The legal opinions in this article are the author’s own, not WorldCC’s, and this is not legal advice.
With an average organization having several hundred Software as a Service (SaaS) applications in the environment, sourcing professionals need to develop a strategic, comprehensive approach to their SaaS portfolio management or risk becoming overwhelmed. So, how can you ensure your SaaS negotiations are still effective? How can you determine which terms and conditions you need today to produce useful outcomes for the next generation? That’s what this article covers.
We are all aware the use of SaaS applications across every enterprise is growing exponentially. No secret the challenge for sourcing professionals is to balance optimization efforts and business needs with the necessary governance and optimization practices to manage operational risk. With the average organization having hundreds of SaaS applications in the environment, sourcing professionals need to implement a strategic, comprehensive approach to risk -- specifically the SaaS application portfolio management risk of being overwhelmed.
A key first action is to inventory current SaaS applications in the environment. This is no trivial task and will require use of a SaaS Management Platform and close internal collaboration to establish a SaaS application baseline. With discovery complete and SaaS application universe defined, the next action is to develop a segmentation or categorization structure that enables sourcing professionals to define the appropriate level of due diligence and governance tactics based upon the established criteria.
Typically, SaaS applications that will require sourcing to be involved fall into two primary categories: 1
- Enterprise SaaS applications such as Salesforce, Microsoft O365, ServiceNow and
- Emerging SaaS Platforms such as storage, collaboration, and other SaaS applications that are pervasive across the enterprise but might not have a consolidated agreement yet.
SaaS applications or platforms where sourcing cannot proactively support renewals can still benefit from emerging services designed to help organizations effectively manage their extended SaaS portfolios. By defining a few core criteria and requirements, sourcing professionals can enable these SaaS renewal and negotiation services to tackle the very many SaaS renewals of tactical SaaS applications and deliver results aligned to the pre-defined criteria.
For the SaaS applications that sourcing professionals will support, now is time to challenge SaaS application providers and establish next generation terms and conditions that balance client and provider interest.
Fortunately, sourcing professionals have already begun to challenge the terms and conditions that were thrust upon them in first generation SaaS agreements from Enterprise SaaS Applications and Emerging SaaS Platform providers. They have realized the full impact of the restrictive contracting practices and are fighting back with usage data.
Unfortunately, it is not easy to achieve optimization (best results) with SaaS application account teams. Leaders such as Microsoft O365 and Salesforce set the standard with criteria such as Qualified Users2 and other standards to lock customers into specific license types and add-on services with no flexibility to adjust based on actual usage. Traditionally, the account teams for these suppliers leverage data pulled from the client’s portal, tenant, or Salesforce ‘Org’ to drive aggressive negotiations based on aggregate reporting data.
REFOCUSING AT MANY LEVELS
Working in collaboration with multiple internal functions -- such as finance, vendor management, InfoSec,3 risk & compliance, and IT asset management -- sourcing professionals can lead the effort to quantify actual usage on many levels. Using a SaaS Management Platform (SMP)4 as the foundation of data collection, sourcing professionals can augment their SMP5 data with additional internal data sources such as human resources employee and contractor designation, and current Active Directory User6 listing.
When normalized and rationalized against the SaaS portal reporting, they will have a detailed depth of knowledge to control negotiations and challenge key terms and conditions that eliminate the desired flexibility for subscription services. They can then focus their energy in three areas where SaaS application providers have dictated terms that severely limit any flexibility and leads to gross levels of lost value.
- License type / profile limitation for software selection
First generation SaaS application enterprise agreements used the traditional method that organizations customarily followed to buy and deploy software. Most purchased a single profile or license type7 designed to meet business functionality and capability requirements. But when combined with additional clauses sprinkled across the agreement -- such as Qualified User, True-Down Limits8 or Single License Assignment – SaaS application providers locked their customers into agreements with no option other than to increase subscriptions levels of the designated profile.
Lessons learned – actions to take
- Before sourcing professionals can challenge the clauses, they need to have deep usage data that far exceeds the superficial, aggregate reporting leveraged by account teams. This will clearly demonstrate the need for usage-based flexibility based on and organizations actual employee and contractor requirements. Although Enterprise SaaS providers will not easily concede on these important terms, they can be placed in an awkward position to defend their refusal to grant flexibility when actual usage documents illustrate significant waste.
- Detailed usage data also enables sourcing professionals to meet with internal stakeholders such as human resources to discuss process alignment and employee category assignment to ensure continuity between a new employee’s function and the license type required. This coordination is key to managing a portfolio of profiles effectively and maintain ongoing efficiency.
Although the above-described actions are primarily intended for Enterprise SaaS applications such as Microsoft O365, Salesforce, ServiceNow and others -- sourcing professionals need to apply equal pressure to other targeted SaaS applications that enjoy broad usage across the employee universe. Establishing flexible license terms that reflect actual consumption establishes a path to strong optimization outcomes. Focusing continually in this area ensures the license baseline and license features effectively align to your organization’s consumption. In essence this forms the quantity component of the optimization formula.
- Automatic Renewal Rate Increase
To date, sourcing professionals have been focusing intently on first generation SaaS agreements that contain provisions for pre-determined rate increases at renewal time. In fact, if a client focuses most of his or her effort in this area, the SaaS account teams will usually concede a few points to create the illusion of savings while they capture enormous sums for add-on products and platform services.
Sourcing professionals seeking greater equality and balance in key terms and conditions need to recognize that all elements driving cost need to be handled in a single comprehensive manner. Second generation SaaS agreements will begin to reflect client price sheet type of outputs that summarize all cost associated with the services. This will eliminate the need to reference price and cost drivers in multiple documents to establish clarity of all elements that can impact the cost of rendered services.
Three key actions -- in addition to challenging the automatic renewal price increase – include these:
- Develop a complete list of all items and their limitations or allowances included in the agreement. This will assist you in budgeting and forecasting as well as focusing on usage analysis to uncover allowance consumption.
- Make sure you use clearly defined terms to describe certain details related to the SaaS applications platform or add-on products. For example, make sure details such as premium support and development sandboxes9 are clear and will be fully understood.
- Define the source data that drives all invoices for these services and confirm you have access to this data so that you can validate or take preemptive action before unbudgeted costs are paid or agreed.
Usage data for evaluating true relevancy and value of supporting these additional cost drivers are typically reported in the SaaS application portal. The trick is knowing how to extract the data and achieve sufficient detail to challenge the SaaS account team’s aggregate reporting. Ensure the data also enables meaningful discussion with business stakeholders and operations on these ancillary platform items that can add substantial, high-margin revenue for the SaaS provider.
Be aware of automatic renewal language. Although the above is primarily focused on Enterprise SaaS applications and Emerging SaaS Platform providers, sourcing professionals need to carefully review and challenge the automatic renewal language of SaaS applications across the other segments or defined categories. This language is viewed as best practice in the SaaS community for obvious reasons, because it places the burden on the client to proactively manage the process.
- Data Governance Requirements
Sourcing professionals, in collaboration with information security,10 compliance and operational risk organizations, must take the lead in negotiations of the multiple elements that address data governance. While the focus of this article is on effective SaaS negotiations and the terms and conditions necessary to achieve a next generation outcome, organizations must first define effective internal policies and controls for the selection, implementation and use of SaaS capabilities and data governance requirements. Once established, sourcing professionals can take the next logical step and ensure SaaS agreements align with these defined policies and controls.
To date, SaaS application providers have taken a template approach to their obligations to effectively govern client data. But again, this places the onus on clients to retrieve or protect data. Sourcing professionals can formalize language covering the four key terms described below -- then focus on incorporating these terms into both Enterprise SaaS and Emerging SaaS platform agreements:11
- Security Requirements: working closely with Information Security, determine the minimum requirements, due diligence, and evidence.
- Data Privacy & Compliance: Establish the measures by which data is protected and compliant with corporate requirements.
- Termination Rights: If an agreement is cancelled or business survivorship threatened; determine how data will be protected and the stated period ensured.
- Data Extraction Provisions: clearly define actions, timing, and obligations for the complete and accurate data recapture.
World Commerce & Contracting members have a tremendous resource to support negotiations of SaaS agreements with current best practices in the As-a-Service Contracting content area. These additional best practices can be used to support the 3 items defined above.
In conclusion, sourcing professionals are facing a significant challenge to establish effective governance and optimization practices for their SaaS application portfolio. With the SaaS universe effectively discovered and segmented, sourcing professionals can establish the strategies and tactics required to achieve the desired outcomes and lead their organizations to establish next generation SaaS agreements that deliver best practices in governance and optimization strategies.
- Enterprise / Emerging SaaS applications – further information:
- Microsoft O365
- Emerging SaaS platforms – related article – The Ten Essential SaaS Trends You Should Watch Out for in 2021
- Qualified User
- SaaS management platform
- symmetric multiprocessing (SMP)
- Active Directory User (listing)
- single profile or license type software
- true-down limits
- premium support and development sandboxes
- Information Security (sometimes referred to as InfoSec)
- Reference related article titled, Five Emerging Themes in ‘Enterprise-as-a-Service’ Contracting
ABOUT THE AUTHOR
Author of The Survival Guide to SaaS Optimization and creator of the Empowered SaaS Optimization (ESO) framework, Jim is the acknowledged community expert in implementation and execution of effective SaaS governance and optimization operations.
Jim’s focus is to provide mid to large enterprises the strategies and services necessary to achieve and maintain true optimization of their rapidly growing SaaS footprint. The Empowered SaaS Optimization (ESO) framework delivers true multi-level, deep optimization based on effective governance best practices. It sets the stage for effective SaaS operations -- whether that pertains to a dedicated staff or to SaaS Governance & Optimization managed services.
Jim is the Lead Facilitator for The Institute for the Advancement of SaaS Governance & Optimization Best Practices. The Institute is supported by an Industry Advisory Council of leaders from large, global organizations and a Provider Advisory Council comprised of the CEOs of 8 SaaS Management Platform providers.
Jim currently leads NPI’s SaaS & SAM optimization practice.
Content reflects views and opinions of the author and do not necessarily reflect the views and opinions of World Commerce & Contracting.