By R “Ray” Wang on January 10, 2012
Business Leaders Often Poorly Prepared For Cloud/SaaS Contract Negotiations
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.
- Blindly including support costs with the contract. While Cloud/SaaS contracts automatically bundle maintenance and updates into the subscriptions, customers often do not realize 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.
- Failure to negotiate flex up provisions. Most contracts begin with a small number of users in a departmental setting. However as usage grow, most enterprises just add additional users without securing upfront discounts potentially leaving 1000′s of dollars on the table. In contracts, remember to secure discounts for 2x, 3x, and 4x, your initial usage.
- 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.
- 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.
- Not trading refrenceability 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 prioritization 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.
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.
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About the Author
R “Ray” Wang
CEO & Principal Analyst of Constellation Research, Inc. , previously a founding partner at Altimeter Group where he led the Enterprise Strategy team. Ray authors the popular enterprise software blog “A Software Insider’s Point of View”., and his point of view is frequently sought by publications such as The Wall Street Journal, Business Week, Fortune, Inc., The Associated Press, CIO Magazine, Information Week, ComputerWorld, Financial Times, eWeek, CRM Magazine, IDG News, ZDNet, TechTarget, and Managing Automation. In both 2008 and 2009, Ray was recognized by the prestigious Institute of Industry Analyst Relations (IIAR) as theAnalyst of the Year and in 2009 he was recognized as one of the most important analysts for Enteprise, SMB, and Software.
Article Originally Published at http://www.enterpriseirregulars.com/44800/five-cloudsaas-contract-negotiation-tips-for-2012/