Firms avoid on-demand pricing surprises with careful SLA negotiations

Some companies are finding that their initial on-demand software discounts disappear when their contract runs out, while others are winning concessions, thanks to a focus on SLAs.

Tom Kelly, the CIO and chief financial officer for 2nd Wind Exercise Equipment, got some good news when he renewed his company's contract with NetSuite Inc., an on-demand supplier of ERP and CRM applications.

The Eden Prairie, Minn.-based exercise equipment retailer has adopted a fully on-demand IT strategy, using Software as a Service (SaaS) for email, payroll, travel and expense reporting. It runs Google applications for its productivity suite. When 2nd Wind recently renegotiated with NetSuite for a second year of service, it got more than just another year of service.

Not everyone is so lucky. In many cases, SaaS applications -- and CRM specifically -- were brought into an organization as a way for business users to get applications up and running quickly with minimal involvement from IT. With those initial contracts now running out, some companies are getting a nasty surprise when the time comes for renewal.

 

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"Three or four years ago, the buyers were not that sophisticated," said Bill Band, vice president and principal analyst with Cambridge, Mass.-based Forrester Research. "They were trying to escape IT and procurement, so there was no provision for price escalation. Now they're coming up for renewal and getting surprises with price increases and adding more people."

It's important, Band advises, to be clear and specific with service-level agreements (SLAs) from the outset.

"Not just renegotiating, but negotiating, can be difficult where the bar has not been set the same as in a traditional hosting arrangement," said Liz Herbert, a senior analyst also with Forrester. It's paramount to establish contractual issues like uptime, she said, as well as the expectations for renegotiations when it comes to price increases and support, like hours of help desk support. "If you're dealing with one of the smaller vendors, you might not be able to get the [support] turnaround you're looking for."

For example, unwary on-demand application buyers may find themselves with long response times for support, limited availability on the times they can access it, or restrictions on how they can reach support, such as email versus phone.

"Some of the vendors do have boilerplates and for more strategic accounts are more willing to make concessions," Herbert said. "Some have nothing at all. They'll just say, 'We're committed to earning your business year over year.' "

A shift in pricing models?

Salesforce.com, a pioneer of the SaaS model, does have a standard contract it works from -- recognizing that as SaaS becomes more pervasive and extends to other applications, companies are going to want to adjust their spending from the standard flat per-user, per-month fee.

"We have looked at other pricing models -- logins per month, for example," said Al Falcione, Salesforce.com's senior director of product marketing. "With Ideas and Content [Salesforce.com's community building and content management applications], potentially every person in the company could be using us. As companies develop applications, they want to pay differently."

Salesforce.com publishes its uptime statistics on a dedicated website at trust.salesforce.com but organizations should still ensure that they include uptime in their SLA, Herbert warns.

"Involve purchasing, IT and legal -- try to get some type of service-level agreement and be clear about support," she said. "Often, it's not the people who renegotiate; it's the first-time contract signers who need to be most vigilant. In the contract, when you're hooked with first-time discounts, that's the time to start thinking about future price increases. Once you're signed up, the vendors have insight into how much you're using the software and how dependent you are."

As with any contract negotiations, it's imperative to get the best deal possible the first time around, not during a renegotiation. Buyers have little leverage once they've signed up. That said, some companies have had success winning concessions if they agree to a longer contract, according to Herbert.

Generally, however, it behooves fully SaaS-based vendors to stick to their boilerplate SLAs.

"We have two flavors, depending on the starting point, and we try to stay pretty close to those," said Mini Peiris, vice president of product marketing at NetSuite. "As we moved to a public company, we really strive for a one-year deal at this point. Otherwise you wind up with higher discount rates, and for multi-year revenue recognition, there's financial implications that aren't attractive when you're trying to model for the street. We push for the one-year deal, and a multi-year deal is the exception."

Some organizations have done well with on-demand SLA negotiations. When it bought Datamonitor in May, London-based publishing company Informa plc discovered that its new acquisition had a much better deal with Salesforce.com. It was able to get the same "sweetheart deal" for its own implementation.

"They've been very flexible," said Jonathan Earp, Informa's CIO.

2nd Wind's Kelly discovered after an encounter with the CEO of Postini -- the email archiving company acquired by Google -- that he was actually paying more than he should for email service. 2nd Wind got a credit for the extra charges.

"In terms of dealing with these vendors, it's like any business: You just need to be educated and know what you're getting into," Kelly said.

And, when compared with negotiating with some of the large, premise-based software vendors, SaaS can be a pleasure. Informa is also an SAP customer. Earp said negotiating with Salesforce.com is a different experience.

"I feel less dirty dealing with Salesforce," he said. "It seems to be easier. It's a much simpler licensing model."

Advice for negotiating on-demand SLAs

At the outset, companies considering large SaaS implementations should forecast the number of users they will add to the system and negotiate agreements if they think they may need to scale usage up or down, according to Forrester. Companies also need to think about more than just price and users in negotiations.

"Where we are running into problems is storage," said David Politis, executive vice president and general manager of Atlanta-based Vocalocity, a VoIP company. Vocalocity has 55 Salesforce.com seats.

"For us, on-demand is key in everything we do. I personally believe in the SaaS model in general," Politis said. "But the amount of storage that they give you is ridiculous. You have to buy additional storage. That, so far, has been one of their biggest weaknesses for us."

Forrester also recommends holding SaaS vendors accountable for data integration by clearly mapping out current and desired processes -- and defining a list of standard and customer fields that should be in the on-demand application. Firms should also be sure to stipulate how they will get their data back at the end of the contract, should they decide to end the relationship.

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