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How to negotiate modest enterprise SaaS deals in the 21st century

Den Howlett Profile picture for user gonzodaddy April 4, 2016
Signing on the dotted line for a SaaS contract should be relatively easy but nothing is simple in enterprise land. Here's what to look for.

At the back end of last week, several colleagues were scrambling to close out deals for theirs vendor companies. They were dashing around the countryside and I asked the question: Why, in a world of services, does the quarter end still represent a time of extreme angst? In my view, there has to be a better way.

First off the bat - large enterprise deals involving millions of dollars don't fall into this conversation so if you're looking for that magic bullet then you're in the wrong place. But the basic principles still apply.

I'm going to assume that you've done your research, been through the demos, got your basic management team buy in, ticked off due diligence including customer references and are now thinking about the nuts and bolts of the deal. I'm also thinking that you probably have a fair degree of trust for the other side of the deal.

The first thing you need to know is the value the deal will bring to you. Until very recently, most enterprise deals have been about how to keep the lights on at minimum cost. While that is a legitimate pursuit, as Phil Wainewright will tell you, the modern software landscape presents different opportunities.

The emergence of new ways to analyze information, the ability to stitch applications together that improve the customer experience and interesting topics like machine learning, change the way you think about software. Now, I see a much greater focus on problem solving and value generation. That in itself should lead you down a path that talks to topics like return on investment based upon calculations and assumptions you can confidently test.

Say for example a piece of software will save you $10,000 a year with a life of five years but an annual price uplift of 10%. If $10,000 is your acceptable target then clearly you don't pay more for the software than that benefit will deliver. If on the other hand you are lead to believe that the software will contribute to improved sales or customer retention then you need to calculate what that is likely to be before you can think about the price you are willing to pay. This is a trickier calculation because you're asking a crystal ball question. I've yet to meet the person who has nailed that, except in exceptional circumstances. But what you can do is develop a series of what if? scenarios that allow you to think about ball park range based figures.

Generally speaking, you will get a better deal at quarter end than you will at any other time in the cycle. That is because even though you may be buying a service, account executives are often compensated upon a component called 'bookings.' This is the contracted value they secure in a given accounting period. It is a throwback to the old licensing model but serves well enough where the contract value is measured annually. The more they can cram into a quarter, the less they have to worry about closing immediately after the quarter end. I get the logic but have never understood it. Why not start the quarter with a bang and still offer a great deal? As a buyer, you can always defer the deal until the end of the next quarter and still get a great price.

as-a-Service contracts are a bit different from 'normal' on-premises licenses in a couple of ways. First, there should not normally be support and storage options. Some vendors try slip this in and provide all sorts of bizarre reasons for doing so. If you are on the hook for storage, ask how much they will reduce each year, given that storage costs are falling all the time. For evidence, check out AWS.

Get your schedule of deliverables and milestones into the contract. This concentrates the mind and sets expectations around what both you and the vendor will be committing to in the post contract period.

Check for onboarding costs. as-a-Service solution implementations are always hectic at the beginning and the vendor will want compensating for that extra effort. You may get a better deal going to a third party but that is less likely if the vendor is relatively new and has yet to establish an ecosystem of partners. Regardless, see if you can get the vendor to bundle the onboarding costs.

Price hikes will be there in the small print so check out what the vendor is saying they want. My baseline is CPI+2% after the initial contract period on the basis that I will see improvements and enhancements anyway so paying that little bit extra is not going to break the bank any time soon. Some will argue that improvements are compensated at the vendor by lowered costs of compute but that isn't always the case. Check out how Dropbox continued using AWS for storage until they scaled to a point where it was more economic for them to build their own data centers.

If the service is coming from a provider that has not been in the market for very long then don't commit to more than a year, unless you can see that the functionality is business critical and you assess the vendor will be around for the long haul. Then it may be worth thinking about 2-3 year terms. In that case, get a fixed price for at least 2 years. The same thinking should also be applied to new technology where the market is undergoing rapid development. That way, you hedge against another player coming along with a superior offering. If you do a multi-year deal with a fixed price component, watch for the price hike clause.

In the good old on-prem days, you could reckon on heavy discounting provided you signed up for a maintenance deal. That's gone. And just as well because as we've seen in the past, vendors have a habit of cranking the maintenance costs when they can. But you can still negotiate for discount if the money on the table is large enough. You'd be surprised how relatively little were talking about before discounting kicks in. Your mileage will vary but anything upwards of 20% from the sticker price is OK.

Don't forget the very small print. Remember I mentioned storage costs? You also need to ensure you have absolute rights over your data to include the ability to take a data dump at any time of your choosing and at no cost. Most will offer a CSV export but some will move your data to a service like Redshift.

This one should be self evident but check for data location. Many jurisdictions have privacy laws that govern where you hold customer data. The fact the data is held by a third party doesn't exempt you from ensuring that you are in compliance.

Check for data sharing. Every SaaS provider will include convoluted wording that says they want access to your data. All include language (mostly derived from Google) that says that it is for service improvement but you must check that is the only purpose for which they get access and that such access is under controlled conditions. After all, it is your data and since you're paying, your customers' data is not the product.

A few final thoughts

  1. Set yourself the goal of making the deal process as enjoyable as possible. That's not easy but it will set the tone for the kind of email exchanges that flow from the various inquiries and answers.
  2. Never demand. Ask what your vendor is willing to put on the table at the first pass. If they've understood you correctly they'll have a good idea where they think both sides need to be. It won't be perfect and there may be some back and forth but that first pass offering is really important. To everyone.
  3. Watch out for the salesperson who is begging. That's always a bad sign that they've got eyes on the prize but not on you as a customer.
  4. Be polite and firm. Temperatures can rise very quickly if you feel like you're losing control of the deal. Not that you ever have control but you do have a shared responsibility with your vendor to get it right.
  5. If your vendor is not using an electronic signing service then they might not be as SaaS-y as they seem.
  6. Give where it matters more to the vendor than it does to you. It's not worth the time or angst on your side and will give relief to an account executive whose already under pressure.
  7. Don't get bogged down in tiny details that won't matter. It's surprising how many people do in order to make a point which sours the relationship.
  8. Negotiations are intense affairs and you will need to take a break at the end to reflect upon what you've achieved before signing off. If you don't do this then you'll almost certainly miss something that's vital to your business.
  9. Never, ever sign a deal where you have that tiny nagging feeling that you've not got it right. You'll live to regret your decision.
  10. Have that post contract deliverables checklist close to hand. You quickly come back to reality once the vendor has rung the 'deal done' bell and you've got the plaudits of your team for crushing it in the deal.

That's about it - anything I've missed?

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