In SaaS contract negotiations, focus on customization, future pricing

Changing pricing models, longer contracts and customization are making it harder to switch providers, so build safety nets into your SaaS contracts.

Software as a Service (SaaS) contract negotiations are taking on new dimensions as vendors introduce utility-like pricing options and try to lock customers into longer contracts. And by building in support for more customizable applications and creating ecosystems of technology partners for related applications, they are also making it more difficult to switch from one provider to another.

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"A lot of SaaS offerings were pretty basic and you had an easier time switching from one to another [until recently]," said Liz Herbert, an analyst at Forrester Research Inc. in Cambridge, Mass. "Vendors are now trying to make it more difficult to switch by making their applications much more customizable." They are also trying to tempt customers into signing longer contracts, in some cases up to five years, by offering steep volume licensing discounts, she said.

Given such factors, any organization will want to work successfully with its current partner, yet create an escape hatch during negotiations in case things go south. Here are some recommendations from Herbert, who authored a Forrester study on SaaS contract negotiations:

Before investing in a lot of customization work, figure out how to take it with you if you switch providers. Document the customizations made, and if using a third-party consulting firm such as Accenture Ltd. or Deloitte & Touche, be aware of project ownership and who is responsible for which pieces. See if the firm will sign off on shared risk for cost and development work needed for a transition.

"If you decide to work with an Accenture, you need to ask them how they will help you transition," Herbert said. "Can they help you keep some portion of the project intact? You really need to consider the roles of all the different providers involved and how they can help you with a transition."

Another option is to own the customization work by doing it yourself, building a custom front end to your SaaS provider's software. This approach will also give you quicker development times and built-in security and access rights, she said.

When writing the terms of your initial contract, negotiate renewal terms, such as a price cap. "There will be a cost increase at the end of [longer] contracts, so set a rate cap for contract renewals, of, say, no more than a 10% increase for subsequent years of the contract," Herbert said.

Make sure there is room for renegotiation in your exit clause, given the evolving SaaS pricing model. In cases where you want to factor in new pricing scenarios, you are better off signing short-term contracts for a year with the ability to renegotiate the price at the end of that term.

I've seen some customers successfully get exit strategies that are 'no cause, no fee,' but many [exit clauses] are still based on a serious failure to meet requirements.
Liz Herbert
analystForrester Research Inc.
Write in compensation terms for use of your data. SaaS vendors create usage reports to help customers identify which users are and are not using a given service. Now SaaS vendors are also collecting data for their own product development purposes. A vendor can look at data across its user base and see that sale force automation usage is high, but the marketing application is not being used as much, for example. In turn the vendor takes this data to develop a product roadmap.

Vendors are also producing and selling more detailed benchmarking reports using data, for example, from a CRM application that shows the average deal size among financial services customers. "Customers are starting to ask for money from SaaS providers if the data is used by the vendor for R&D, and they are asking for free copies of the benchmarking reports, too," Herbert said.

Work with your legal team on the terms that will allow you to break the contract, including how much you will have to pay if you want out and what vendor shortcomings will justify termination. "I've seen some customers successfully get exit strategies that are 'no cause, no fee,' but many [exit clauses] are still based on a serious failure to meet requirements," Herbert said. This is also the time to set parameters around performance problems that justify breaking a contract.

Let us know what you think about the story; email: Christina Torode, Senior News Writer

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