How To Manage Cost Increases with SaaS Contracts

According to Gartner, the software as a service (SaaS) market generated $37.7 billion in 2016. Transparency Market Research projects it’ll reach $164.29 billion by 2022. The benefits this kind of software affords over its on-premise counterparts are well documented by this point. Users will benefit from the seamless and continual access through the cloud, easy integrations between SaaS products, and automatic upgrades that ensure they always have the most recent version of the product.

But while the rise of SaaS brings with it numerous positive outcomes, it also introduces all sorts of risks to companies’ IT departments, particularly those trying to rein in costs. A company that has spent the last 20 years purchasing perpetual licenses for its software has likely had to radically rethink how it negotiates its contracts.

Koorosh Dehghan has witnessed firsthand how the nature of the software contract is changing. He graduated from law school in 1997 with a concentration in intellectual property and has been helping businesses draft and review contracts for 18 years. Currently, he’s the head of governance and contracts at Marriott International, which means he spends most of his time on the Fortune 500 company’s IT procurement (he also participates in the Society for Information Management’s (SIM) IT Procurement Working Group). “Two decades ago I didn’t deal with any SaaS agreements,” he said in an interview. “We didn’t have the ability to do on-demand subscription. Instead, the [software] company would want upfront payments for the software in exchange for unlimited use.”

Those perpetual license contracts often ran into the hundreds of pages, and much of the negotiation went toward the price for support and maintenance, which typically made up 25 percent of the total cost of the software. It’s only within the last six or seven years that Dehghan found himself frequently reviewing SaaS contracts. And with SaaS’s rapid ascendancy, he’s had to change his approach to contracts and how he assesses their short and long term value to the company for which he’s negotiating. Over time, he’s adopted a number of negotiating tactics that help ensure Marriott is getting the best price for the most value. Here are six of them:

Get to know your vendor

Before sitting down to negotiate, get to know your vendor and its current customer base. Is it a large or small company? Is it relatively new and/or venture-funded? Details like these can give you leverage as you negotiate. “Is it a company that doesn’t have a lot of customers but is growing quickly?” asked Dehghan. “Or are they a more mature company that has a lot of clients and has slowed growth? The reason that’s important for me to know upfront is I know how much I can push them on pricing. If it’s a small company their chief goal might be to get their service in as many doors as possible, and they’re willing to reduce prices heavily in order to get that big customer that they can talk about with other potential clients.”

Are there things other than money you can bargain with?

If a SaaS company is relatively new and looking for fast growth, it might be willing to reduce its prices if your company will agree to participate in a case study or allow your logo to appear on its “current customers” page. “Right now I’m in the hospitality industry, and so I want to see if they have a big client in that industry, because if not, that may be an opportunity for them to feature us as the customer in that vertical,” said Dehghan. “I’ll be able to use that to get some aggressive pricing in exchange for publicity, whether it’s a referral, a testimonial, a case study, some advisory hours with them, or maybe just allowing them to use our logo as an existing customer.”

Negotiate for longer contracts

Nearly all SaaS companies are willing to lower their prices if you’re willing to sign a longer-term contract. That’s because it’s vastly less expensive for them to keep an existing customer than it is to acquire a new one. “If it’s a vendor that we haven’t done business with or they’re not well known, I try to add an ‘out’ clause,” explained Dehghan. “It says that after 90 or 180 days, if this is not doing what we expected it to do, then we can get out of the contract. And some vendors are willing to agree to it, which shows me they’re pretty confident about their product.”

Negotiate contract extensions

It’s never too early to begin thinking about when the contract term ends. “Let’s say the business client tells me, ‘You know, this is good service and we’d like to lock them in for two years, but we don’t know what our needs will be two years from now,’” said Dehghan. “What I like to do at that point is lock in the vendor for two years but negotiate extensions at Marriott’s option for no price increase.”

Negotiate down your per-user cost

Many SaaS products price their services based on the number of users who will be logging in. So if it charges $60 per month per user and you have 10 employees at your company who will use the product, then you’ll be charged $600 per month. Dehghan recommends negotiating the contract so that as you add users, your price per user decreases after you hit certain benchmarks. “For example, I would negotiate it so that for the first 100 users we would be paying $50 per user,” he explained. “But once we hit 1,000 users, it’s going to reduce our cost to $40 per user. And once we hit 10,000, it’s going to get down to $30. Incrementally, the vendor is still making a lot more money, and we as the client will pay less per user as we add more users.”

Negotiate for an enterprise-wide license

Sometimes, especially if your company is large enough, you can negotiate away the per-user cost completely. “Instead of buying individual licenses for thousands of people, what we try to do is just see if we can negotiate with the SaaS provider and get an enterprise-wide license allowing unlimited use. It makes it easier for both sides to manage because you don’t have to worry about audits to see how many people are using it. It’s another win-win for both sides because it typically gives Marriott a lower price and the vendor a lot more profits.”

Your success with these negotiations will depend on a number of factors, including how large your company is and how small the vendor is. But typically a vendor will go to greater lengths to get you using its product more often for longer periods of time, and so you shouldn’t hesitate to use this desire as leverage. As with most things, it doesn’t hurt to ask.