitations in the scope of what it can offer to the user. A license scope covers the parties (Licenser and Licensee) involved in the contract with clarity around their rights and responsibilities.
- Total contract value: This section covers the overall fee, which would be broken down later. It should include platform fee, implementation fee (if applicable), billing frequency (monthly, quarterly, or annually), and even the paying method and details for invoicing.
- Pricing tiers and subscription plans: Each tier in a subscription plan has varying prices and scopes of products offered. Software providers package their offerings in different bundles based on usage and need - this could be in the form of tiered-pricing models or flat per-user costs. This section details the pricing tier applicable to your business.
- Subscription terms, early termination, and renewal process: This section covers the contract period, i.e., when the agreement begins, when it ends, and when it is due for renewal. This section also delineates the penalties for terminating a subscription early and includes a renewal clause.
- Data security and ownership: We share sensitive information or customer details or give access to other forms of data to our SaaS providers. It is important to chalk out the scope of this section to manage your data better. Protection of your data must be a part of the agreement.
- Service level agreement (SLA): You pay for a certain level of service guaranteed by the vendor. This clause goes beyond the features a product offers and covers aspects like average response time, maintenance, and mechanisms to measure the quality of services offered, and may also cover penalties the vendor may levy if it fails to live up to quality standards.
Now that you know the different elements, let’s discuss how you can look into each of these and start negotiating your SaaS agreements.
Negotiating essentials for SaaS agreements
It is imperative that you negotiate different elements to get an agreement that benefits your company and do so with ample time at your hands to ensure the best result. When switching vendors for software, it is best to begin negotiations at least 2 months before your previous agreement ends. In the panic and confusion of a lapsed agreement, users may end up not finding the best offers for their team, purchase the same multiple times, or get stuck with long-term, high-penalty lock-ins.
“You sign an agreement; you make a contract, and you live up to it. You never get what you deserve. You get what you negotiate. You got a right to say yay or nay.” - Don King
Here are some levers to consider while negotiating SaaS agreements:
- Pricing: The price points in a SaaS contract are based on a multitude of factors, the most important being the number of licenses being purchased. Based on the said number, the number of people who will be able to use the software simultaneously will be affected.
Pricing factors include fees, support fees, hidden charges, and more. You may also be purchasing different software from the same software provider, which could be packaged even better. This can also be used as a point to negotiate prices. The pricing (and savings) of annual subscriptions is also a point of negotiation versus taking monthly subscriptions.
Questions to ask/consider about SaaS pricing:
1. Can you get better discounts for more users?
2. Does the pricing include additional charges for support fees, training, implementation, or otherwise?
3. Is this pricing fee scalable as you grow as a business or expand the scope of the contract? Many products provide incredible discounts in the first year for users. You have to ensure that the fee is manageable for the years to come.
- SLAs: An SLA defines a minimum service standard. For SaaS tools that give you a guarantee, you can define the percentage of availability of the service vis-a-vis their business and negotiate the compensation you will receive if the quality is not respected.
For Example: At Spendflo, we guarantee up to 30% savings on the SaaS stack, which translates to 2-3X ROI, or you get your money back. It is a part of our SLA too.
Questions to ask/consider about quality:
1. Can they ensure over 99.5% uptime? (Product downtime can impact your business)
2. How will support be provided for the pricing you have chosen?
3. Can we define any concessions if the SLAs are not met? (This could be an additional discount or even cancellation of the contract for major SLA issues)
- Data Security: As mentioned earlier, data security is of utmost importance, and your software vendor should comply with all data protection protocols relevant to your country and business. The liability of a data breach must be with the software vendor, and you should add an opt-out clause in your SaaS agreement for any major data breaches.
Questions to ask/consider about data security:
1. What kind of data do they store and where?
2. Is data deleted or scrubbed periodically? Can it be erased per request?
3. Do they comply with data protection protocols like GDPR, HIPAA, SOC2, PCI DSS, etc?
4. Can you add an opt-out or termination clause in case of any breaches?
- Back-Ups and Recovery: It isn’t always smooth sailing when it comes to using the software. It is possible that you aren’t satisfied and choose to terminate the agreement prematurely. In such scenarios, it is essential to preemptively understand the implications of terminating an agreement concerning data.
Questions to ask/consider about data back-up and recovery:
1. Does the vendor allow for the data to be downloaded once a contract has been terminated?
2. Is there a provision to recover the data for free? Or is it a paid feature only?
3. Where are backups stored? Learn more about data centers for the vendor.
- Tiers boundaries: As mentioned before, one of the key features of the SaaS model of application distribution is pricing tiers for users. With each pricing tier, the length of the subscription, number of users for the license, feature usage ceilings, and the price vary. Be aware of the limitations which come with each pricing tier. Otherwise, you run the risk of being slapped with additional fees.
Questions to ask/consider about tier boundaries:
1. If the package includes a certain cap on usage of features, what happens if you exceed it? Will you be charged extra or will you get notified before you exceed it?
2. Do add-ons make sense, or would moving to a higher tier be better for you?
This is not a conclusive list - you should ask as many questions as possible. It is the vendor’s responsibility to clarify all the clauses in the agreement to ensure clarity, find mutually beneficial grounds, and assure you that you are making the right decision by signing the SaaS contract.
Spendflo tip: Despite negotiation being common knowledge for procurement, IT, and Finance teams, companies are using over 150 tools on average. Businesses still waste up to 30% of their SaaS spend. Spendflo buys, negotiates, and renews your SaaS contracts for you, and helps you save time and up to 30% of your spend.
Pitfalls to avoid while signing SaaS agreements
As the SaaS model continues to take the world by storm and make access to applications infinitely easier and more streamlined, there are still potential risks involved with SaaS agreements. SaaS agreements can be tricky and these are a few pitfalls to bear in mind while negotiating said agreements:
- SaaS vendor lock-in: A long-term vendor lock-in implies that a user has to continue using a product or application that they are unhappy with, because the cost or implications of switching to another vendor is too high. You may feel the need to make the switch for many reasons, the simplest being that the service needs are no longer being met by the vendor. This can come about because the vendor modifies their product, their pricing, or perhaps new features could be offered at additional cost. In such scenarios, due diligence before signing any SaaS agreement is pertinent.
- Inflexible pricing: Flexible pricing and multiple pricing tiers are the essence of SaaS products. Users are drawn to the SaaS model as it provides pricing tiers based on their needs. Inflexible pricing is a red flag in SaaS agreements as it goes against the essence of the agreements - providing users with flexible and cost-effective pricing plans.
- Lack of SLAs: An SLA ensures that users are aware of the scope of services offered by the product. When SLAs are chalked out clearly for a user, it reduces the room for errors, confusion, and additional fees. If your agreement doesn’t have these, you should consider that as a red flag.
But, the SaaS-buying process is broken
The SaaS stack for businesses is continuously evolving, and thus, is a growing expense. The pandemic has accelerated this growth even further. As per Gartner, the SaaS industry would be worth $171.9 billion in 2022. If 30% of that is being wasted, that accounts for over $51 billion lost this year due to SaaS and buying inefficiencies.
Here are some inefficiencies most companies face in their buying process:
- Users and purchasers are different, which may lead to a lack of visibility into overall SaaS stacks. No single person or department has complete visibility of their subscriptions.
- Recurring subscriptions are a continuous process, and not a one-time effort. They warrant continuous revisits to optimize contracts.
- There may be overlap in features and functionalities - and you may be using different tools which solve for similar problems
- Limited usage data - to make the right decisions about the renewal of SaaS subscriptions.
- A lack of benchmark data and pricing insights, and also limited understanding of competitor companies or offerings for a vendor.
- Decentralized and long approval processes, which may lead to missed opportunities.
- Scattered way of keeping track of renewals and when they should be looked at.
- Chasing individual vendors for compliance of data sounds impossible.
- Hunting through thousands of email threads to follow up with the right people for approvals and renewals.
All of this leads to a higher and unnecessary SaaS spend, even for software that isn’t being used properly or may be redundant.
Leave the negotiation to the experts
Spendflo is a buying and optimization platform built to do the heavy-lifting for you. We discover, negotiate, centralize, and manage all your SaaS tools in one place. It is a need of the hour for companies and users that are juggling multiple SaaS products simultaneously.
Hear directly from one of our clients - Airmeet:
Using SaaS buying and optimization platforms like Spendflo have a myriad of benefits:
- View your entire SaaS stack on a single platform. One source of truth for all of your SaaS spends, contracts, and licenses.
- Discover new products that may be beneficial to your business needs without spending hours researching.
- Choose your products, while our team of expert buyers does the negotiation for you and finds you the best prices.
- Reduce time spent in finalizing contracts by simplifying your purchase requests and approvals from within Spendflo.
- No need to spend hours collecting the right details. Spendflo compiles all your required documents and security checklists, and all you need to do is sign.
- Stop worrying about renewals. Get a single snapshot of all contracts that are up for renewal and insights into how much you are saving on them. Go beyond that, and pay for the tools you use.
- Guaranteed ROI of 3X with Spendflo on your entire SaaS toolkit.
Spendflo is being used by hundreds of companies, who have collectively saved 1000+ hours and over $5 million in SaaS spends. Automate your entire procurement costs through Spendflo, and improve your company’s purchasing power. Get started today.
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