3 Tips for Reducing Cost and Risk When Negotiating a New Software Purchase

Unlock success in software negotiation with these expert tips.

As a procurement specialist at a small or midsize business, you’re naturally concerned about cost and risk when entering into a SaaS contract for the first time. No matter how effective an application may be for your business, hidden costs, barriers to exit, and security issues may give you a reason to pause.

In this article, we identify the costs and risks associated with a new SaaS contract and how to reduce them while negotiating your purchase.

Even though these are some of the basic details, you can also include other important information, and this is where the negotiation process can play a significant role. For example, if the contract doesn’t already include it, you can add a section about cybersecurity and data protection. You can also contractually obligate the software provider to include services or features that make it easier for you to meet compliance standards.

For instance, suppose your business is impacted by the Health Insurance Portability and Accountability Act (HIPAA). You can then include encrypted data backups in your agreement with your software provider, which would keep patient health information more secure because the software provider offers an automated backup feature.

In this way, a software contract can be a versatile, powerful tool for helping your business get the most out of the software it uses and the services of the provider. With this in mind, when you take the time to negotiate before the contract begins you can put your organization in a stronger position when you have to renew.

What are the risks/negotiating points to be aware of?

The costs associated with licensing the product are just the tip of the iceberg. You also have to consider some less obvious details, such as:

  Hidden costs: These may include extra charges if you have to scale, fees for customizing your software, or other expenses.

  Price caps: You can negotiate a price cap, which can limit the total amount you have to pay. For instance, even if you go over the limit regarding how much data you use, you may not have to pay more than a certain amount per month.

  Demand planning: It’s best to plan for periods of abnormally high demand as you negotiate your contract to make sure that your usage doesn’t exceed the agreement’s boundaries.

In addition, there are some risks to keep top of mind as you negotiate the terms of your contract.

One risk that could impact how you use the software is URL terms. These may control who owns or controls the URLs connected with the service. For example, let’s say you subscribe to a web app that generates URLs that users can access while using the app online. Your contract can establish who owns each of these URLs and whether you can publish or disseminate them in marketing collateral.

You may also encounter risks associated with the services described in the agreement. To illustrate, there should be specific language regarding how the provider will manage changes to the scope of your usage. For instance, if you have to scale up from a cap of 100 to 150 users, can each of these expect dedicated, hand-held support if there is an issue? Or will the provider only be able to manage a certain number of help requests per month

For example, they may be more than willing to scale you up to 150 users, but can they assist as many as 150 employees with configuring their installations according to their specific roles? These intricacies should be ironed out before moving forward.

Many business models depend on subcontractors and other vendors who, at times, may need access to your software. If this is the case for your organization, during negotiations, you may want to get answers to the following questions:

• Can we add several temporary users when we have a subcontractor that needs access to our system?

• If the number of users we add puts us over the user limit, how will that impact what we have to pay?

• Are you going to help with onboarding temporary subcontractors who may only use the software for a few weeks? If so, is that included in the current pricing?

Once you and the provider agree on these and similar points, you’ll want to make sure they’re clearly stated in writing.

3 tips for reducing cost and risk when negotiating a new software purchase

By using the following three tips, you can drastically reduce the risk of hidden costs or a contract that limits your agility.

1. Give yourself time to prepare

Your preparation may take considerable time because it needs to focus on informing the team of stakeholders the agreement will impact. They need to know the risks inherent to the agreement because it can impact how they do their jobs or the decisions they have to make.^[1]

For example, suppose your contract has a lock-in period of a full calendar year. If you decide to end the agreement earlier than it’s scheduled for some reason, you have to pay an early termination fee. Knowing the potential costs ahead of time can help those involved in finance and designing your budget and C-suite executives decide whether this is the best SaaS solution to go with.

You should also talk about timelines for purchasing, onboarding, and implementing the service. Even though the purchase may be quick, it may take several weeks to get everyone fully onboard. In some cases, this could be due to the SaaS provider having limited staff to support the implementation. If another provider has a bigger team, they may be able to get everyone up and running much faster but may cost more.

By giving yourself time to have these kinds of negotiations, you can reflect on everyone’s concerns during the negotiation process.

2. Shop around

The sooner you introduce competition, the more leverage you have as you negotiate with a given provider. When you bring the SaaS provider’s competition into the mix, you’re able to achieve better pricing and terms.^[1]

Because it can take time to thoroughly vet the competition, you’ll want to give your team as long as nine months to a year to scan the market and consider alternatives.^[1]

Here are some factors to consider when deciding which competitors to introduce to the process:

• How much each service costs: This includes additional expenses, such as those associated with enhanced support services, scaling, or early termination fees.

• The features each competitor’s solution includes: By doing an apples-to-apples comparison, you may be revealed to valuable features of a competitor’s solution that can give you an edge while negotiating.

• Timetables for implementing the solution: Knowing their competition gives you a shorter runway for takeoff may motivate a SaaS provider to drop their costs—or optimize their onboarding process.

3. Know what kind of leverage you have

Your leverage will be unique depending on your organization’s needs and capabilities, but it may include^[1]:

• The size of the deal: If you’re going to be spending considerable cash on the deal, you can use this to get better pricing. This should include all business units across your organization, as well as a full range of costs. For example, if you're going to need to upgrade your service during a busy time of the year, you should also include this in your overall spending analysis.

• The number of products and modules you’ll be using: If you’re using several different elements of a provider’s offering, you may have more leverage than a company that only uses one or two. For example, you’re considering going with JD Edwards EnterpriseOne. If you’re going to use their supply chain management, customer relationship management (CRM), real estate management, and business intelligence modules, your broad usage may give you more leverage.

• How long a SaaS vendor’s specific service line has been in the market: If you're going to be using a relatively new service, you may have more leverage than if you were using more mature solutions.

In addition, as is the case with many contracts, the length of the agreement and when you’re signing on may enhance your leverage as well. Longer contracts give you more leverage, and signing on towards the end of the provider’s fiscal year or quarter can also strengthen your position. Your business can significantly boost the provider’s numbers, adding a nice polish to their financial reports.