6 Overlooked Elements in Your Planning & Budgeting Software Contract

Demystifying your software contract with the help of a Shortlist Category Expert

6 Overlooked Elements in Your Planning & Budgeting Software Contract

The fun part is over. You’ve sat through demos, scored them, and received pricing. After comparing quotes, you’ve made the decision. Time to commit.

You’ll usually sign three documents when purchasing a new Corporate Performance Management system, or any large business software platform for that matter:

  • Order Form
  • Subscription Service Agreement
  • Statement of Work

Those will contain many of the items referenced below, with different vendors putting them in different places. For example, some vendors will put the Renewal Cap right on the Order Form. Others will sneak it into the SSA where it’s hard to find.

The items listed here are usually negotiable, even if the sales rep doesn’t include it in their list of “levers” to get you a good deal.

If you’re working with ShortlistMatch on your evaluation, don’t be afraid of what you’ll see on this list. We’ll be able to give you guidance on a contract in just a few minutes. We’ve seen thousands of these.

Wondering about License Types? Those are covered here. (LINK)

1. Renewal Caps

Assuming you’re looking at a product that is subscription-based, expect to negotiate your renewal caps. They can be found:

  • On the Order Form
  • In the Subscription Service Agreement
  • Nowhere (look out!)

A Renewal Cap dictates the maximum amount, usually in the form of a percentage, that your annual price can increase when the time comes for the renewal. Take the example below in the case of a 10% Renewal Cap. Example is annual.

List Price of Software $50,000
Discount 40%
Final Price $30,000
Renewal Cap 10%
Annual Price at Renewal $33,000

 Depending on the length of your contract, this price increase could come as soon as a year, or perhaps after 3 years. This is why, while it may sound counterintuitive, confident vendors may encourage you to sign a 1-year agreement. This allows them to bump up the price every year instead of every 3 or 5. Think of it like this:

1 Year Contract Length 3 Year Contract Length
Starting ARR $30,000 Starting ARR $30,000
Year 2 $33,000 Year 2 $30,000
Year 3 $36,300 Year 3 $30,000
Year 4 $39,930 Year 4 $33,000
Year 5 $43,923 Year 5 $33,000
Year 6 $48,315 Year 6 $33,000
  $231,468   $189,000

 

In this case, the buyer ends up paying almost 20% more for the licenses over the life of the system when considering both contract length and renewal cap. This is why I always suggest negotiating this down to something more reasonable like 3-5%, and signing for 3 years if you’re confident about the system.

What’s worse? No renewal cap at all. In that case, the vendor has no barrier to doubling, tripling the price. That is a terrible situation to be in and should be dealt with during the original purchase. If the vendor tells you “Ah don’t worry, we’re totally fair when it comes time for renewal”, do not believe them. I’ve heard it said a thousand times, and it’s just never true. The renewal sales rep earns commission by raising the price. There must be guardrails, otherwise you’re going to get stomped.

There are some situations where a renewal cap might not apply. What if the license pricing is based on employee count or revenue? In those cases, you’ll be audited at renewal with those metrics in mind. In those cases, don’t expect prices to drop if you have a massive layoff or if your sales drop off a cliff.

The Fine Print

Beware of this doozy - something like “Renewal must include all products on this order form for the cap to apply”. This means that, should you drop some functionality at renewal, the cap will disappear, and the renewal sales rep will almost certainly raise your price well above what it was before to trap you into keeping the product you don’t want. It’s dirty – but very common.

Lastly, understand that vendors will raise list prices every year. Some younger companies raise or lower them multiple times per year, trying to find the right balance for the market. Your renewal cap is a guarantee that the price won’t go up, regardless of if they raise list. List doesn’t matter anymore. Never allow a renewals rep to try the ole’ “our list prices went up” trick.

 

2. Contract Length

This one plays a big role in the Renewal Cap discussion in the previous section but also has other implications. The most common lengths are 1, 3, and 5 years for most vendors.

If you’re going to go through the hassle of implementing a planning, budgeting, forecasting or consolidations tool, you’ll likely retain it for 5 years or more. This is assuming it works well for you and the implementation was done properly. With that in mind, there are two schools of thought on contract lengths.

For buyers who are not confident about what they’re licensing, or maybe they’re anticipating some sort of change in the business that will negate the CPM tool, they’ll ask for a one-year term. They feel that the risk of price increases is worth it, as the bigger risk is paying for years for a product that never worked for them.

Buyers who are more confident in their decision will opt for 3 to 5-year terms if the vendor is willing. This can save a significant amount of money over time. It also saves them the hassle of dealing with the renewal sales rep each year.

 

3. Payment Terms

Speaking of payments, the terms at which you’ll pay the vendor are always negotiable. There are a few factors to consider:

  • Net Terms: Due on Receipt, 30, 45, 60, 90
  • Payment Schedule
  • Pay As You Go: This one is rare in Corporate Performance Management. I can only think of one vendor who offers these terms as of this writing.

Net Terms

I’ve had customers push hard for 90-day terms, hoping they would complete the implementation by then, and if not, just not pay. I agreed to it once and noticed that it caused the customer to behave differently during the implementation. They seemed to always have one foot out the door instead of being fully committed. And, shockingly, the implementation went on a bit longer than 3 months. In this case, I should have refused the request and questioned the buyer’s commitment to the project.

In the end I don’t think you should worry too much about negotiating this. 30-45 days seems reasonable. Due on receipt is a little too aggressive, and 90 days is an eternity.

Payment Schedule

There are a few varieties here.

Licenses

  • Set Schedule: Monthly, Quarterly, Annually, for the length of the contract
  • Upfront: 100% of the Total Contract Value (TCV)

If you sign a multi-year contract, do not pay it all upfront. At worst, pay it annually. Best case you negotiate monthly or quarterly. I say this because I’ve worked with customers who have paid upfront for multiple years only to realize that the product wasn’t going to be a fit. Now they have no leverage outside of legal means, which are ugly and expensive.

Implementation

  • Fixed Bid: 25% down, 50% at month X, 25% at project completion or some mix of those percentages
  • Milestones: e.g. $5,000 when the integration is live, $10,000 once the financial reporting package is done, $5,000 once our department contributors are trained, $10,000 once we can go live with the annual budgeting process
  • Hourly: The most basic of all agreements. You get a bill each month for the amount of hours consumed.

Pay As You Go

Again, very rare. Add licenses, delete licenses whenever you feel like it. You’ll be charged each month for what those licenses were. Use some storage? Get charged. Remove a module? Bill goes down.

It’s a cool licensing model that gives you total flexibility but might hit you with a surprise charge if you start enabling features that you shouldn’t have.

 

I’ve worked with customers who have paid upfront for multiple years only to realize that the product wasn’t going to be a fit.

4. License Start Date

This one takes people by surprise who aren’t experienced in buying software. I’ve encountered buyers who convince themselves that the contract doesn’t start until the system goes live after implementation. This is never true. You have a license to use the system on the day listed on your Order Form. If a date is not listed, it is implied that the start date is the same day you put pen to paper on the Order Form.

The only benefit to negotiating this is if you want to buy now to get some sort of preferential pricing (vendor’s fiscal year end license giveaway) but plan to start implementing a month or two down the road.

 

5. Future Discount Guarantees

Sometimes called Discount Locks, these are intended to save time negotiating discounts in the future by guaranteeing a specific discount for additional licenses. This is helpful if you plan to roll out a budgeting system to just the finance team, but maybe next year provide access for all the department heads.

There are some nuances here that are important to look out for:

  • Discount Scope: Is it a blanket percentage discount for everything in the vendors portfolio? What if they release a brand-new product next year. Will it apply to that, or does it only apply to what is on the current order?
  • Discount Amount: Is the discount guarantee the same as the discount you’re getting on the original order, or is it tied to some sort of tiered spending threshold? Or is it different altogether?

Read the language carefully. It should be obvious if the language you’ve received falls into one of the categories above.

 

6. Cancellation

As a rule of thumb, SaaS agreements aren’t cancelable during the agreed upon term. There isn’t really a concept of returns in the industry. One reason for this is what some call “The Buyers Emotional Journey”. It looks like this:

Window Shopping on Websites Optimistic
Intros and Discovery Calls Excited
Demonstration Super Stoked
Implementation Scoping Less Stoked
Pricing Proposal Freaking Out
Signatures Totally Amped
Implementation Kickoff Anxiety
Mid Implementation Depression
Implementation Completion Runners High

 

If cancellations were readily available, just about every buyer would throw in the towel at the “Mid Implementation” depression phase. That is the peak of regret and second guessing in the process. Being in the software industry for as long as I have, I know that, if you can just get the customer through that period, your odds of retaining them are dramatically higher.

The other reason is the ASC606 rules that you are familiar with if you’re in the business of selling subscriptions. If both parties are allowed to cancel without consequences, the contract essentially doesn’t exist for the sake of revenue recognition. Hence, few sellers of subscriptions are going to be willing to negotiate that.

If you can negotiate a cancellation clause, it will generally be in the first few months of the contract. You may be on the hook for licenses up until that point if you end up cancelling.

 

In Conclusion

There is a lot here, but don’t let that scare you. If you work with ShortlistMatch on your evaluation, we’ll take a look at all of this for free. Reach out to us or start with a questionnaire.

Wondering about how licenses work? Go here.