Further info and resources from my website

Monday, January 11, 2016

Pricing and contracting with your cloud vendor: Tips and tricks


As a new year starts, many of you will be busy working on an RFP for a new HR or ERP system. One aspect that draws little attention from the myriad  reports and posts on system evaluation deals with pricing, contracts and other T&Cs (terms and conditions). This means that because of the inherent knowledge imbalance between vendor and customer, the latter is always the loser as they tend to learn after the fact (the reason for this knowledge imbalance being that vendors respond to RFPs all year long, whereas customers  engage in new RFPs only once in a while, and their procurement departments cannot be expert in all business domains and vendors -especially for smaller-sized companies.)

So, as a New Year's gift to my readers, here are some advice and information which I am sure you will find useful as you negotiate the perilous shoals  of cloud contracting.

No public price list
Unfortunately for user organizations, cloud vendors are playing this game with their cards close to their chest. It is almost impossible for a new customer to find out what is the "true" price of a specific module - "true" meaning how much a comparable company has paid for the honor of becoming a user. Don't expect any customer to share that information freely at Workday Rising, SuccessConnect, Oracle World or Cornerstone Convergence. And as for the vendor, mum's the word. In other words, you're pretty much on your own here.

The basics
A couple of things you need to keep in  mind. 

By now, you must be pretty much aware of the PEPY (Per Employee Per Year)-based subscription model, radically different from the upfront licensing model so prevalent in the Jurassic era of on-premise computing. PEPY means that, for a given module, you will be charged a certain amount X total number of employees. That will be your annual subscription.

Vendors, like cell phone operators of old, will insist on your committing to several years, the minimum contract often being for three years. Of course, you may find yourself deeply unsatisfied with your vendor after a year or two. Too bad; you're stuck with them, and have to wait for the minimum period to end before switching vendors. By then you will have realized  that switching ERP/HR vendors isn't as easy as switching cell phone operator (Do you really want to go through another grueling RFP exercize and even more stressful implementation phase or phases?) So...you are more likely than not to just stick with your vendor. Even more reason to make sure you got the pricing and contract details right upfront.

You may wonder, quite legitimately, "Why should I start paying my subscription fee as soon as the contract is inked when it may be months before my employees can start requesting their leave of absence on the new system or my managers to carry out out their team performance appraisals?" Well, most vendors' response is, somewhat disingenuously, "We're providing you with access to the system, with many standard processes and reports, often with dummy data, our job is therefore done." You will have to be a particularly good negotiator, or quite an important customer whose business the vendor wants, to get them to agree to a billing postponement. Or obtain a discount. 

Plan as much ahead as possible
Speaking of discounts, if there is one rule that is as prevalent in cloud pricing as it was in the olden days of on-premise systems, it is that the more modules you buy, the more interesting ( i.e. the lower) pricing becomes. This means two things.

First, you need to compare what is comparable. In the below table mapping Workday and SuccessFactors to typical HR processes, you will see that every vendor has their own way of arranging HR processes in their offering modules. (I have left Oracle out, since Fusion is priced as both an on-premise offering and as a cloud one.) If you are going to only need HR Admin, Performance and Compensation, you may wonder why you should pay for more. SuccessFactors may appeal to you as a better priced vendor, with Workday as the vendor pushing you to consume more. But, as you grow and decide to automate more processes or  replace other legacy systems, Workday won't charge you more for implementing new processes since these were all included in the core offering.

To each vendor, their world's view

Second, if you have a pretty good sense of your roadmap then include those areas/modules in your planning by ensuring a price lock-in as early as possible. You may not be sure that Employee Central is the right HR system of record for you when you implement the talent modules. But if you wait until the moment you need it, it may be too late (meaning too expensive). Better ensure you already have a price guaranteed in your contract in case you decide to enable it. Be careful about not including it right away: you don't want to start being billed for a feature you will not be using for years (remember that even for the ones you are currently implementing it may be one or two years before you start using them, but you are paying full price from Day 1!) Same thing for geography. If you are going to expand to new territories and some modules are country-specific (Benefits, Payroll) or the employee count increases exponentially, then take that into account and include it in the contract (the more employees you have, the lower the PEPY is). Remember this cardinal rule: it is always better to negotiate free of pressure than under duress.

And in this brave new world of cloud, a subscription comes with a certain number of environments. Make sure not only that you negotiate the right number for the implementation phase, but even more importantly the ones you will need after you go live. You may need a separate environment for training, another reserved for your super users etc. Don't buy more than you really need, but don't be short either.

Price lock and price caps
I already discussed price lock-in which you should have as early as possible (in order to negotiate the best deal), and for as long as possible (in order to postpone billing as late as possible). Another important thing that many customers tend to forget is to demand a price cap. Remember that the agreed upon subscription PEPY is only valid for the duration of the contract. Let's say that you agreed on $50 for a 3-year commitment. Once you've reached the end of that period, the contract is up for renewal and unless  you've thought ahead, your vendor  can demand whatever price increase they feel like: 10%, 20%, 30% and you have no legal/contractual remedy to stop them (except not renewing and looking for another vendor which, for some of the reasons mentioned earlier, is rarely feasible). Better think early about this and ensure your PEPY cannot go beyond the inflation rate and a reasonable percentage.

Working with other lines of  business (LOBs)
Depending on how your company is organized you will have to work with various LOBs: Legal, Procurement, IT are the more likely departments to engage with. Remember that each comes with its own knowledge limitations: even Procurement, which is used to negotiating, may not realize some gems that only you know - some hand-holding may be required. For instance, in order to negotiate a good price lock, you may insist on including Payroll and Recruiting as possible extensions, but only you know that you are unlikely to bring payroll operations back in from your current outsourcing vendor. Use that as a bargaining chip to get a better deal on Recruiting (which you definitely need) and "sacrifice" Payroll which you never intended to implement in the first place (make sure your vendor is not aware of that!) Legal may not understand all the practical aspects hiding in an SLA so be sure to educate them. IT tends to have more experience running projects than HR, so use them for that. They may even have experience with other cloud systems in other non-HR areas, such as Salesforce for CRM, so use some of that experience to drive a good bargain.

What is an employee, anyway?
A source of frustration for some customers is that that the PEPY concept is not as straightforward as it may seem. Some vendors have various categories of employees: full-time employees, part-time, temp, candidates, dependents, retirees etc. Every price for every module will therefore depend on that definition which you may not even agree with. What if your situation changes in mid-year? Will your subscription have to be recalculated? One thing's for sure: your headcount is unlikely to remain the same over your contract's life.

Show your preferred vendor  how little you care for them (yes, I mean it) 
Most of the advice given throughout this post is predicated on your preferred  vendor (usually the one that comes up on top of the vendor ranking at the end of the evaluation exercize) not suspecting that they have "won"...even if they have! This is crucial for various reasons. One, obviously, is that once they know they have won, they will be very reluctant to compromise on some of your requests and you won't be able to wrench any additional advantages from them. Second, and worse, as soon as the other vendors know they have lost (you'll be surprised what a small world the HR/IT industry is), they will stop engaging with you which will soon be reported to your preferred vendor and you lose more negotiation leverage. Third, by negotiating with two vendors in parallel (I don't recommend three) with both thinking they have good chances of winning, you will be amazed at how much lower you can bring the price, and how better terms you can get. Even if, at the end of the game, you still end up with your initial preferred vendor, you will do so in a much better situation - so that second vendor was quite helpful (and in some cases they may even become the preferred vendor in a classic case of the dark horse winning the race.)

Also consider the following
Remember the tip on that module you didn't really need but insisted on as a bargaining chip to get a better deal on the one you're really interested in? You can do that with a lot of other items, such as Premium Customer Service or whatever the vendor calls that platinum card you get by paying more. Insist on it as if the success of your project depends on it and then drop it in exchange for a useful freebie (or a longer price lock period)

If you are based in a country your vendor is keen to enter then you can get a further couple of percentage points of discount. Agree to do testimonials and speak at vendor events in exchange for a further 2 or 3% off.  They want you to be an early adopter? Sure, but then you should demand and get an even more sizable discount.

Always keep an eye on when your vendor's quarter ends. If you are in the home stretch then you will find that your vendor will be particularly open to your "suggestions". Don't hesitate to tell them you're suspending negotiations because of their being "unreasonable". Meet with the other vendor, and make sure your preferred vendor is aware  of that. Stop taking their calls. You will be amazed by what eleventh-hour negotiations can deliver.

Shoot for this...

Remember that your cloud vendor is also your partner on the journey to a successful new HR system. You will be bedfellows for years. You don't want to antagonize them unduly. Understand how far you can go in  your demands without losing them. Have a sense of where brinkmanship should stop so that you don't overplay your hand. And once the contract is signed, forget the negotiation game and give credit where credit is due. If they live up to your expectations, let them know it and, more crucially, let the rest of the industry know it. Drive a hard bargain but be a fair customer.

...And not this

One last thing: Realize you may not be the only one reading this post. Your vendor may have beaten you to it.

(This post focuses on pricing issues related to software vendors. Of course, an HRIS project often involves another  vendor, a system integrator, which brings pricing and contracting issues of its own. I will discuss those in a later post)