Crisis forces changes to SaaS contract negotiations

Now could be the right time to take another look at your organisation’s SaaS contracts.

The impact of COVID-19 has highlighted the ever-increasing costs, high degrees of lock-in and inflexibility of SaaS contracts. Organisations are realising that many current contracts aren’t fit for purpose, especially in times of crisis.

With many organisations forced to look at ways to optimise and cut costs in their IT budgets, future software and SaaS contracting must be looked at in a different way to ensure that costs align with value.

Gartner talked to many organisations over the past year that approached their major software and SaaS providers for relief, only to be left disappointed when offered extended payment terms in response. Only in very few instances have organisations — even those in dire financial distress — been able to align their costs with usage or make dramatic reductions commensurate to their current needs.

Some had an expectation that they could more easily right-size their SaaS contracts if they were negatively impacted by the pandemic. However, the contract the customer signed was typically very clear: no downward flexibility and no termination for convenience.

Customers found their contracts wanting in other ways. Some, for example, had even signed contracts that had no concept of force majeure and a right of termination linked to that. Almost no contracts have business downturn language.

Despite these issues, a large majority of large software and SaaS vendors very publicly offered ‘free’ software to clients for a limited time shortly after COVID-19 made the headlines. This was only ‘free’ if you weren’t already using the software and offers came with certain monetary strings after the free-of-charge period.

We’re now starting to speak with organisations whose free-of-charge periods are almost at an end. Not surprisingly, they really want to keep using the software and, in most cases, have little leverage to negotiate reduced fees.

Some still believe that a contract renewal is an opportunity to negotiate the cost of a contract downward, when keeping volumes flat. In reality, most SaaS vendors applied increases to unit pricing for the majority of renewals in 2020, within the range of 5 to 25% — and in some cases even more. The majority of customers have little leverage at renewal.

If your renewal is due in 2021, there will most likely be insufficient time to introduce and evaluate true competition, so that you could move away from your expensive and inflexible incumbent vendor to an alternative. The cost of switching may be prohibitive.

One option is to sign one- or two-year deals if your current vendor won’t negotiate more flexible or equitable terms, so you have time to go to market, plan your exit and migrate to an alternative provider in a controlled fashion. This threat alone may be sufficient leverage to get a more equitable deal with your incumbent vendor.

If switching from your incumbent, negotiate additional discounts or a one-off payment to offset potentially large migration costs with any new SaaS vendor. Negotiate appropriate robust exit provisions, such as free-of-charge data extraction and transition assistance, so future migrations can be achieved with less risk and cost.

Don’t forget to negotiate language in your contracts that allows commitments to reduce if there is a business downturn by including a structure to change quantities, price per unit or contract duration.

*Jo Liversidge is a Senior Director Analyst at Gartner, focused on IT procurement. She provides expertise in the areas of software licensing, pricing and contract negotiation strategies for Salesforce, Microsoft, Oracle and other SaaS providers.