Revolutionize your software contract negotiation process

Software-as-a-service (SaaS) contracts are legal agreements between SaaS vendors — the provider of a given software solution — and customers. These contracts outline the terms and conditions under which the SaaS application is provided and used. They’re an essential part of the SaaS model, clearly establishing the expectations, responsibilities, and rights regarding use of the software. Or, in other words, what you’re getting for your money. 

A robust SaaS contract covers every aspect of service delivery. Not only will it describe the features and functionality the customer gets access to and at what price, but also things like who owns data stored within the SaaS application, who’s liable in the event of security issues or data breaches, and the process for terminating the agreement such as notice periods, data retrieval, or exit fees.

Contract terms are rarely fixed. Negotiation around key areas such as price, length, and features and functionality is almost expected. They are customizable to the needs of the customer and the vendor, with each party wanting to maximize the benefits for them. 

That’s why negotiating SaaS contracts is such a skill in any procurement process - balancing the needs of a business, the relationship with the vendor, and getting the most for the lowest cost possible.

SaaS contracts – key terms to know

Naturally, SaaS agreements can be incredibly complex, even for relatively simple solutions or products. Here are some important terms in a SaaS contract negotiation process:

• Software as a service (SaaS) – A delivery model where software is hosted on a cloud platform and accessed via the internet, typically on a subscription basis.
• Service level agreements (SLAs) – Part of a SaaS contract that defines the levels of service a vendor must provide, such as response times, guaranteed service uptime, and other performance metrics, along with any warranties.
• BATNA (Best Alternative To a Negotiated Agreement) - The best course of action if the primary negotiation fails, it can help customers avoid being forced into accepting a poor deal. 
• Data ownership – Clauses related to who owns data uploaded or generated within the SaaS solution.
• Data security – Agreements around how data stored and processed by the application 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, typically monthly or yearly.
• License – Generally speaking, a permit granted by vendors to use their SaaS products, but often referring more specifically to the pricing model, such as per-seat, concurrent, or usage-based subscriptions.
• Per seat licensing – Where a single software license is required per unique user requiring access to the SaaS solution.
• Concurrent licensing – Where any employee can use the license up to a maximum number, say up to five employees at once.
• Usage-based licensing – Where customers pay for the SaaS product based on usage metrics such as hours, data, or actions.
• Term – The duration of the SaaS contract, including start and end dates or renewal periods.
• Renewal – The process of extending the contract for another term. Many SaaS contracts include automatic renewal clauses by default.
• 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.

Why negotiate SaaS contracts?

As software stacks continue to grow, contract costs are driving up your organization’s spending. Technology is essential in powering your business’ growth and capabilities, especially when it comes to servicing your customers, so it’s not simply a case of cutting it back or getting rid of it to curb spending.

SaaS vendors don’t use pricing models that have set ‘list prices’, as in retail, instead preferring subscription-based pricing with flexible starting points. This is because each business will need varying levels of service from a vendor - in terms of usage, level of customer support, standard features, and much more. So it’s in the best interest of the vendor to offer tiered or flexible pricing to fit these requirements.

Because of the sheer variance in ultimate price, it makes it more difficult to present an easily understandable price to customers. However, vendors use this as an excuse to obscure or even completely hide their prices from public view, giving them the power to present inflated quotes to customers behind the screen of one-to-one conversations.

SaaS contract negotiation is therefore critical to counteract these vendor-engineering high prices. Effective negotiation to reduce costs also helps combat the scourge of SaaS inflation, where SaaS inflation rates sit far higher than regular consumer goods rates - mostly due to high vendor pricing.

Both you and your supplier will be looking to extract as much value from the contract as possible, often at a conflict of interest. There are, however, a number of negotiation levers at your disposal as a prospective customer. Using a SaaS contract negotiation checklist, your procurement operations teams can ensure your business gets what it needs from the arrangement.

Length of contract, feature sets, usage parameters, volume limits, product performance SLAs - practically anything is up for debate if you can negotiate effectively. It’s in the interest of the vendor to give you a best-fit product to ensure a long-term relationship with you, and that means tweaking what they offer to add in, takeaway, or stagger various elements. 

However, vendors are also trained negotiators. So they won’t just ‘give’ away contractual tweaks and changes. It’s up to you as a SaaS buyer to negotiate effectively using data and benchmarks to get the best deal for you. 

Partner with an expert buyer from Vertice

When you leverage our SaaS purchasing platform, cloud cost optimization tool, or our unified package, we’ll help you compare vendors to find the perfect solution for your business. From there, we can negotiate on your behalf — not only will we fight for the best price based on the level of service you require, but we’ll also leverage our market intel on what other businesses are paying.

You’ll also get access to contract management tools that make it easy to see what your SaaS applications are costing you and when your license agreements will renew. That way, you’ll be poised to negotiate a better deal when the time comes, or eliminate redundant or unused solutions entirely.

Key SaaS contract negotiables

Before negotiating SaaS contracts, it’s important that procurement teams understand the purpose of the purchase. Part of that understanding involves deciding, prior to discussions, which parts of the contract are up for negotiation and which aren’t. 

For example, if a business is looking to procure a CRM solution but cannot afford to be exposed to a long-term lock-in, is there a possibility of including a six-month break-clause in the contract alongside standard annual terms? Suppliers will want to encourage longer-term commitments, but exposing your business to a long-term cost for a tool that doesn’t fit requirements is a red-line, so you need to work out what you can negotiate within these parameters.

Knowing which elements of the contract need to be discussed creates a focused and effective negotiation — instead of spending time going through every detail, you can hone in on the terms and clauses that make the most difference to you. A SaaS contract negotiation checklist helps keep this on track, and likely will include standard negotiating points that you can add and subtract from during each individual procurement process.

Let’s take a look at some common sticking points of the negotiation process.

Product features

Many SaaS platforms cover a number of business disciplines — Zoho, for instance, is an integrated solution for marketing, IT, and HR professionals. 

A new customer might look to procure its marketing capabilities only, content with the existing IT and HR solutions in their software stack. However, there might be one part of Zoho’s HR functionality that the customer particularly covets. The issue is simple: the customer wants access to this one perk of the Zoho platform without having to subscribe to the entire HR strand.

This is a classic lever of contract negotiation. Although it’s a stretch to say that customers can cherry-pick precisely the features they want during negotiations, it would also be folly for software suppliers to wave away requests like this. After all, they’ll be able to charge extra for the added feature, allowing both parties to feel they’ve added value to their side of the deal.

However, vendors are also restricted by their own sales strategies and terms and conditions. So it’s not always a given that they will be so flexible. This is where negotiations can become stuck.  

Pricing

Perhaps the most obvious purpose of every SaaS contract negotiation is to lower the overall cost of the deal, and is integral to effective SaaS spend management. Suppliers hope to secure more favorable contract terms by hiding their pricing structures, forcing prospective customers into directly contacting sales for a quote. 

However, well-prepared procurement teams can drive price points down through the practical use of pricing data and a methodical negotiation process that covers product features, renewals, service agreements, and any other negotiable element of the deal. 

Without pricing benchmarks or industry pricing averages, customers risk going into negotiations without a reasonable starting point for costs. This can lead to substantial overpayments that aren’t immediately relevant, and allows the vendor to effectively control the price point discussions.

Renewals

Agreements over contract renewals constitute a large part of negotiating SaaS contracts. It’s here that suppliers attempt to drive their bottom line, locking new customers into auto-renewal clauses with year-on-year price hikes. The end result is that customers receive the same product and service but at higher cost, and often without the spirit of friendliness and attention to detail that new customers enjoy. 

When negotiating SaaS contracts, customers should look to impose conditions on contract renewal, covering areas such as platform performance, scalability, and ease of use. If customers are unsatisfied with the product, they should look to start renewal or renegotiation processes early - using the time to air grievances in a review and implement agreed resolutions into the new contract.

Failure to sufficiently track when contracts are up for renewal can impact how successfully customers are able to negotiate. For example, starting talks with the vendor 90 days before a contract expiry or auto-renewal data leaves ample time to discuss contractual improvements, negotiate any price increases and agree on any new terms of service. 

However the later customers leave it, the less time there is to work with vendors on these points and the more pressure a vendor can put on a customer to sign a new contract before hitting an expensive auto-renewal or experiencing a drop in service after the contract expires.

Service agreement (SLAs)

SLAs ensure that suppliers meet the expectations of their customers, such as achieving product uptime at the advertised percentage. They are essentially mechanisms to hold the vendor accountable for their service.

When a supplier is in breach of a service agreement, customers are legally permitted to cancel their contract at no expense — but only if they’ve negotiated this condition during contract discussions. 

These agreements can also include measurements around onboarding processes, training programs on how best to use the platform, security protocols, and technical assistance from customer support teams. Negotiating SLAs can be tricky, as vendors may not want to expose themselves to proving when they are in breach of contract, given that various penalties or discounts could be levied against them.

Best practices for negotiating SaaS contracts

So, how do you go about negotiating SaaS contracts in order to get the best value for money? Here are eight negotiation tactics to apply across your procurement process.

• Come prepared – Make sure you understand your business’s requirements and what you need from the solution by engaging with stakeholders and employees.
• Shop around – Get a sense of the market rates for solutions addressing your business needs, and keep these in mind during SaaS contract negotiation.
• Engage early – Communicating openly with the vendor from the get-go means more opportunity to hammer out a competitive agreement.
• Identify key requirements – Prioritize negotiation points based on the potential impact to your business, and be prepared to compromise on less important terms.
• Go beyond price – It’s not just about driving down the amount you pay. Requesting a higher level of service or usage can increase the value of your SaaS agreements.
• Seek legal advice – Be sure to get legal counsel from a professional who specializes in SaaS agreements to review proposed terms and identify potential risks.
• Manage vendor relationships – A solid business relationship with your service provider can go a long way in SaaS contract negotiation, with many vendors rewarding long-standing loyalty with discounts or price fixes.
• Use SaaS buying tools – Platforms like Vertice can streamline your procurement process, negotiating on your behalf and offering greater visibility into your entire cloud footprint throughout the contract lifecycle.
• Have a SaaS contract negotiation checklist - This helps you ensure that you are including everything you need to in your negotiations. They can become stressful and go off-track easily, which suits the vendor more than the customer.

The challenges of SaaS contract negotiation

Negotiating SaaS contracts is not without its difficulties. It’s important to be prepared for the potential challenge. Here are some common issues to watch out for:

• Complex pricing structures – SaaS providers often offer multiple pricing tiers, usage-based charges, and additional fees, making it hard to understand the true cost of the service.
• Realistic service-level agreements – Negotiating an SLA that balances your performance expectations with the provider’s capabilities requires careful consideration and collaboration from both parties.
• Vendor lock-in – SaaS contracts often include terms that make it difficult for customers to switch providers or migrate their data and workflows to alternative solutions.
• Renewal terms – Many contracts include auto-renewal clauses, often at higher rates, putting the burden on the customer to renegotiate more favorable terms.
• Changing business needs – It’s not always easy to forecast how your organization may evolve or grow during the contract, resulting in significant overage charges or wasted spend on services you don’t require.
• Legal and compliance risks – Legal and compliance considerations may vary across industries and jurisdictions, and ensuring your contract meets these needs requires constant oversight from subject matter experts.
• Negotiation power imbalance – SaaS providers may have greater negotiating power, especially against smaller customers or in highly competitive markets.

Negotiating SaaS contracts - strategies

Business negotiations can be broadly characterized into two strategies: distributive negotiation and integrative negotiation.

Distributive negotiation is a strongarm approach, where one party dominates negotiations to secure an arrangement that suits them.

Integrative negotiation, by contrast, concentrates on striking a mutually beneficial deal. When negotiating SaaS contracts, we recommend opting for this approach over trying to outmuscle software vendors. Remember that your suppliers are managing businesses too, and a pleasant negotiating experience will pay dividends during any future discussions.

With this in mind, here are three key pillars of SaaS contract negotiation that support integrative negotiation.

1. Research

SaaS contract negotiations are fruitless unless supported by sufficient research. At the negotiation stage, the purpose of this research relates to the product under discussion. What are its capabilities, how will it improve business operations, and what are the features your stakeholders require? These are some of the questions you should know prior to negotiation.

Without a clear understanding of the reasons why your team is interested in procuring a new platform, negotiations can become muddled, and stakeholders can be left with a solution they don’t want or even need.

Misunderstandings about the role the solution will play is frustrating for suppliers too. Rehashing the terms of the arrangement — or perhaps even canceling the agreement altogether — can be complicated, costly, and time consuming. With sufficient research underpinning negotiations, discussions have a better chance of leading quickly to a win-win resolution.

2. Decide on a BATNA

Before you head into contract negotiations, decide on your company’s BATNA — the best alternative to a negotiated agreement. BATNAs are arrangements signed off by both parties prior to negotiations, confirming the next steps in the event that no deal can be made.

The aim of SaaS contract negotiation is always to strike a happy medium, but for various reasons this isn’t always possible. BATNAs are insurance policies that prevent negotiations turning sour when deals look unlikely to close. By slightly relaxing the importance of the discussions, BATNAs afford both parties greater peace of mind at the table.

3. Be open-minded

Negotiating SaaS contracts is the one time where both parties can be honest about what they desire from a partnership. In this spirit of honesty, it’s important to be as open-minded as you can.

This doesn’t mean you should bend to the will of your supplier, but consider where there’s room in your position for compromise. You’ll enter negotiations with the expectation that your provider will adopt a similar position, so it’s only right that you do the same.

Being open-minded about what’s up for discussion will also clarify which parts of the contract are non-negotiable. Your supplier will respect these and work around them as best as they can.

Successful negotiations are firm but fair, understanding where there are opportunities for the arrangement to truly suit both parties without compromising on what’s essential. It’s through open-mindedness in negotiations that flourishing long-term vendor relationships can develop.

Negotiate with leverage to get the best deal

Knowledge of best practice SaaS negotiation strategies gives you unparalleled buying power when approaching software vendors.

To retain your business as a customer, providers are often willing to offer competitive rates or more flexible contract terms — but only if you drive a bargain in your negotiations.

To gain the all-important leverage, Vertice can handle your negotiations with the data necessary to secure a discount — all the while avoiding the common pitfalls in software buying.

• Learn all you need to know about software negotiation strategies
• Secure discounted rates with multi-year contracts
• Negotiate using a third party

Effectively manage SaaS renewals

Renewals are another component of SaaS contract negotiation. With each new tool taken in your SaaS stack, you’ll be dealing with another renewal date to keep on top of, and another means for software vendors to increase the price you pay.

When you’re expanding, it can be all too easy for contract dates and timelines to fall by the wayside and be forgotten about until it’s too late.

If you aren’t managing your renewals, you could be missing out on valuable opportunities to cancel unused contracts or renegotiate your terms for maximum return on investment.

With our one-stop software management platform, Vertice can help you to manage your renewals and identify opportunities across your portfolio to maximize return on investment.

• Regain control over your SaaS renewals

Solve the problem of pricing transparency

One of the biggest challenges that you’ll face in SaaS procurement is the lack of pricing transparency across the industry. Just 45% of SaaS vendors publicly display their pricing information online, leaving many buyers none the wiser as to whether they’re getting a good deal or not.

Using an extensive database, Vertice provides unparalleled insight into the pricing benchmarks offered by over 13,000 global SaaS vendors — intelligence that you won’t find anywhere else.

• Understand why and how SaaS pricing is obscured
• Get to grips with SaaS pricing benchmarks

Value creation through customer-empowered negotiations

Value creation is a term used to describe the process of extracting more value from an existing process. In the current business and economic landscapes — where global conflicts, political elections and trade restrictions are heavily influencing global markets — value creation is seen as a more sustainable instrument for business growth. 

Negotiating SaaS contracts is a procurement area rife with opportunities for value creation. There are currently underused software tools in your current stack, and features within those tools are also underutilized. Additionally, if you’ve been subscribing to a platform for a long period of time, it’s likely that you’ve also fallen victim to standard year-on-year price hikes.

Businesses using a SaaS spend management platform to generate full-stack observability can naturally discover licenses ripe for value creation targeting. It’s then up to negotiating teams to enhance and optimize contracts to increase their value. 

Vertice’s customer purchasing teams provide expert assistance here. We’ve benchmarked pricing data from over 16,000 vendors, understanding what businesses just like yours have paid for their subscriptions. We use this information as leverage during SaaS negotiations, driving price points down to ensure our clients never overspend when purchasing new licenses or renewing existing ones. 

This white-glove service is the first step in our efforts to optimize your SaaS operations and lower spend by up to 30%. Later steps assure consistent value creation at company-wide level via our SaaS Purchasing Platform and Cloud Optimization tool. 

Vertice’s mission is to lower SaaS expenditure across the board, and we have the tools to make it possible. We’re not bound by partnerships with specific vendors, nor are we incentivized to procure the most expensive solution on your behalf. We simply want to lower your software bill, no matter the size of your organization or the industry you operate in.

Leave SaaS contract negotiation to Vertice

Vertice is a two-part service. Our customer purchasing teams work on your company’s behalf to secure optimized SaaS contracts, while our SaaS Purchasing Platform provides greater visibility into your software subscriptions to identify cost saving opportunities. Our aim is simple: to lower annual SaaS spend across the board, regardless of the solutions your business needs. 

It’s no secret that hiding pricing information is standard practice in the SaaS industry, but our purchasing teams can bypass this frustration thanks to cost benchmarking data across more than 16,000 software vendors. With this information, we’re able to analyze pricing on thousands of past deals to gain insight into exactly what other companies are paying for given products.

The result? Our clients gain the upper hand when negotiating SaaS contracts. We won’t be strongarmed into purchasing a product at an inflated price, because we know the agreements similar organizations to yours already have in place.  

Companies across a range of industries have taken advantage of our white-glove SaaS contract negotiation service with some impressive results:

• Spenmo saved 50 hours of negotiating time, generating 25% in savings;
• Lighthouse shaved $170,000 off a single SaaS contract, achieving ROI within three days of becoming a Vertice customer;
• Capmo enjoyed a 50% decrease in time to contract approvals and 33% cost reductions on those same contracts. 

For more information on how we could help your business negotiate optimized SaaS contracts, get in touch via the form below.

Vertice in action

How we recently helped a technology company save big on their SaaS costs.

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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.