Create a strategy
The first step in the process is to speak with your finance and accounting counterparts to understand what contract adjustments will be most impactful for your organization:
- Are you focused on reducing long-term costs? Then you’ll want to prioritize the cost of your subscription fees
- Are you focused on reducing short-term costs? Then you’ll want to prioritize one-off costs like professional services
- Are you focused on cash flow management? Then you’ll want to prioritize changing the payment terms
Keep in mind: Because subscription fees are recurring costs, these will be the largest expenditure for your organization. This means that reducing your software fees will have the greatest overall impact on your expenditures, but this will also be the area that vendors will least want to discount.
Understand your position
Once you know what you're looking for, you'll have to set reasonable expectations, but better understanding how much bargaining power you have:
Time of year
Most HRIS companies are publicly traded which means that their quarterly and annual results are very important to their stock price. Sales leaders are often incentivized to bring deals forward and warned not to allow deals to delay into future quarters.
You will often see sales organizations offer discounts that are contingent upon making a change before the quarter is over. In fact, as a buyer, you can ask your sales rep if any end-of-quarter discounts are available:
“My finance team is moving slowly right now, but I think an expiring discount would get their attention. Are you running any end of quarter promotions?”
It is important to know where your organization stands relative to the software vendor's priorities. Are you a big fish in a small pond? Or is your team's revenue a drop in the bucket?
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
Finally, it may be useful to learn more about an HRIS 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: Despite the fact that we are entering an economic slowdown, most HRIS companies are reporting stronger than expected results which shows that they are not in a desperate position with regards to economic concerns.
Begin the conversation
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.
Walk away happy
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.