7 min read
Jun 03, 2020
Software Buying Tips

5 Steps To Ace Software Contract Negotiations

Successful software contract negotiations benefit from prior preparation, a solid team and strategy, and timely decision-making.

G.M.
Gitanjali MariaSr. Content Analyst

Negotiating a software contract isn’t easy, whether you’re doing it for the first or the fifth time. You’ll have to check that the software meets your business needs while ensuring that the vendor isn’t overcharging or manipulating crucial contract terms. Software negotiation is a team effort that requires tons of preparation, a solid strategy, and even a pinch of luck!

Software contract negotiation doesn’t start or end at the vendor’s negotiation table. Preparation begins way before you meet the vendor’s sales team. It’s a long process that requires weeks or, sometimes, even months of research, discussions, and amendments before a deal is finalized. This article discusses five steps that you must get right to successfully negotiate a software contract. 

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1. Set up a buying/negotiation team

Having a strong team to help you during the software negotiation and selection stages will go a long way in ensuring that you sign a favorable contract. Include associates with diverse business expertise so that you receive input on software selection from different business units. As a team, decide on the software features needed, budget, optimal contract length, etc.

The table below lists some of the key business/functional units that must be part of your negotiation team.

Business/functional unit Inputs provided
Procurement Negotiation strategies and request for proposal (RFP) creation
Finance and budgeting Budget, total cost of ownership (TCO), and total cost of acquisition (TCA) estimates
Business units that’ll be using the software Software feature/functionality, user headcount, and integration requirements
IT management and security Data privacy, integration and monitoring, regulatory compliance, and customization requirements
Legal Terms and conditions checklist, contract drafting and review, and legal term definitions
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2. Conduct thorough research

Learn as much as possible about the vendors you’re negotiating with, and maintain an inquisitive stance throughout discussions. According to Gartner, when considering a purchase, 45% of a B2B buying group’s time is spent on research (via online and offline means).

Thorough research will help you shortlist vendors based on their product offerings, price discounts, and many more criteria. It’ll help you gather market insights and analyze software pricing models of multiple vendors. It’ll also help identify vendors’ strengths and weaknesses, marketing strategies, unique selling points, etc. Read customer reviews on third-party websites, such as ours, to learn about the experience actual buyers have had with different vendors and their products. 

Below is a downloadable vendor assessment template that your team can use to rank vendors. Use the template to capture product details for multiple vendors, score them, and identify the ones that best serve your needs.

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3. Have a flexible negotiation strategy

Negotiations mainly revolve around three factors—price, support, and terms and conditions (T&Cs).

Price

Price is often the driving factor for most software buyers. The price and discounts listed on vendor websites may seem attractive, but always look out for hidden charges, such as installation and maintenance costs, data transfer charges, and service charges. 

Negotiate with vendors to lock in a price for the entire or a major part of the contract term. Seek discounts as your user count increases. Negotiate to have lower termination costs, an extended warranty period, and discounted maintenance rates. Loop in your finance team to understand hidden costs, such as end-of-term price increases, and compare products based on the TCA rather than the listed price alone.

Case story

Bob contacted two SaaS vendors offering live chat software with similar features. Vendor 2 quoted a price $25,000 less than that quoted by Vendor 1. Bob was tempted to sign a five-year contract with Vendor 2. However, a chance encounter with his finance manager helped him understand the true cost of software acquisition for Vendor 2 (refer below charts for calculations) and how he would end up paying more over a five-year period.

Software support

Support services include the technical support vendors provide for implementing and maintaining software, such as installation assistance, data migration support, product updates, and remote troubleshooting. Negotiate with vendors to access these services at no or minimal costs. Mobile applications, a dedicated customer service representative, training videos, and community resources are some other support options to explore. 

Ask your vendor for a clearly defined service level agreement (SLA) that outlines service guarantees for metrics such as uptime, incident response time, recovery point objective (RPO), and recovery time objective (RTO). Ensure that the SLA also covers details on penalties and remedies when metrics aren't met.

Terms and conditions

The fine print of most T&C documents troubles buyers. The language is complex, and many technical and legal jargons are used, making it difficult to comprehend. 

Many businesses make SaaS software purchases online, without reading the T&C document. Such buyers risk paying additional costs, losing data privacy, etc. later on. Therefore, you must ensure full disclosure of all T&Cs during the software evaluation phase itself.  

Here are some common terms you’ll need to negotiate:

Term What you should negotiate for
Audit protection Most vendors add the right to conduct periodic metric count verifications to track your account’s usage. Negotiate to ensure transparency in audits, a limit on the number of audits, and access to audit reports/results.
Renewal price protection When you renew a software contract, ensure that the price increase isn’t over 5% and is for the entire renewal term and not on a year-on-year basis.
Line item payments Negotiate that the vendor will break up every cost item, such as support and storage, so that you know what you are paying for and have complete control over adding or dropping services.
Data confidentiality, privacy, security, and intellectual property protection Ensure that the software provider won't be using or sharing your data with third parties. Confirm that your data will be encrypted while in transit and at rest. Look out for compliance with regulations and industry standards, such as GDPR and ISO.
Storage limitation Get the vendor to explicitly mention storage limits, and negotiate pricing for any incremental storage that you might need.
Termination Negotiate to be able to terminate the contract within a reasonable notice period. Add terms to recover payments made upfront or to cancel any future payment obligations
Force majeure Clearly define force majeure events—extraordinary circumstances that free either or both parties from contractual obligations. Also, negotiate to make the vendor’s third-party providers accountable.
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4. Time your negotiations

Timing your contract negotiation process will increase your bargaining power. Stretching negotiations toward the end of vendors’ quarter or fiscal year will put pressure on them to get the deal done and close their books. Give yourself enough time to clarify gray areas or get rid of any apprehensions before committing to a contract.

Plan your software purchase well in advance to avoid last-minute rush. Start the process preferably 12 months before your existing contract ends.

Here’s a timeline that you can plan for:

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5. Be prepared to exit if required

Be clear on what you absolutely need to sign a deal, and ensure that you aren’t compromising. Prepare to walk away if your terms aren’t met. Have a viable plan B—your next preferred vendor—and be ready to engage in fresh negotiations. Sometimes you’ll need to reframe your expectations or change your negotiation tactics/strategy.

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Practice until you get it perfect!

You may not always be able to pull off a successful negotiation. Practice and experience will make you an expert. Here are some tips to improve your negotiation skills.

  • Conduct mock negotiations with your staff. Practice as many scenarios as possible and figure out which negotiation strategy works best.

  • Shadow leaders who are expert negotiators. Observe and try emulating their body language, expression, voice tone, etc.

  • Experiment with artificial intelligence (AI)-based models to build data-driven negotiation strategies and predict vendor behavior to have an upper hand in negotiations.

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