April 30, 2019

The Hidden Aspects of Multi-year Contracts

Buying SaaS? Think twice about multi-year contracts.

Cash is king for fast growing tech-forward companies. So when buying SaaS, companies often opt for multi-year contracts. It’s the logical choice, right? Vendors offer 10% to 30% discounts and companies can avoid annual price hikes and the hassle of renewal negotiations.

In theory this is good for everyone – customers save money and vendors have contractually dependable cash. Of course, this assumes full utilization and accurate need projections in anticipation of growth. And, as we’ve seen with dozens of clients running hundreds of SaaS applications, these are rarely safe assumptions.

Evaluating the worthwhileness of multi-year contracts requires a clear view of license use. Actual savings can only be realized if licenses are fully utilized.

Before signing off on multi-year contracts for SaaS tools, consider a few of the downsides associated with buying this way.

1. No solution flexibility

Not having the financial flexibility to respond to marketplace changes or evaluate competing services is a liability.

Innovation is a daily reality in the world of enterprise technology. Companies may find themselves locked in a multi-year agreement with a legacy software company, only to later find a solution from an upstart competitor that better fits their use case. Not having the financial flexibility to respond to marketplace changes or evaluate competing services is a liability. Companies attracted to the dollar benefits of multi-year deals assume productivity, collaboration, integration, service model, speed, security or other feature risks if they can’t adopt new and better SaaS when it hits the market.

2. Multi-year contract legalese

It’s important to understand what’s being agreed to in the multi-year deal.

Even if licenses are discounted, hard to understand contract terms for a multi-year deal may make a SaaS solution more expensive than anticipated. In some instances, they may reduce away any attractiveness of a longer contract versus having annual flexibility. SaaS pricing is notoriously opaque and it’s expected that SaaS companies make it a strategic priority to optimize their take from new customers. One study shows that 80% of the top 250 most successful SaaS companies in the world don’t list pricing. The reason for this? Salespeople can show value for services, convince buyers into going multi-year or makeup for discounts by repackaging them as one-time, initiation costs or ongoing service fees. While we don’t assume most SaaS companies have nefarious pricing tactics or that upfront pricing should be standard, caution must be taken. The point is, it’s important to understand what’s being agreed to in the multi-year deal and to make sure there’s exceptional value relative to those who only agree to annual contracts.

3. Innovation disincentive

As you’re locked into a set rate and fixed license amount, there’s not much they can do to upsel you.

If a company has the bulk of its revenue tied up in multi-year contracts, its innovation urgency is low. These companies may think: what’s the point of hustling on new updates when we have customers for a guaranteed 3+ years? Customers with multi-year contracts may sense the attention of their account or support reps wane too. As you’re locked into a set rate and fixed license amount, there’s not much they can do to upsel you. While there’s no ill intent here, it has become common practice. Since their company business model and personal comp plans depend on adding new business, you can bet that’s where their attention will be too. While this isn’t true of every vendor, it’s easy to see how vendor and customer incentives become quickly misaligned in businesses dependent on this type of contracting model.

Multi-year or per license?

While counterintuitive, growth companies should consider whether forgoing multi-year and paying more on a per license basis – while actively manage use – is a better long term approach.

Consider the simple example below:

This compares a company that opts for a multi-year contract to lock in license pricing versus a company that pays annually. Both companies try to project license need, although gauging licensing three years out is a much more inexact science.

In this example, the company pays more for every license, but buys more inline with actual through keeping a close eye on usage. In our eyes, this is key to maximizing the ROI of a SaaS subscription.

With Cleanshelf, companies can take advantage of insights from Cleanshelf Service Reviews to diligently measure the value of each application. They can also leverage our market insights to find out what other, similarly-sized companies are paying for common SaaS tools, regardless of contract type.

Ultimately, multi-year contracts may be the right solution. But this should only be determined after a thorough review of utilization and a clear understanding of what’s actually being agreed to.

About Cleanshelf

Cleanshelf is the leading SaaS spend optimization solution focused exclusively on tracking, controlling, and benchmarking subscription SaaS applications. Cleanshelf’s cloud technologies help companies save up to 30% on their SaaS spending by automatically identifying unused, underused, or unmanaged licenses and subscriptions.

Headquartered in San Francisco, CA, Cleanshelf serves dozens of clients, including Drawbridge, Revinate, Dynamic Signal, Qumulo, and Service Rocket.

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