Make a New Year resolution to add this to your next enterprise software RFI/RFP

Profile picture for user brianssommer By Brian Sommer January 7, 2020
Summary:
It’s a new year, so shouldn’t your firm start off its software selection activities on the right foot? Software contracts and their terms are something vendors refine hundreds or thousands of times annually. They write them to their advantage not yours. Here are some pointers for evening the odds. Good luck…

List

Before you invite any ERP or other enterprise software vendor in for a selection project, you should set some of the ground rules you expect in their contract. There’s no reason to blindly accept the T&Cs they want. It’s your money and if they want it, they need to meet you at least half-way.

Your selection team should consider inserting a version of the following in its RFI/RFP:

RFI Qualification Document

Your firm is being considered for an enterprise software selection. We have documented a number of items we desire from a finalist vendor. However, we will NOT consider any vendor that will not agree to the following:

  • Price certainty for 10-15 years – Our last enterprise software solution has been in use for over a decade. We expect our vendors to provide firm pricing (i.e., subscription costs, renewal price increases, user costs, etc.) for the next 10-15 years. We do not believe it is fair for a vendor to offer an initial term pricing for only three years and then substantially raise prices once the customer is locked-in.
  • No document pricing – If your firm charges a document (or line item) fee in addition to a subscription fee, we are not interested in your solution. We can provide you with current document/line item counts and you are welcome to reprice your subscription cost to reflect our probable usage. However, we find variability of document pricing makes planning/budgeting and cost allocations difficult to complete and not a great use of our team’s time.
  • No embedded URLs – If your software agreement contains URLs, you must agree to incorporate these as part of the original contract. We do not believe it is fair for a vendor to place certain contract terms in a website that the vendor can alter at any time. We believe a good contract is one where both parties agree to the terms and conditions and honor these for the life of the arrangement.
  • No right to audit – This is a SaaS multi-tenant deal. You will know how many users are accessing the software so that an audit is superfluous. Software audits are a major time user of our IT group and we will no longer support these as we shift to the cloud.
  • Three or more user pricing tiers – A two-tier subscription pricing model is a non-starter (i.e., one price for full access users and one price for read-only access users). We expect to have a number of users who will need read/write access to 1-2 modules (e.g., Accounts Payable clerks need full access to the A/P module but read only access to other modules) and read only access for other modules. Paying full-access pricing and not being able to take advantage of it is a waste.
  • Additional users come at a steep discount – Vendors love to charge more for additional users when these users will likely cost them nothing to sell or support. When our firm is growing, scale is in play. Vendors should charge less per user for additional users.
  • When the business contracts, so should the subscription costs – It’s hard to find a software agreement where costs ever come down. When our firm’s business contracts for economic factors, a divestiture, etc., your total pricing must allow a commensurate pro rata cost reduction. We expect a great vendor partnership in good times and bad. One-way price movements are contrary to a great vendor relationship.
  • Protection and indemnification from Indirect Access – If the use of your software triggers an indirect access charge from your firm (or another software vendor), we expect your firm to drop this matter and/or support us in fighting the claim by the other vendor.

Push back

You can expect vendors to push back on almost every one of these. You’ll need to stand firm. Don’t waste time or reward bad actors with your business and your capital. And don’t let them try to accommodate 2-3 of these. They need to meet you on almost all of these demands if you want to be able to sleep well at night.

Why must you demand these things?  In short, you’ll get screwed if you don’t. Maybe the initial term will seem affordable but subsequent renewals can become acutely painful. For example, I recently reviewed a contract where the document pricing was initially marked down to 4% of list price. When I pointed out to the client that the initial document pricing of $800,000/year could jump to $20,000,000/year at renewal, document pricing became a real negotiation item.

New cost categories

My clients are often frustrated by their inability to plan for the cost of using the new software. In some recent deals, lots of new costs popped up in the RFI/RFP responses including:

  • Document storage – Vendors will charge you for every scanned invoice, job application, etc. that your firm wants to capture digitally and reference with your transactions. Don’t be surprised if vendors charge a ridiculously high cost for this service. This fee is for document storage and not the fee vendors charge for documents/line items.
  • Application Maintenance Service – the implementer wants to charge an annual fee to maintain the cloud application. This (substantial) cost element occurs when the software is running in an on-premises, hosted, private cloud or other single-tenant deployment. Many multi-tenant solutions do not need this.
  • Managed Services - this is sometimes pitched when the customer might need help documenting and managing service tickets. As before, this might not be needed with multi-tenant solutions as the vendor is only supporting one version of the code in one technical environment.
  • Integration Services – this additional service helps connect new and old applications together. It can also include support to pre-test integrations every time a new release of the application software comes out.
  • Cloud platform management – this service helps the customer adjust their cloud hyperscaler environment to keep costs low and to avoid performance issues. Multi-tenant solutions don’t need this.
  • Database tuning service – For non-multi-tenant deployments, this service optimizes database performance.
  • VM license – you may need to acquire a virtual machine license to operate the new software on a hosted cloud environment. This is not applicable for multi-tenant solutions.

For software buyers, you need to get the vendors (and their implementation partners) to provide a detailed cost schedule. Moreover, this schedule should extend for ten+ years. Pay particular attention to costs that get reset at renewals as substantial price increases can occur then. (Note: if the vendor tries to justify major increases at renewal (i.e., increases that exceed inflation rate) as due to increased functionality now in the product, then remind them that you were willing to subscribe to the less-featured product and may not need these other capabilities.)

The key cost worksheet

What you’ll need to do next is to get a 10-year worksheet completed that includes all one-time and continuing costs. Put your spreadsheet into the RFI/RFP and require the vendors to pre-fill it. The spreadsheet should at least have buckets for the following cost categories:

Annual subscription cost

  • Applications - vendor supplied and third party (if applicable)
  • Tools (e.g., integration tools) (if applicable)

Document costs

  • Cost per document (or line item) X total annual documents (or line items) (if applicable)
  • Cost to store each document, photo, image, etc.

Implementation costs

  • Cost per additional users - full access, read-only access and limited access.
  • Hosting service fees (if applicable)
  • Application Maintenance Service (if applicable)
  • Managed Services (if applicable)
  • Integration Services (if applicable)
  • Cloud platform management (if applicable)
  • Database tuning service (if applicable)
  • VM license (if applicable)
  • Backup/Recovery software (if applicable)
  • Hardware Refreshed every 3 years (if applicable)
  • Annual Maintenance fee for application software (if applicable)
  • Annual Maintenance fee for systems software (if applicable)

Response 

Just know that many vendors will not complete this fully and only provide costing for the initial 3- or 5-year term. Kick their response back if they do this and tell them it is non-responsive. You can’t agree to decades-long deal when the other party will only share cost data for a fraction of this time. You might have to pester these vendors many times as they may ‘forget’ to include all costs in their initial pricing.

Also, contrary to the guidance you may have provided the vendors re: user counts, some vendors will lowball user counts or miscategorize the allocation of users so that subscription costs are minimized and the proposal will initially look more competitive.

There’s one additional wrinkle with this. Have the vendors complete the spreadsheet three times. You want to see how costs vary under several scenarios:

  • Expected normal growth – tell the vendor what kind of user growth, revenue growth and document growth you anticipate over the next ten years.
  • Outsized or lumpy growth
  • 30% contraction in business

What these different costing scenarios will point out may include:

  • How costs quickly grow at renewals
  • How the addition of new users is especially costly
  • How the subscription and other costs remain high in spite of having fewer users, annual documents, etc. than in a prior year

My take

Don’t be taken advantage of by an enterprise software vendor. Their contracts, terms and conditions were designed by their firms to maximize their income – not save you money. Two of the more interesting issues today concern the effect of abnormal price escalations at subscription renewals and the sheer number of new cost/expense categories that could materially impact total cost of ownership. Worse, a failure to understand and limit some of these costs could expose your firm to excessive price increases at renewal.