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How to Negotiate Contracts with HR Technology Vendors

man and woman talking in an office.

​One of the most daunting aspects of choosing a new technology vendor is negotiating the final contract. After product demonstrations are complete and a winning vendor is chosen, HR buyers find themselves having to make a deal with salespeople who are highly skilled at maximizing revenue for their employers.

How do you ensure the contract you sign doesn't leave you with buyer's remorse? SHRM Online spoke with human resource technology consultants and practitioners for their advice on how HR leaders—many of whom are in buying mode in 2021 as technology budgets expand—can maximize value in contracts, avoid pitfalls and capitalize on what often are missed opportunities to reduce costs.

Tap Internal Experts

Recruiting a small team of internal negotiators from sourcing, legal and IT can help ensure better deals, experts say. "The typical HR professional is in a purchase scenario maybe every other year for small systems and once every three to five years for larger systems like an HCM [human capital management] cloud suite," said Ron Hanscome, a research vice president specializing in HCM applications for research and advisory firm Gartner. "They are up against vendor salespeople who negotiate these contracts every day. So one of the best things for HR is to not go it alone, and bring in experts from sourcing or procurement to help negotiate contracts."

Gartner research shows that when sourcing experts are left out of negotiations for technology vendor contracts, HR can pay up to 30 percent more for those contracts, Hanscome said.

Be Ready to Negotiate

Most vendor pricing is negotiable in some fashion. "Sometimes vendor pricing is published, and other times it's not," Hanscome said, noting that smaller vendors are more likely to publish tiered pricing levels based on system features offered. "But in my view, it's almost always subject to some level of negotiation," he said.

Wiggle room on pricing often is tied to company size. For example, most providers of software-as-a-service (SaaS) products charge per employee, per month fees to use their software, and the more users a company has, the greater the prospect of receiving volume pricing discounts.

Hanscome said some vendors also consider offering discounts based on the type of worker using their platforms. For example, a full-time salaried worker might use the platform far more often than a part-time contract worker, and a vendor may offer price discounts for the latter based on lower volume of use.

Consider Creative Options When Seeking Better Contract Terms

Some vendors may offer improved contract terms for certain services or value you can bring to the relationship. "You might be able to negotiate better terms if you're willing to be a reference for the vendor or if you allow their logo to be exposed, for example," said Elaine Orler, senior vice president of technology consulting for the Talent Function, a Cielo company in San Diego. "Consider turning the cost conversation into a value conversation and go into the discussion knowing what you're willing to contribute."

Evaluate Total Cost of Ownership, Not Just Monthly Software Costs

Getting approval from a CFO for a significant new HR technology purchase increasingly requires a total cost of ownership (TCO) analysis, an evaluation sometimes overlooked by HR buyers.

"It's easy to focus only on per user, per month costs for vendor software, but you also need to factor in costs for things like technical support packages, system implementation and user training," said Michael Rochelle, chief strategy officer and principal human capital management analyst with the Brandon Hall Group in Delray Beach, Fla. "If a CFO doesn't see those kinds of expenses included, they'll immediately know you've greatly underestimated costs. HR buying teams should be prepared to have a full TCO discussion with a prospective vendor."

Negotiate at the End of a Vendor's Fiscal Quarter or Year

Salespeople often are anxious to meet their numbers at the end of a fiscal quarter or fiscal year and are more likely to offer discounts to quickly get deals on the books in those periods, experts say.

"Vendors work on different fiscal years and quarters, so it's important to know what those are and try to swing deals in those time periods," Hanscome said.

Don't Hide That You're Talking to Competitors

Don't shy away from applying competitive pressure in negotiations, experts say. "Be clear up front about which of the vendor's competitors you may be talking to," said George LaRocque, founder of WorkTech, an HR technology advisory company in New York City. "There is a rate card for most of these systems, and salespeople are usually empowered to move off of that card fairly quickly. There's nothing like some competitive pressure to find out what the vendor's bottom-line numbers really are."

Be Assertive in Negotiating Renewal Terms

Some vendor contracts include automatic contract renewal language. Try to remove or modify such conditions, experts say. "I usually recommend automatic renewal language be struck from a contract and replaced by an option to renew at the close of the contract at a set percentage hike," Hanscome said. "You don't want to be at the mercy of a vendor's automatic price hike at renewal."

Consider Longer Contract Terms for Better Pricing

HR buyers sometimes seek shorter contract terms for fear of overcommitting to a vendor who may not live up to their expectations. But experts suggest considering longer contract periods to get better pricing.

"Selecting and then implementing new systems like a core HR and payroll suite are long, exhausting efforts," Hanscome said. "You need to ask yourself how likely you really are to switch to a new vendor in three years. If you're confident in the new vendor after doing extensive due diligence, you should consider a five- to seven-year term, because that could provide you with a nice price discount."

Ensure You Meet Customer Support Staff—Before Inking the Contract

The vendor salespeople who negotiate your contract will no longer be in the picture by the time you start using a new system. Make sure you meet the person or team responsible for customer service after the sale, experts say.

"That is who you have to live with after the purchase," LaRocque said. "The vendor should make available the person who will be managing your account so you can get to know their capabilities before you sign the contract."

It's also important to understand the stipulations of service level agreements (SLA) around issues like system uptime, data access, security and more, LaRocque said. "Know what your escalation path is for any service issues you run into, so you won't have to rely on calling an 800 number when there are any urgent problems."

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


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