Three Areas Where Most SaaS Agreements Fall Short (and What to Do About It)

Enterprise vendor cost optimization efforts have always been a consideration for leadership to extract the most performance value from vendors while saving costs. With the recent pandemic, these optimization efforts have accelerated to the top of the list of priorities for many Fortune 500 CIOs and CPOs. Among the levers being pulled to rein in costs is the migration of applications to the cloud provided by third parties as software-as-a-service (SaaS).

One of the biggest mistakes companies tend to make in this exercise is accepting SaaS application pricing and terms and conditions (T&Cs) at face value. This often happens when organizations are under pressure to implement solutions quickly or simply lack enterprise-level focus. The reality is that you do have leverage, and below you will find techniques Wavestone recommends IT and procurement leaders use to assert their buying power when negotiating SaaS agreements.

Here are three major areas where most SaaS agreements fall short, and how to fix them so your enterprise can maximize value and gain better savings.

1. Your applications portfolio isn’t aligned with the business strategy.

The problem:  Being smart about your SaaS procurements means understanding what you need to buy (which modules) and how they will be used (license requirements, normal or peak usage volumes, seasonality, etc.).  Without a strategic planning focus, a company will not make a cost-optimal purchase decision and will only learn what they should have bought through costly experience.

The fix: To ensure your SaaS agreements deliver value to the most pressing business needs, you need to develop, understand, and adhere to a multi-year IT-business strategy. Use this strategy to guide the planning process of utilization and contract term commitment for each SaaS agreement.

The go-forward strategy, contract renewal dates, and application usage metrics will be key data points in your discussions and benchmarking research prior to negotiations. Combining these key metrics and benchmarking data based on the enterprise industry and size will provide a comprehensive view of your current demand management. Leverage app usage details to identify optimization opportunities in current or future licensing agreements.

2. You’re not getting the true cost of service delivery, which may impact overall IT spend over time.

The problem: Lack of understanding of the vendor pricing structure and units of measurement, which could lead to overpayment for comparable services and unexpected price increase.

The fix: Competitive price benchmarking can make the decision-making more efficient and save the enterprise upwards of 30% in costs. It begins with an understanding of how the SaaS provider measures and prices its delivery. Depending on the enterprise domain being serviced, (human resources, finance, and so on) the measurement unit can be number of employees, number of users, number of licenses, or based on revenue. Once the metric is defined, benchmarking of unit costs via a value-added reseller or research advisory firm will be more accurate and worth the savings effort.

Extending an agreement’s length of term is another way to achieve savings. For example, a three-year agreement allows an average of 15% savings of total contract value, while preventing automatic price increases each year. Keep in mind that many SaaS agreements do have automatic price adjustments of up to 7% per year. A contract extension could result in a 23% cost avoidance.

Two other areas for cost optimization opportunities are the SaaS and software provider’s revenue recognition and payment terms. In many cases, the revenue recognition dates fall at the end of quarters for vendor earnings reporting. Take advantage of these dates to gain better rates as vendor account managers urgently want to close deals before the quarter ends. At the same time, have an internal procurement process in place to issue an immediate signature and purchase order.

In the case of payment terms, buyers traditionally were expected to make payments within 30 days. It is now common to see payment terms of up to 45 and sometimes even 60 days, depending upon the relationship.  The extension of payment terms frees up cash flow for other projects and protects the enterprise during any potential economic downturns.

3. You accept the provider’s terms and conditions as-is, resulting in preventable legal and financial exposure

The problem: Blind acceptance of changing T&Cs can lead to both legal and financial conflicts when issues arise or business models shift.

The two largest pitfalls in SaaS agreements are click-through T&Cs and the absence of clauses related to M&A divestiture activities.

1. Click-through T&Cs are not dated and can be changed online by the SaaS provider with no notification or consultation, which can be detrimental to the enterprise.

The fix: Enterprise stakeholders are often unaware that they can get these web-based T&Cs in hard copy to be reviewed in detail by their legal team and signed by their leadership. This extra effort will not only ensure contractual compliance but also reduces risks in contract lifecycle management.

2. During any divestiture activity, SaaS licensing costs can fluctuate due to over-licensing. Over-licensing occurs when the need for licenses is reduced significantly due to the divesture, but the retained enterprise is still required to pay the pre-divestiture fee in full.

The fix: Include a standard assignability clause within the contract T&Cs to allow the simple transfer of cloud-based licenses from the retained entity to the divested. This is to avoid placing the additional financial burden of shifting licensee allocations and contract disentanglement efforts on both parties.

Approaches in Negotiating SaaS Agreements

Conclusion

Traditionally, SaaS agreements were assumed to be fixed and non-negotiable, both their terms and conditions and, in some cases, the price per resource unit. Accepting SaaS vendors’ terms on paper at face value will result in both additional hard and soft costs that could be avoided using the techniques we recommend.