Procurement

  • 8 min read

Negotiating IT Contracts - The Comprehensive Guide

Sethu Meenakshisundaram

3rd November, 2021

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As an organization, you might want cost-effective yet feature-rich software for your business. But, how can you ensure the right quality of service?

That’s when a SaaS IT contract comes to your rescue.

But, how do you shortlist the right SaaS vendor for your business?

A SaaS contract defines the type of relationship between a SaaS vendor and its customers. It contains clauses for pricing, renewal, data privacy, IP rights, service level agreements, etc. With a definite contract with your SaaS providers, you can negotiate favorable terms and conditions for your business.

Let's clearly understand a SaaS contract, its benefits, and the right way to negotiate a SaaS IT contract agreement.

What Is a SaaS Contract

A SaaS contract is a legally binding agreement between a SaaS vendor and a customer (or a client). The SaaS company agrees to provide a specific IT service at defined terms and costs by signing the agreement.

Usually, the agreement centers around terms like the type of subscription, service charges, maintenance, support, and data security.

For example, imagine you are an organization that intends to purchase a SaaS email marketing software. You choose a vendor, and you can customize the software for your email campaigns. You need not worry about hardware or maintenance costs. The SaaS company takes care of both the up-gradation and maintenance charges.

Also, you can either opt for a monthly subscription to the email marketing software or go for a yearly plan. With negotiations, you can bargain for a discount with the long-term assured subscription plan.

SaaS IT contracts come with numerous benefits. Let’s see how.

What Are the Benefits of SaaS Contracts?

With SaaS contracts, you can have advantages like price locking, reliable service level agreements, and reduced setup time.

Let’s explore these benefits in detail.

1. Cost-effective Pricing in Exchange for Long-term Commitments

Negotiating a SaaScontract is one of the easiest ways to get a cost-effective deal. Probably, your existing business model may not be compatible with your vendor's business model. Then, you both can negotiate a middle path and finalize a mutually agreed costing plan. Hence, you need not spend an exorbitant amount on setting up your business.

For example, you may have a monthly subscription-based business plan while the vendor follows a yearly billing plan. Here, you can request the vendor to give you a discount for an annual billing plan. In this way, the vendor has the assurance of a long-term contract while you can avail of a cost-effective discount plan.

2. Assures a Minimum Performance Level

With a SaaS IT contract agreement, you get minimum quality assurance from your SaaS vendor. A service level agreement binds the vendor to render you negotiated services like reduced downtime and faster response time in case of customer calls.

For example, consider customer support. You can ask for24*7 support by email or through call. With better IT support, there is better performance of your workstation devices with minimal glitches. In case your vendor doesn't provide you with quality support, you can even terminate the agreement. Usually, businesses include an 'opt-out' clause to ensure the delivery of quality services.

3. Reduced Setup Time

When it comes to SaaS solutions, you need not worry about hardware requirements, software upgrades, or maintenance issues. You can directly access the software on the cloud using the webpage. 

The vendor handles the maintenance and support. Because of this, the total setup time of a SaaS solution reduces drastically. 

Moreover, SaaS IT contracts build a new level of relationship based on trust and integrity. Hence, your vendor will be proactive in setting up your SaaS systems. 

4. Option To Upgrade or Downgrade Features

Imagine your business plans to expand in the future. Then, the number of employees increases, and you also need to upgrade your data storage capabilities. In that case, you may want to scale up your cloud usage. 

Your SaaS IT contract agreement helps you scale up the platform usage space with minimal upfront costs on hardware purchase. You can ask your vendor to upgrade or downgrade your plan whenever as per your requirements. For example, you can choose a higher plan that offers you more licenses, increased storage capability, data export options, etc.

With a clear understanding of the benefits of a SaaS IT contract, it is time to learn how to negotiate a SaaS IT contract. 

How To Negotiate a SaaS IT Contract?

While negotiating a SaaS IT agreement, keep in mind the level of negotiation, the tone, the language, and the mandatory clauses to be included in the agreement.

Levels of Negotiation

There are different levels of IT contract negotiation based on the size of the SaaS buyer. For example, for small businesses with basic needs, the SaaS vendors offer fixed tier plans (one flat price). But, as the size of customers increases, the requirements also shoot up. Hence, for enterprise-level customers, there is a need for detailed SaaS contracts. These contracts are long-term agreements with a more extended subscription period. 

Let’s understand the step-by-step process to negotiate an IT contract.

Crucial Tips To Have a Fruitful Negotiation

When you negotiate an IT contract, make sure that you get a fair deal. Be clear with pricing and renewal norms, type of support, data security issues, opt-out clauses, etc.

• Have a Clear Purpose

Before even going into the negotiating table, ask yourself, "what am I trying to achieve with the negotiation? Is it a long-term subscription? Our cost-effective pricing? Else, is my focus on good maintenance and support? Having a clear-cut goal keeps you focussed while negotiating. Hence, make sure that you enter the negotiations with a positive frame of mind and clarity.

• Design Standard Operating Procedures

A SaaS IT contract negotiation involves multiple teams like legal, sales, development, marketing, and more. Therefore, you need to be transparent with the standard operating procedures for each team. In case the deal does not come through, what are the alternatives available for each group? Make sure that they can fall back on something concrete. Else, you may end up directionless, leading to disagreements between teams.

• Get a Template Ready

Ensure that you get a template for an IT contract ready from your legal team. It should be easy to customize. When a new team handles the agreement in the future, they need to have a clear reference to change the parameters. A template is a safe and effective way to speed up your negotiations. Otherwise, drafting contracts from scratch every time can be very time-consuming.

• Negotiate Custom Pricing Plans

Sometimes, your business model may not be compatible with that of the vendor's business model. Your plans might have a significant difference in pricing, duration, no: of licenses, etc. In such a case, try to negotiate specific custom pricing plans.

For example, imagine a company offering you two licenses per month at a higher cost. But, you can negotiate a yearly deal at a discounted price with more licenses, like three per month. Here, the vendor has the advantage of a long-term subscription. In comparison, your organization reaps the benefits of discounted prices with more no: of licenses.

• Incorporate a Clear Clause for Handling Extra Charges

Extra charges or additional charges can creep in at any time during the SaaS subscription period. Sometimes, you may not be aware of the costs until the billing period.

Hence, make sure that you have an explicit clause for extra charges in the IT contract agreement. You can request your vendor to notify you if they plan to bill you. The payment for the hidden charges can be made optional.

• Finalize the Pricing Period

Make sure that the plan is compatible with both you and the vendor. For example, a yearly plan with a discount can be cost-effective for both you and the SaaS vendor.

• Start With a Basic Plan

While starting with a new vendor, initially choose a basic plan. Going ahead, if you like their service, you can opt for more custom features. In this way, you get a clear picture of their services, support, and higher-level features. Else, you may end up spending more initially and feel dissatisfied with the services.

• Use a Discount Clause for Long-term Contracts

As an organization, you may be looking for a cost-effective plan. At the same time, the vendors may be looking at a profit perspective. In that case, you can bargain for a discount in return for a long-term contract. The vendors will be more than happy to have an extended agreement with assured returns.

• Insert a Service Level Agreement Section

A service level agreement is a type of agreement where you get an assured service quality from the vendor. It could relate to timely customer support, service bandwidth, software upgrades, etc. Some vendors even mention the estimated response time in the agreement. You can even terminate the deal if you don't get quality service. Also, you can apply penalties for breaking the agreement.

Consider an example of SLA from Microsoft Azure.

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• Have an Explicit Renewal Clause

How do you want to renew your service? Some vendors have auto-debit facilities. Here, the money automatically gets deducted at the end of every renewal cycle. Or, you can even opt for the manual deduction, where there is a payment notification at the end of the renewal cycle.

Be clear with the renewal option that you will choose. You may not want to make payment in the face of unsatisfactory services.

• Option To Scale Down

Most vendors support you when you want to scale up your business. It could take the form of increased licenses and discounts. But what if you're going to scale down? Imagine your business plan did not work out as expected. Will the vendors support the downgrade? Make this clause clear in your agreement, else you may end up paying more for the services.

• Type of Support Provided

Your business can run into various issues while using a SaaS service. Your server can go down, and there could be data access challenges or even security issues that can stall your work progress.

In this scenario, you would want quick support from your vendor in resolving the issue. It could be through 24*7 toll-free numbers, email support, or online self-help documents. 

Note that the level of support may depend on your pricing plans or license tiers. You need to ensure that you pick the plan that provides you with the right kind of support.

• Data Security Clause

SaaS cloud holds several personal details of your employees like name, address, phone no: etc. You may not want a hacking incident that can compromise data security. Ensure that your vendor follows recent data security compliance measures. 

For example, the European Union encourages all the European nations to follow the GDPR (General Data Protection Regulation). Similarly, HIPAA (Health Insurance Portability and Accountability Act of 1996) encourages transparency in sharing health information in the US. There is an inbuilt privacy rule attached with HIPPA.

Some organizations like Hubspot have a data protection officer to take care of the data privacy issues of their customers.

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• Check the Type and Frequency of Backups & Recovery

Data backup becomes essential when you want to recover your data lost due to a breakdown or if you choose to change your vendor. Most vendors provide data backup every day. But, recovery can take days or weeks together.

Hence, while negotiating the IT agreement, ensure that you get a reasonable data recovery time. Also, ensure that you have regular yet frequent backups of your data.

• Intellectual Property Rights Clause

Intellectual property (IP) rights in a SaaS contract mean that either you or the vendor have complete ownership over certain items in the service. For example, the vendor has full ownership over source code, while you may have exclusive rights to any content shared over the vendor platform. Further, these can involve website design data, developer codes, computer data, etc. You need to ensure the protection of these data explicitly in the contract agreement. Hence, make sure that you have copyrights, trademarks, or patents in place to protect your sensitive data.

• Incorporate an Opt-out Clause in the Contract

Imagine you don't like the vendor's service after using it for a while. Then, can you opt-out of the agreement? This flexibility is necessary for you to shift to the best vendor and avail of quality services. Some contracts even call for a penalty for not providing desired services. While few vendors even help you with transitioning to a new service provider after payment of nominal fees.

Negotiate the Best SaaS It Contract for Your Business

Negotiating a SaaS IT contract is the first step in ensuring quality service for your business. The benefits of a SaaS IT contract involve cost-effectiveness, reduced setup time, intuitive user interface, and better performance.

However, while negotiating an agreement, you need to have a clear purpose and follow a standard operating procedure (SOP). Make sure that you negotiate a custom pricing plan, preferably for a long-term basis. Also, be cautious about future hidden charges.

When it comes to service features, start with a basic plan. You can choose to scale up in the future. Also, see if the vendor gives you the option to scale down due to business recessions. Overall, ensure that you have enough data security and take a backup of your data anytime.

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About the author

Sethu Meenakshisundaram

Sethu is the Co-founder of Zluri. He believes SaaS and APIs will help everyone become a builder. He frequently writes on SaaS management and workplace automation. Before Zluri, he was part of the founding team at KNOLSKAPE, one of the leading corporate learning gamification startups that he helped scale across 30 countries. Other than technology, Sethu is passionate about quizzing, board games, and photography. His retirement plan is to operate a board game bistro in one of the touristy spots of Southeast Asia.