Five Cloud/SaaS contract negotiation tips for 2012

Business leaders often take great care in building their Cloud and SaaS strategy, only to have many of the benefits of flexibility and agility hampered by overlooking details in their cloud contracts. In conversations with over 200 cloud...

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Business leaders often take great care in building their Cloud and SaaS strategy, only to have many of the benefits of flexibility and agility hampered by overlooking details in their cloud contracts. In conversations with over 200 cloud customers in 2011, key reasons include:

  • A common belief that SaaS and Cloud contracts are simple
  • Lack of software contract negotiations and procurement experience
  • Failure to review previous departmental contracts now in renewal mode
  • Limited access to SaaS and Cloud contract expertise

Avoid These Common Mistakes in Cloud Contracts

While SaaS/Cloud contracts are considerably less complicated, buyers should remember that even Cloud/SaaS software contracts still require some careful planning. Lessons learned from over 1200 software contract negotiations highlight five common mistakes made in cloud contracts.

  1. Blindly including support costs with the contract. While Cloud/SaaS contracts automatically bundle maintenance and updates into the subscriptions, customers often do not realise that they do not have to buy support. In fact, vendors are not allowed to require customers to buy support with subscription. Avoid going for the highest level support upon initial contract signing. This option can always be added at a later date.
  2. Failure to negotiate flex up provisions. Most contracts begin with a small number of users in a departmental setting. However as usage grows, most enterprises just add additional users without securing upfront discounts potentially leaving 1000€²s of dollars on the table. In contracts, remember to secure discounts for 2x, 3x, and 4x, your initial usage.
  3. Forgetting to negotiate flex down. As with securing discounts for adding usage, the true test of elasticity occurs when companies flex down usage. Negotiate the ability to reduce usage by 10%, 20%, and 30% without incurring penalties.
  4. Paying upfront without a discount. While many Cloud/SaaS vendors prefer annual agreements and annual payment upfront, savvy Cloud/SaaS buyers prefer to pay in more frequent cycles such as monthly and quarterly. Should a Cloud/SaaS provider seek upfront payment, negotiate a discount commensurate to your hurdle rate.
  5. Not trading referenceability for success. Customers often jump at the ability to serve as a referenceable client without ensuring that the software has been deployed. Agree to serve as a reference only after the software has been deployed. One common strategy, trade referenceability for prioritisation of key features into the next release.

As Cloud/SaaS contracts emerge as the norm, buyers should keep abreast of other changes. Stay tuned for the 2012 Cloud/SaaS Customer Bill of Rights to be published Q1 2012.

Your POV.

Need help with your software contract? Contact us throughout the vendor selection process. We can help with a quick contract review or even the complete vendor selection. Let us know your experiences. Add your comments to the blog or reach me via email: R (at) ConstellationRG (dot) com or R (at) SoftwareInsider (dot) com.

Published by R "Ray" Wang

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Buyers, do you need help with your apps strategy and vendor management strategy? Trying to figure out how to infuse innovation into your tech strategy? Ready to put the expertise of over 1200 software contract negotiations to work? Give us a call!

Related Resources and Links

20100419 Tuesday’s Tip: Dealing With Pesky Software Licensing Audits

20090714 Research Summary: An Enterprise Software Licensee’s Bill of Rights, V2

20101214 Tuesday’s Tip: Dealing With Vendor Offers To Cancel Shelfware And Replace With New Licenses

20100308 Monday’s Musings: Decoupling Support From Maintenance - What Apps Vendors Can Learn From Microsoft Dynamics
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Although we work closely with many mega software vendors, we want you to trust us. For the full disclosure policy, stay tuned for the full client list on the Constellation Research website.

Copyright © 2012 R Wang and Insider Associates, LLC All rights reserved.

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