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How to Successfully Negotiate SAAS Contracts with HRMS Vendors
 

By Dave Zielinski  8/21/2013
 

 

If you haven’t yet negotiated a software-as-a-service (SAAS) contract with an HR technology vendor, chances are you’ll be involved in one soon, given the growing popularity of that software-delivery model. 

Although vendors negotiate hundreds of these contracts annually, most HR information system (HRIS) managers negotiate only a handful in their careers. So it pays to level the playing field by understanding the common pitfalls and missed opportunities in crafting these not-so-simple contracts.

SAAS arrangements, where organizations rent software applications hosted by vendors in the cloud, continue to gain traction as a preferred software solution for HRIS leaders.

In a  survey of 1,025 global companies across all industries, released Aug. 21, 2013, by Towers Watson, respondents who said they were planning to change their core HR management systems (HRMS) were asked which model they were considering. More than 35 percent said SAAS only, while just 12 percent said on-premise software; 24 percent said a combination of the two. The remaining respondents to the 2013 HR Delivery and Technology Survey were undecided.

Here are some areas experts say you should focus on to ensure win-win outcomes when negotiating SAAS contracts.

Pay upon “going live” versus implementation. It’s common for SAAS vendors to ask HR clients to pay annual subscription fees upfront or within 30 days of signing a contract. But since it can often take up to six months to fully implement or configure SAAS systems, “HR clients end up paying for a full year, when in essence they are only getting a half year of value,” said Ron Hanscome, research director of HCM Technologies for Gartner Inc., an information-technology research company.

Many vendors balk at agreeing to implementation “payment holidays,” but Hanscome suggests settling for no less than three months following implementation before starting payment, in essence making the first year of a subscription contract a 15-month period.

“Why should you be paying for something you aren’t yet using on a live production basis?” Hanscome said.

Ray Wang, CEO and principal analyst at Constellation Research, a technology research and advisory firm, said HRIS managers should strive to pay only for what they start with, as they often lose leverage by trying to negotiate the “big deal” with vendors.

“If you have 1,000 employees and think you might only get 100 up and running in four months, you should start with 100 licenses to keep some leverage then add employees or divisions as you continue to scale,” Wang said. “Many vendors don’t like the buy-as-you-go approach, but it should be part of the negotiation process.”

Constellation Research developed its Enterprise Cloud Buyer’s Bill of Rights based on its involvement in negotiation of 500 cloud-based contracts. The document is designed to help clients and vendors change the tenor of contract negotiations “from user subservience to an equal and collaborative long-term partnership,” according to Wang.

Be firm on service level agreements (SLAs). These agreements spell out services that SAAS vendors will provide during the contract, including system uptime, performance benchmarks, response time to problems, and more.

Hanscome said that while SLA standards such as “99.5 percent uptime” sound good, they don’t always include factors like scheduled maintenance by the vendor. “It’s important to understand what these maintenance windows are and the potential amount of downtime that could happen—especially if you’re an organization that runs 24/7,” he said. “If you’re global there’s no time when your system isn’t being used by employees around the world, not just human resources staff.”

Contracts also should specify your recompense if monthly uptime conditions aren’t met. Hanscome said such a provision might state that the first time an uptime requirement isn’t met will result in a meeting to discuss what happened; a second violation might result in a five percent service credit and a third problem a 10 percent credit. 

How quickly SAAS vendors will respond to client questions or problems should be addressed, too. “If you place a call or log a ticket, when should you expect a call back?” said Jason Averbook, chief business innovation officer at Appirio, a consulting firm specializing in cloud technologies.

“We encourage organizations to establish service tiers for that, getting vendors to commit to answering routine questions in X amount of time, mission-critical questions in X amount of time and so on,” he said.

Account for add-on costs and define users. Averbook said you’ll also want to ask SAAS vendors if there are implementation costs associated with the frequent software updates they release, as well as extra costs for mobile applications or foreign language capabilities.

“Some vendors have additional charges for these things, and some don’t,” he said. “The software upgrades are great, but if they’re costing you a lot from a process or change management standpoint to implement them, it changes the equation.”

Tension can also arise over how SAAS subscription users are defined in contracts. Both sides naturally count full-time employees as users, but what about retirees, seasonal workers and others?

“You have to make sure there is a common understanding of a user and how they’re counted,” said Derek Beebe, director of HR technology at Towers Watson.

“Say you have 10,000 active employees and 4,000 retirees. Do those retirees count as users? What if you’re a retail organization with a lot of turnover? You might have a base of 1,000 employees but in reality have 2,000 working over a contract period. At the end of the day, whether you pay for active or inactive users, you’re going to pay a total cost.”

Hanscome said it’s also wise to limit how much vendors can increase subscription fees during the contract and at renewal. For the three-year SAAS contracts typically signed for non-core HCM systems, he suggests contract language that caps price hikes at renewal to five percent or perhaps to the consumer price index (CPI) plus one or two percent.

Get IT involved early in negotiations. In its study of SAAS contracts in the HR industry, Gartner found that information-technology procurement professionals often don’t take part in negotiations until late in the game—and sometimes not until after a contract is signed and ready for payment. “In those situations, our research found, HR functions can pay 30 percent more [if they fail to involve] the IT function at the beginning of the process,” Hanscome said.

Wang said IT’s input is vital to understanding—and negotiating—the costs of data integration or migration before signing contracts. “That includes anything from interfaces that have to be upgraded to connections to things like benefits system,” he said.

Data security and privacy. The bad news is, hosted software solutions are increasingly under attack from sophisticated hackers. But the good news is, most reputable SAAS providers have the latest security features in place to keep confidential HR data locked down.

Many SAAS providers have moved from doing their own hosting to contracting with third-party providers to host client content, a development some experts view as a security upgrade.

“These third-party hosting facilities are contractually committed to levels of application security, rack security and physical building security that is above and beyond what an individual vendor could likely spend on those areas,” said Hanscome. “So we see this as a prevailing leading practice in the field.”

You’ll still want a request for proposal, to establish whether vendors have passed industry-standard audits around data center security, experts say, and to ensure your data are encrypted both at rest and in transit. So widespread is the practice that Google has announced it is now encrypting cloud storage by default.

“You’ll also want to know if your vendor is assuming liability for security breaches in its work environment, such as if someone is carrying a laptop or tablet with your company-specific information that gets stolen,” said Hanscome. 

What happens when contracts end? Contracts should always state that you own the data hosted by SAAS providers, but also essential are provisions stating that you’ll get that data back in usable form—and in timely fashion—when the contract ends.

“You become lower on the vendor’s priority list when a contract ends, so you want to have a provision that not only says you’ll get your data back in the format you choose, you’ll also receive it within a week or two,” said Debby Carreau, president of Inspired HR Ltd, a HR consulting and outsourcing firm.

Dave Zielinski is a freelance writer and an editor in Minneapolis.

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