6 Steps for a Successful Software Contract Negotiation

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Gather vital information about the vendor, and build a team to advocate your software needs.

header image shows icons representing a contract and an online shopping bag

Your company chose new software, and now it’s time to negotiate the contract. This seemingly simple discussion can make or break the entire deal and determine how useful the software ends up being for your business.

Software providers want their tool to work for you, but they also have skilled teams trained to maximize deals in their favor. Come to the table ready to negotiate like a pro: Gartner recommends these preparation tips for an optimal software contract negotiation to get the best software deal possible. We’ve also summarized the key actions you should take at each step (full report available to Gartner clients).

1. Assemble a negotiation team

The vendor is bringing their strongest team to the negotiation table, so you need to assemble one of your own to focus on specific aspects of the deal. The members of this team will depend on your business size and resources—the table below shows the various focus areas and things to consider for each focus area:

Focus area Things to consider
Procurement
  • Negotiation strategy
  • Request for proposal creation
  • Price checklist
Legal and contracts
  • Contract development and review
  • Legal terms and requirements
  • Terms and conditions checklist
  • Contract review and database
Business needs
  • Business need communication
  • Process performance
  • Hardware and software requirements
  • Technology standards
Application development
  • Project management
  • Build versus buy
  • Customization efforts
Finance and accounting
Vendor management
  • Relationship
  • Performance measurement
Information security
  • IT security policy
  • Data privacy
  • Regulatory compliance

Use this table as a checklist for your team members. Of course, not every company has individuals for each of these focus areas—if that’s the case, select the most appropriate team members to take on multiple responsibilities.

2. Capture fees and hidden costs

You’re probably going to pay more than the price listed on the website of your favorite software, and unless you ask, vendors won’t offer a detailed look at actual pricing. To go into a negotiation with a true cost assessment, ask questions ahead of time about these pricing aspects:

Software Maintenance and support Services and training
  • Fees: List and net price
  • Type: License or subscription
  • Metric: Per user vs. per month
  • Delivery: Cloud or on-premise
  • Integration: Fees for vendor assistance
  • Warranty: Length and expiration
  • Options: All coverage types and prices
  • Descriptions: Coverage details
  • Discounts: Options for reduced prices
  • Options: Pricing and time/materials
  • Rates: Blended or role-based
  • Methods: On-site, remote, or online
  • Payment: Timing of payment and travel fees

You’ll need to do a deeper dive into the software pricing metrics to get the most accurate costs. Depending on your specific business setup, certain vendor pricing methods can be a “win-win.” For example, a company that is rapidly hiring new employees can get more value for their money with a software subscription model that allows unlimited users for a set price.

Be sure to review the trade-offs for each method of software pricing to avoid overpaying (full report available to Gartner clients):

Pros and Cons of Software Pricing Metrics

3. Understand your T&Cs

The terms and conditions (T&Cs) of your software agreement describe the risks and rewards of the contract. Each software provider includes different terms, so it’s simpler to craft your own checklist of items that are must-haves for your business.

These terms will change depending on the deployment method—whether you install the software at your location or use it through a web browser.

Here are examples of terms and conditions typical for both types of software deployment:

On-premise software SaaS and cloud software
  • Defined pricing metrics
  • Clear service recovery plan
  • Cap on maintenance renewal increases
  • Right to perform audits
  • Cost of changing hardware
  • Bundling and renaming protection
  • Renewal price protection
  • Acceptable penalties for vendor service failure
  • Rights to customize, test, and develop
  • Clear data privacy and security terms
  • Defined support services
  • Rights to convert to on-premise

4. Uncover vendor motivations to gain leverage

The vendor is likely to gather information about your budget limits, how the software will be paid for, which executive will approve the deal, and who makes the final decision.

This gives the vendor more detail to leverage the deal in their favor, but you can ask questions to reveal the vendors’ motivations to make sure you have the same advantage.

Consider questions such as:

  • How do you get paid—straight commission, or salary and commission?
  • Do you get bonuses throughout the year? When do you get your biggest bonus?
  • Are you more highly compensated on some products and services than others—which ones, and how does the compensation incentive program work?

After gathering this info, see if these factors can give you a greater advantage:

Consider fiscal year-end. Do you have any vendors pushing you to close on a deal soon? Sales teams are normally aggressive, but they ramp up the pressure near their company’s fiscal year-end, and so should you.

It’s always best to stretch software discussions into the end of a fiscal quarter or year to leverage the vendor’s urgency to get a better deal—special pricing and discounts are easier to obtain when the sales team really needs to close the final deal of the quarter or year.

Fiscal year-end Vendors
January Autodesk, Salesforce, Workday
February Dell
March BMC, Compuware, Fujitsu, Hitachi, Lenovo, Symantec
April Infor
May Oracle
June Microsoft
July Cisco
October Broadcom, HPE, Micro Focus
November Adobe
December Amazon, ASG, Citrix, Google, IBM, Informatica, SAP, SAS, ServiceNow, Software AG, Tableau, Unisys

Is your vendor a startup? The booming growth of cloud-based software has spawned hundreds of small startup software providers that can offer more flexible terms and contracts than their larger enterprise competitors. A more agile startup vendor could be the perfect match between your functionality needs and budget.

This startup could also be preparing to raise funding—in this case, the vendor will want to increase customers and revenue ahead of a series funding round, which gives your company an advantage to negotiate a more valuable deal.

Depending on the size and type of software company, you can find funding, acquisition, and investor details at Crunchbase to leverage during the negotiation.

5. Use a scoring template to identify your best options

Use the criteria listed in the table below to score your top few software options against each other—this way, you’ll know exactly how invested in the deal you should be, or whether you can walk away.

Score the criteria from 1 to 5, and give important considerations more weight when calculating winners. Use as many or as few of these as needed for your vendor options:

  • Pricing
    • License fees
    • Customization and implementation costs
    • Maintenance fees
    • Training costs
  • Required (and nice-to-have) features and functionality
  • Operating requirements (compatibility and mobility)
  • Integrations
  • Support and training capabilities
  • Terms and conditions (T&Cs) risks

Capterra excel scorecard for rating software

6. Be prepared to walk away

After scoring each vendor, reviewing terms and conditions, and understanding the stakes for both the vendor and your company, you know whether you can afford to walk away toward other viable options.

Your list of requirements and valid alternatives gives you the ability to abandon negotiations with lower-scoring vendors when they don’t progress in a favorable direction. If you do walk away from negotiations, take the time to reset with your team:

  • Reframe your expectations
  • Strengthen your negotiation tactics
  • Determine if the next best software option is really worth pursuing

You’ll learn from each discussion how to better leverage your research and how to best respond to tough questions and tactics from vendors.

Gather the best resources for your software negotiation

Make sure your company is prepared for the most important conversation in the life of your software. To recap, gather your team of negotiators, understand the hidden costs and acceptable contract terms, then develop an effective game plan that puts the pressure back on the vendor.

If you’re getting a headstart on the process, you should analyze real user reviews and schedule a few software demos, then follow these steps from the beginning so you can tailor your negotiation plan to each vendor.

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About the Author

Taylor Short

Taylor Short

Taylor Short is a Senior Content Analyst at Capterra, covering technology and changing trends in the hotel industry, property, and maintenance management. He conducts primary research with both consumers and business owners to publish market reports and video content. His work has been cited in dozens of notable publications, including The Washington Post, Lodging Magazine, Facility Management Magazine, and Facility Executive Magazine. After earning a bachelor's degree in Journalism from the University of North Texas, he worked as a reporter covering city governments, businesses, schools, and police for newspapers in Dallas, Austin, and other regional markets. Taylor has also freelanced for Reuters News Agency and tutored students in English and writing at Austin Community College.

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