SaaS Contract Negotiation

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contract negotiation process

The number of SaaS licenses in the average organization is on the rise.

This increase is not a problem in and of itself — these subscriptions are often in place to support ambitious business growth — but negotiating SaaS contracts and optimizing the terms of the arrangement is becoming more difficult to achieve.

Successful SaaS contract negotiation requires an understanding of both market conditions and platform facility, as well as strong negotiating tactics. But above all, it demands time to prepare.

Read on and learn how Vertice can support the process of negotiating SaaS contracts — through our platform and white-glove purchasing service, we ensure you never overspend on SaaS contracts again.

 

What is a SaaS contract?

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.

SaaS contracts – key terms to know

Naturally, SaaS agreements can be incredibly complex, even for relatively simple solutions or products. 

Here are some of the important terms you should know to better understand the 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.
  • 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. But SaaS isn’t going anywhere anytime soon — so how can you pay less for the digital solutions that power your business?

The answer lies in SaaS contract negotiation.

Between the billing price, support and maintenance fees, and hidden clauses, there are plenty of SaaS contract components that can be negotiated to push down your recurring costs and ensure that you’re getting the best possible terms.

Learn more about the levers you need to pull to execute successful software negotiations with Vertice.

The listed price is rarely the best price

It’s not always the case that SaaS companies publish pricing for their solutions on their websites. And even when they do, it’s important to realize this isn’t necessarily the best deal you can get. When negotiating SaaS contracts, there’s plenty of room to broker a better offer. After all, SaaS providers want your business — and they’re often willing to negotiate more favorable terms if it means they’ll close the deal.

Off the bat, many vendors offer discounts on their SaaS solutions for customers who pay annually instead of monthly, sometimes 20% or more. While that typically means a greater upfront cost, it’ll save you money in the long run. Volume-based discounting is frequently available as well, which can yield significant SaaS spend savings for larger enterprise customers.

Of course, you shouldn’t just be looking at the number on the sticker. Even if the service provider won’t budge on the price itself, it’s often possible to get improved terms when negotiating SaaS agreements. For example, you could request higher usage limits, faster response times, waived implementation fees, or free training and onboarding for your workforce. The bottom line? The majority of SaaS providers are willing to work with your legal team to provide a flexible pricing structure that meets your organization’s specific needs.

That’s where Vertice can help. 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 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.

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.

The challenges of SaaS contract negotiation

Negotiating SaaS contracts is not without its difficulties. It’s important to be prepared for the potential challenge. In any case, here are some common things 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.

Three SaaS contract negotiation 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 negotiation strategies that support integrative negotiation. 

1. Research

SaaS contract negotiations are pointless 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.
 

Effectively manage SaaS renewals

Renewals are another component of software contracts that can be negotiated. 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.
 

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.
 

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On top of that, buying, renewing, negotiating and managing your company’s SaaS stack are all major headaches.

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SaaS contract negotiation FAQs

Further reading

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.