Coming to Terms

Gartner's Thomas Otter will explain to those attending this year's HR Technology® Conference why they shouldn't "go it alone" in negotiating a SaaS HCM contract, whatever its scope.

Sunday, September 16, 2012
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Thomas Otter tells the story of a company that signed a Software-as-a-Service agreement covering 10,000 records. Six months later, he says, a division of the company, representing roughly three-quarters of the business, was sold off.

Because no provision was included to address the possibility of workforce reduction or a business divesture, Otter says, the company had to pay fees as if those employees were still there for the full term of the agreement.

It ended up costing the company dearly.

It's not unusual for HR leaders to think they can "go it alone" in negotiating a SaaS HCM contract, as was the case here, says Otter, vice president of research with Gartner Inc. in Stamford, Conn. But, more often than not, he adds, those same individuals are regretting that decision later on, since such a negotiation is not one of HR's core competencies.

At this year's HR Technology® Conference in Chicago, Otter will conduct a workshop on Tuesday morning, Oct. 9, titled "SaaS Contracts: How Not to Get Ripped Off." Among other things, he'll offer attendees a comprehensive list of what to do and what not to do when negotiating a SaaS contract.

At the top of Otter's list of talking points will be the need for HR leaders to work closely with IT procurement when it comes to the agreement-negotiating process.

Don't Do-It-Yourself

As far as Otter's concerned, involving IT procurement in the SaaS HCM contract negotiations isn't simply a nice-to-do; it's an imperative. Gartner's data, he says, suggest this involvement can save employers, on average, 30 percent.

The reasons are simple.

"HR directors buy software once a year or maybe once every five years," Otter says. "A software salesperson, though, sells software every day.

"IT has a role in the business," he says. "Procurement has a role in the business. HR has a role in the business. And HR's role in the business isn't to negotiate software deals."

You wouldn't want an IT director developing grievance procedures, would you? Otter asks rhetorically.

Sure, he says, HR has a vital role in choosing the software. "I just don't think an HR director or HR IT director is well-versed in procurement skills and negotiation strategies, contractual clauses and the like. To ignore the experience of IT procurement in the acquisition of software is foolish and naïve behavior."

Otter says it's typical for companies to involve IT procurement in purchasing an "end-to-end" SaaS HCM solution. But it's not uncommon to find HR departments buying specific SaaS applications, such as recruiting, learning, performance and compensation, without IT's participation. "In fact, that's probably the majority [of deals] I see," he says.

Otter also says the HCM SaaS contract process is chock-full of landmines.

Take renewal clauses, Otter says. "You think you're getting a good discount, but you don't put any clause [in writing] regarding the renewal," he says. "So you automatically renew three years later . . . and there's a 20-percent or 30-percent increase. Whoops."

The first thing employers should do when they sign a contract, he says, is to ask, " 'How long are we going to be deploying the software for?' Let's imagine it's a performance-management system. Typically, you might want to deploy the software for five or six years. But if the term of your first contract is three years, then you better have a plan for the renewal -- because the best time to negotiate is at the time you sign the contract.

"Once you've rolled the thing out, you have zero leverage," he adds.

Then there are the service-level agreements, Otter says. "What happens if the system goes down? Often, those [scenarios] aren't in the contract, so you need to write those in." Similarly, employers need to ensure that the SLAs include penalties when levels aren't met.

"The vendor says, 'We have an SLA of 99.9,' but nowhere in the contract does it describe what the penalties are if you miss the SLA. What's the point of that?"

Clients might think that 99.9 is a really good SLA, Otter says, but then "you read further down in the contract and see that there are exceptions. A good procurement professional will [see the holes] and change the contract accordingly."

Or what about having access to data after the contract concludes? Otter says. "Let's assume you buy a learning-management system and then, after three years, you decide the vendor is not for you. You've got training and all sorts of things in that system, but in the contract, you don't have a provision for getting that data out in a time frame that suits you."

Then there's "shelfware," he says.

"It's bad enough when you buy on-premise software and don't use it," Otto says. "But what's worse is buying SaaS software and not using it," because you're actually paying for the hosting and the backup and then not taking advantage of it.

The list of things that can go wrong when HR tries to "go it alone" goes on and on, Otter says.

He cites, as an example, an HR department at a U.S.-based multinational that did a deal for a global system without involving legal or European colleagues in the discussion. "Both the French and the German works councils, and their data-protection offices, refused to deploy the system because there were no provisions regarding [the] European privacy law," he says. "So [the company] ended up getting stuck with a set of licenses that it couldn't use."

Fair and Transparent

To his dismay, Otter says, he's rarely seen a SaaS vendor put on the table a "balanced contract" from the beginning. "The behavior of most of the vendors in the area of contracts is as though they're still looking for an easy deal," he says.

Going forward, Otter says, vendors need to begin to include fairer and more transparent terms and conditions in their contracts, and consumers of the software need to begin "pushing back when terms are unfair."

Of course, he says, many of these same issues could also apply to on-premise agreements. But he believes employers are more apt to go into a SaaS negotiation believing they're not nearly as complicated as an on-premise deal and that SaaS vendors are much easier to negotiate with.

Otter contends they're wrong to think that.

"There's this weird myth that the SaaS vendors are the good guys," he says. "That the big ERP vendors are vicious. And that the SaaS guys are all open and transparent, [and] structure their contracts very fairly. That they're going to liberate you from the bad guys. That's nonsense!"

Generally, Otter says he's disappointed with the contractual behavior of SaaS HCM vendors. "I don't know of a single vendor that has a boilerplate contract I'm comfortable with, whether [we're talking about] an ERP vendor or a SaaS vendor. They all need to look in the mirror as to their contracting behavior."

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SaaS vendors tend to point the finger at the ERP vendors or on-premise vendors as being deceitful when it comes to maintenance, he says. "But I believe that dealing with SaaS vendors can be equally problematic."

Obviously, Otter says, it's to the vendors' advantage to pitch the deal so it falls under HR's operational spend, thereby leading HR to think it doesn't need to include other parties in the process.

"HR thinks they're getting a great discount," Otter says. "But once the organization has bought the software, then the hidden costs start to emerge, like professional-services fees, like integration costs and data conversion. These fees start to appear from nowhere."

That's not to say some of the blame shouldn't be placed on procurement's shoulders, Otter adds. "Often, the procurement function is not giving SaaS contracts the greatest attention either, because they're more worried about the big ERP contracts."

Slowly but surely, however, that's beginning to change, he says. "Most procurement functions now have been involved in some sort of SaaS deal, so [the procurement folks] have a much higher level of awareness than before."

During his career at Gartner, Otter has reviewed many contracts and is often amazed by what he sees. "I can tell right away as to whether anyone [knowledgeable] has looked at it. I see people signing boilerplate, straight out-of-the-box contracts, with limited protections."

Inevitably, that leads to problems down the road. "They're doing their organizations a serious disservice when they do that," he says. "They're wasting money and exposing their organizations to unnecessary risks. Then, IT and procurement are left to pick up the pieces."

SaaS agreements, Otter says, aren't any more complex than on-premise agreements. "They just have a different type of complexity," he says. "The challenge is that some people assume this is going to be easier because you don't have to buy hardware. There's a view that these systems are so lightweight and simple that the contractual side of it is also lightweight and simple. The truth is they're just different."

Otter doesn't view the relationship between HR and procurement any differently than the relationship between marketing and procurement or operations and procurement.

"No one likes the procurement department," he says. "They're typically gatekeepers; a good procurement department will challenge you as to why you would want to buy the solution in the first place. They'll be challenging the vendor. They'll be driving the best bargain for the organization."

Almost always, Otter says, they'll end up slowing down the purchase cycle.

But HR leaders need to remember that they're there for a reason, he adds.

Otter suggests that HR leaders would be well-served by engaging procurement early in the process, especially as the renewal date approaches.

"Let's say you do a three-year SaaS deal," Otter says. "Let's say it's for a piece of recruitment software. Three months before the contract ends, you realize you have to do something. Then you follow up with the vendor. Well, three months before the deal ends is too late."

Instead, he says, you need to call the vendor 18 months before the contract concludes. Let them know how things have gone so far, that a renewal is coming up, and that you're going to review them as well as others.

By doing this, Otter says, "you moved the situation from the vendor having you over the barrel from a renewal standpoint to you having the vendor in position to defend [itself] against competitors."

If your contract is for three years, he says, behave as if your contract is for three years. "Don't assume it's going to go on without any active involvement," he says. "You need to keep the vendors on their toes."

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