Build a game plan
It’s important to talk to your team and finance department to understand which contract adjustments will make the greatest impact on your business:
- Do you want to minimize long-term costs? Then you’ll want to get the lowest subscription fees possible
- Do you want to minimize Year One costs? Then you’ll want to focus on the implementation and set-up costs
- Do you want to manage cash flow? Then you’ll want to focus on the payment terms
Note: Due to their recurring nature, your subscription fees will be the largest source of expenditures for your company. Therefore, negotiating your subscription fees down will have the greatest impact on your total cost of ownership. Naturally, this will be the area that vendors least want to discount
Gauge how much leverage you have
You’ll want to understand how much bargaining power you have, so that you can have realistic expectations about the success of your negotiations:
Most sales teams are measured on a quarterly and annual basis. Because of this, sales leaders don’t want potential deals delaying into next quarter or next year.
The number one way they can ensure a deal gets closed sooner than later, is by offering an end of quarter discount that is contingent upon your purchase being made in that time frame.
Don’t be afraid to flat out ask for the end of quarter discount. “My exec team is dragging their feet on this, but I think an expiring discount would get their attention. Are you running any end of quarter promotions?”
How much of an impact will your purchase make on this software vendor’s bottom line? To answer this, you need to have a rough idea of the size and makeup of a vendor’s customer base.
If the vendor has relatively few customers and you would be one of their largest clients, then you have significant leverage. If the opposite is true, then you may need to set expectations a bit lower.
An OutSail advisor can help you estimate where you fit into a vendor’s customer base
Learn about the vendor’s recent business and see if there are cracks in the foundation that might give you more leverage.
- Revenue Growth: Many vendors will have their quarterly earnings reports publicly available. Check to see how their revenue and profits from the most recent quarter compare to that same quarter the previous year. If revenue is flat or down, the vendor might be struggling to get new business and your leverage could go up.
- Business Concerns: Major changes at a software company can scare off potential buyers and lead to a more desperate seller. This could include: a recent merger, a changing C-suite, or some bad publicity. Any of these impacts could lead to the vendor being more incentivized than ever to get deals across the finish line.
- Economic Climate: Understanding the macroeconomic climate will also help you set expectations. In a slow, downturn economy, you will have much more bargaining power than you would in a bull market.
Note: The HRIS market was estimated to grow by 3% in 2020, but due to the economic slowdowns caused by COVID-19, the market is now expected to shrink by 2%. Those numbers may seem small, but that represents hundreds of millions of dollars in lost revenue. The only way for software vendors to make up that loss is to win a higher percentage of opportunities, which will mean going lower on price than they have in the past.
Start Your Negotiations
Now that you understand your goals and have set realistic expectations, it is time to start your negotiations.
- Begin the Conversation Early: If you wait until the last minute to start negotiating, it will appear to the vendor as a last-ditch effort to save a few bucks, instead of a serious part of your decision process. Make sure to broach the subject early on and keep it top-of-mind throughout your conversations with your vendor
- Let Sales Be Your Ally: Your salesperson will be the person who advocates internally on behalf of your team with the sales leader who can approve contract changes, so treat them like an important ally. Arm that salesperson with honest information on what your company’s priorities are (lower subscription, better payment terms, lower implementation) and why achieving these concessions will be a critical part in your decision process.
- Keep Your Options Open: Even if you are enamored with one vendor over all of the rest, it can be smart to keep your second-place option warm. Having a second proposal in hand can help drive urgency and also provide a back up plan, should something unexpected come up with your vendor-of-choice.
Note: Negotiating does not have to involve deception. The best course of action is almost always to have honest communication with your salesperson about your needs and how they will impact your decision process. That being said, it can also be smart to keep your options open and not tip your hand on your preferences. A well-timed silence can also cause a little bit of panic that can go a long way.
Get the Best Deal
Now that you are at the bargaining table, it is time to ensure you receive the best possible deal. Here are some core areas that most negotiations will focus on, as well as a few others that you may not have considered:
- Costs: Cost is the number one place where businesses negotiate, which makes sense since cash is king. Your two main levers with cost will be: one-time costs (mostly implementation fees) and ongoing costs (mostly subscription fees). Communicate your needs to your sales ally and use the leverage you have to push for a better deal
- Payment Terms: Most vendors will operate on an annual billing model, where you pay your entire software fees upfront for the year. In some cases, you will have the ability to push for semi-annual, quarterly or monthly payments so that your business can spread the cash outflows over a longer period. Additionally, you can also try to negotiate the payment terms to be set at Net-60 or Net-90, instead of the traditional Net-30.
- Cost Increases: A traditional contract will give the vendor the ability to raise your subscription fees indiscriminately. You can limit the vendor’s ability to that by tying their increase to something, such as an annual percentage (say 3% per year) or to the consumer price index (CPI).
- Penalties: In cases where it is critical that a certain go-live date is achieved, it can be smart to a consequence for late delivery if the vendor is at fault—such as a reduced payment. One approach would be to withhold a portion of the initial subscription fee until go-live.
- Service Level: Whenever possible, service level agreements should be specifically negotiated into the contract, including consequences for non-performance. This will minimize misunderstanding down the road and create appropriate incentive for the vendor to perform.
Note: Not even the best negotiators can get every clause and discount thrown into their agreement so it is important to prioritize each of these factors and get clear on which ones will make the biggest impact on your overall success with this vendor.