SaaS Contract Negotiation

As the legal agreement between a vendor and a customer, SaaS contracts set out the expectations, responsibilities, and rights regarding the use of the software, data security, service levels, and payment terms.

What many companies aren’t aware of, however, is that the terms of a contract are rarely set in stone, and by taking a proactive and strategic approach to SaaS  contract negotiations, you can often secure a far more lucrative deal for your organization.

In this guide, we have outlined exactly what can be negotiated, along with proven strategies for effective software contract negotiations, and guidance on the steps you can take to outsource this part of the procurement process for maximum time and cost savings.  

What can be negotiated in a SaaS contract?

Before we dive into the actual SaaS negotiation strategies, it’s worth understanding some of the key terms and clauses that will often be found in a software contract.

Key terms of any software contract:

• Service level agreements (SLAs) – The part of a software agreement that defines the level of service a vendor must provide, such as response times, guaranteed service uptime, and other performance metrics.
• Data ownership – A clause specifying who owns the data uploaded or generated within the SaaS application.
• Data security – How the data stored and processed by the system will be protected.
• Data portability – The ability of the customer to transfer their data out of the SaaS application.
• Subscription fee – The recurring payment made by the customer to access the SaaS application. This will typically be monthly or yearly, however some companies will sign up for multi-year agreements.
• License – This typically refers to the permission granted by vendors to use their SaaS products, but more specifically, it often pertains to the pricing model, such as per-seat, concurrent, or usage-based subscriptions.
• Per seat licensing – This is where a single software license is required for every unique user that requires access.
• Concurrent licensing – A licensing model that allows any number of employees to use the software, up to a specified limit, such as five users simultaneously.
• Usage-Based Licensing – A pricing model where customers pay for the SaaS product based on specific usage metrics, such as hours, data consumption, or actions performed.
• Term – The duration of the SaaS contract, including the start and end dates or renewal periods.
• Renewal – The process of extending the contract for another term. According to our own data, as many as 89% of SaaS contracts include auto-renewal clauses.
• Termination clause – The conditions and procedures for terminating the SaaS contract.
• Compliance – Provisions relating to the vendor’s responsibilities to comply with relevant industry regulations and standards, such as data protection laws.
• Force majeure – Clauses that relieve the vendor or customer from contractual obligations due to unforeseen circumstances beyond their control, such as natural disasters or ‘acts of God’.
• Fair use policy – Restrictions on the maximum usage of the software permitted within the SaaS contract.
• Overage – Additional costs for software usage beyond the contract’s fair use policy.
• Customization – Terms governing the ability of the customer to configure the SaaS application to their specific requirements.
• Indemnification – The process of compensating the customer for damages incurred due to the SaaS provider’s actions or negligence, typically with a limitation of liability clause that determines the maximum potential compensation.‍
• Intellectual property rights (IPR) – Clauses relating to the ownership and usage rights of intellectual property such as software code, trademarks, and patents.

Key SaaS contract negotiables

Knowing exactly what can be negotiated within a SaaS contract is key to securing the best deal on your software purchases and renewals.

With this in mind, we’ve outlined some examples below:

Auto-renewal clauses

For some companies, auto-renewals are seen as a convenience, not only because they ensure that business-critical software applications continue without any interruptions, but also because they save organizations the time and effort of initiating renewal requests.

Convenience aside though, these auto-renewals can become incredibly problematic when they go unmanaged, or worse they become forgotten altogether. This can easily happen when organizations lack an effective procurement management process, especially given how the average company uses 110 tools.

Not only do these automatic renewals leave you contractually committed to paying for the subscription for another year, and often at a far higher cost – our data indicates that SaaS prices rise by an average of 9% when auto-renewed – but they also leave you unable to cancel or rightsize the contract.

With this in mind, it’s almost always recommended that you request the removal of this clause.

According to Vertice’s own Head of Procurement EMEA, Nick Riley,Vendors will almost always remove an auto-renewal clause when asked to do so. If they don’t, ask them to include a separate clause that states that they will contact you, in writing, 90 days ahead of the renewal date to remind you of the upcoming renewal”.

Price increase clauses

33% of contracts include clauses that allow the vendor to increase pricing, usually at the point of renewal. But while this is the average, it is significantly higher in software categories such as email marketing (71%), content management systems (53%) and accounting (50%), and is therefore something you should be looking out for in the contract.

According to Nick, “It’s also worth being aware that clauses around price uplifts and renewals are often separate, so make sure to check the whole contract”.

If it does consist of a price uplift clause, we'd recommend negotiating its removal. If this isn’t possible, then you should consider negotiating a cap on these price uplifts, otherwise you could be left paying substantially more.

Some vendors, for example, include clauses allowing them to increase their pricing by any amount, as long as they provide the customer with 30 days notice.

Overages

Some software providers will charge overage costs, which are fees that are incurred when a user exceeds the contract’s usage limits or terms of their plan.

While vendors will generally negotiate on this, it’s not guaranteed. In fact, we’ve seen some vendors charge 25% more on anything that exceeds the contracted amount. When it comes to the types of overages to look out for, there are two common ones; user-based overages and usage-based overages.

• User overages

These fees are incurred when a number of users accessing the platform exceeds the allocated user limit outlined within the contract. What many companies aren’t aware of, however, is that you can often negotiate on additional users.

"When it comes to negotiating for more users, we tend to be open with the vendor about the customer’s plan to scale, as this can give us leverage. We would never guarantee growth beyond a 12-month prediction though”. Nick Riley, Head of Procurement EMEA

Nick also recommends building in pricing bands. If you have 100 users now, but plan on having 150 by the end of the year and 200 six months later, find out what the cost would be for those additional users. You can then secure the pricing for these additional users in your order form without having to commit to adding them.

• Usage overages

Usage-based overages refer to the additional charges incurred when a user exceeds their predetermined usage limits. While they can be slightly more difficult to negotiate on, some suppliers will let you run into overages for a month, but if you renew early they will let you skip the fee altogether.

While these are the two most common examples of overages, it’s also worth looking out for any clauses that might stipulate that a fee will be incurred if you exceed the predefined limits or terms of support, for example the number of support tickets you raise or the extent of technical assistance provided.

Billing terms

It’s important to understand the payment frequency specified in the contract. While the average vendor will push for an annual payment, it can be worth trying to negotiate monthly, quarterly, or biannual billing instead.

This way, you’re not only able to better manage your cash flow, but you may also have greater flexibility to adjust the contract based on your evolving needs.

Payment terms

While most software providers will give you 30 days to pay once the invoice has been raised, there is often the possibility to extend this.

In our experience, 90 days will typically be the best-case scenario you can hope for. In an ideal world, you’ll be looking to achieve monthly billing and net 90, allowing you to pay as little as possible and as far in the future as possible.

It is worth noting, however, that suppliers will often charge you more for this level of flexibility, which is why you tend to get better deals on annual plans.

Break clause

When vendors only offer a two-year contract, it can be worth negotiating a break clause. This means that if the vendor hasn’t delivered what it had promised within the service level agreement (SLA), companies can get out of the contract after the first year.

‍Reduction clause

Like with a break clause, you may want to consider requesting the inclusion of a reduction clause. In other words, a contractual provision that allows for a decrease in certain terms of obligations under specific circumstances.

If, for example, there's a chance you’ll require fewer users a year into a multi-year contract – whether that be because of planned redundancies or because you only need a higher amount for a certain time such as for the duration of a project – then it may be something worth requesting.

Cooling off periods

Another clause that can be negotiated and possibly included within a SaaS agreement is one that allows for a cooling-off period. At Vertice, we will occasionally negotiate this when a key stakeholder, for example the person responsible for legal, is on vacation. This can be thought of as a paid trial period for a month.

Exit clause

This is one of the most important elements to negotiate in a SaaS contract, as it provides the terms and conditions under which your organization can terminate the agreement before the end of the contract term.

Contract negotiation strategies

Engage in software contract negotiations as early as possible

Initiate discussions with vendors at least 90 days before contract renewal dates. This proactive approach not only allows you time to make more informed decisions based on utilization rates, but it also means you can obtain leverage such as pricing benchmarks.

Data from Vertice does in fact show that companies that begin negotiations more than 90 days ahead of renewals achieve average savings of 49%, compared to just 19% when they start between 30 and 90 days.

Discounts can differ significantly depending on the type of software. Get a detailed breakdown in our Spend Insights Hub

Consider multi-year SaaS agreements

Multi-year software contracts can provide significant cost savings, as many vendors will provide discounts for extended commitments.

In fact, we’ve found that for each additional year a customer commits to, vendors will offer an extra 5% discount on average.

Implement procurement automation

Automating the process for contract management in procurement can save a substantial amount of time, while reducing errors and ensuring compliance.

By implementing a procurement automation tool, you can specifically automate the purchase requisition process, streamline approvals, track renewals, and optimize spending.

See how one company accelerated their procurement cycles by as much as 55% by automating the process

Find out what other companies are paying for the same tools

One of the best ways to ensure you’re getting the best deal on your SaaS contracts is by benchmarking pricing and terms against other companies. By understanding what others are paying for the same plan type, you can strengthen your position during negotiations.

The best way to access this intel is through a SaaS contract negotiation software provider.

Leverage external negotiation support

Perhaps the biggest challenge with software contract negotiations is that they’re incredibly time-consuming – data shows that each one takes an average of 21 days, and as many as 385 hours are wasted on negotiations every year.

For many procurement teams, this means that it’s only possible to focus on the more strategic accounts, leaving tail spend unmanaged. Unfortunately, this often results in missed opportunities for savings, as smaller contracts or less critical tools don’t receive the attention they deserve.

Even for the tools that are being managed, success in negotiations is often limited without the right leverage and expertise.

This is where working with an outsourced procurement provider can make a significant difference. By partnering with a specialized procurement firm, companies can:

• Gain access to expertise – Third-party procurement providers bring years of negotiation experience to the table, not to mention extensive vendor knowledge.
• Increase leverage – Not only do procurement companies have access to exclusive pricing data, they know which levers to pull and when, ensuring more favorable agreements.
• Free up resources – With external procurement support, internal teams can focus on more strategic initiatives, while leaving the complex and time-consuming negotiations to experts who can handle them more efficiently.
• Unlock hidden savings – An experienced SaaS negotiator will be able to uncover savings that may have been overlooked or ignored. They will also have unparalleled knowledge, for example an understanding of the pricing models that often don’t go advertised.

Let Vertice handle your SaaS negotiations

Effective contract negotiations not only require a huge amount of time, but the best outcomes rely on a nuanced understanding of the vendor, knowledge of what other companies are paying for the same subscriptions, and experience in navigating complex negotiation strategies.

At Vertice, we not only secure the very best deals on SaaS for our customers, but our advanced technology also enables them to streamline their entire procurement process, _.

Why not see for yourself how our platform supports organizations like yours by taking a self-guided tour of Vertice here. Alternatively, have a read of how we’ve saved one company more than $155,000 on a single contract, while helping another achieve average contract savings of 30%.

If you’d like to read any more of our guides, the list below contains helpful supplementary information around the SaaS contract negotiation process:

• Procurement negotiation — A guide to procurement negotiation, with benefits, barriers and tips on how to structure the process.
• Contract renewal management — Information on how to take control of contract renewal management in the face of rising SaaS subscriptions.
• Vendor relationship management — An overview of the four stages of vendor relationship management and why it’s important.
• SaaS implementation — Useful information on SLAs and the processes of implementation.
• SaaS contract negotiation — Additional reading on SaaS contract negotiation, including definitions of key terms and associated challenges.
• SaaS visibility — A guide to surfacing SaaS licenses in your business and eradicating shadow IT.