How To Renegotiate Software Contracts When Cutting Costs
Note: This article is intended to inform our readers about business-related concerns in the United States. It is in no way intended to provide legal advice or to endorse a specific course of action. For advice on your specific situation, consult your legal counsel. The applications selected in this article are examples and are not intended as endorsements or recommendations.
- 5 steps to take when renegotiating software contracts
- 1. Review your tech stack
- 2. Read the software contract you want to negotiate
- 3. Research vendor’s financial situation and current industry standards
- 4. Know what you want out of the negotiation
- 5. Reach out to the right people
- Have software backups in mind, just in case
Experts are smelling a recession on the horizon. Even as far back as September 2022, seven out of 10 economists predicted a global recession was at least somewhat likely in 2023 . Four months later, managing director of the International Monetary Fund (IMF) Kristalina Georgieva validated these suspicions in an interview with CBS News.
In the interview, she says that 2023 will be a tough year for businesses, attributing the looming recession to the simultaneous economic slowdown in the world’s three “big” economies: the United States, European Union, and China .
"We expect one-third of the world economy to be in recession," Georgieva says in her interview with journalist Margaret Brennan. “Even countries that are not in recession, it would feel like a recession for hundreds of millions of people.”
If you’re a small-business owner or manager, you’ve probably already heard the alarms, and maybe you’ve even sounded alarms of your own. If you’re worried about how a recession would impact your company, you’re not alone. Like other business owners, you may have started thinking about ways to reduce costs, and revisiting your software contracts may be a good place to start.
5 steps to take when renegotiating software contracts
Robert Leonard, CEO of Aimvein, decided to renegotiate a few of his company’s software contracts to optimize operational expenses and become more efficient.
To do this, he and his team had to decide what changes they wanted to make, research vendor competitors and industry standards, and then set up a time to talk with vendors.
Leonard’s renegotiation was successful: “After successfully completing these negotiations, we are anticipating lower overall bills and additional savings that will help keep us financially sound in this challenging economy,” he says.
If renegotiating software contracts sounds like a potential cost-cutting solution for your business, follow these five steps to make sure you’re ready to talk to software vendors:
Review your tech stack
Read the software contract you want to negotiate
Research vendor’s financial situation and current industry standards
Know what you want out of the negotiation
Reach out to the right people
1. Review your tech stack
Before you start software contract negotiations, you first have to know which contracts you want to renegotiate.
Jaden Oh , director of search at TRAFFV, recently negotiated with a vendor on the pricing and scope of the software contract. As a result, he expects to save up to 40% on the software contract. “We achieved this by auditing all our licenses, identifying those no longer in use, and negotiating a lower price for their renewal,” he says.
Gartner recommends reviewing your complete portfolio of products and vendors to identify contracts based on risk-level and volume of spend . While auditing your tech stack, ask your team:
What can we cut completely?
What can we reduce?
What is absolutely necessary?
Audit the platforms your company uses to find platforms that could be eliminated altogether or that could be renegotiated in terms of number of users or unnecessary features.
2. Read the software contract you want to negotiate
Before reaching out to software vendors, read the terms of the contract you want to renegotiate. This will help you understand:
Where your business is in the subscription lifecycle (e.g., in the second year of a three-year deal or 90 days away from an auto-renewal)
Areas of flexibility
What would be considered a breach of the contract
The terms of any early-out or force majeure clauses
Jamie Miller , co-founder of Treadmill Review, recommends always keeping track of software subscriptions on auto-renewal, also known as “evergreen clauses.”
“These clauses may appear useful at first look because they might save you time while renewing and save your staff from being shut out of necessary resources,” she says. “However, they might really hurt [your business] more than they help since they give up important negotiating leverage.”
Gartner recommends starting the software renegotiation process 90 days before it is scheduled to auto-renew and then engaging in renegotiation talks 30 days before auto-renewal .
By reading the contract, you can see where your business has room for negotiation and use it to your advantage. Always be aware of auto-renewal schedules so you don’t accidentally forget and waste money on an unneeded product. If you find it difficult to understand the legalese of your software contract, consider consulting an attorney.
3. Research vendor’s financial situation and current industry standards
Before you start negotiating with the vendor, you want to make sure you have all the information you need to set realistic and achievable expectations.
Start by researching the vendor’s financial situation. If the vendor is facing financial challenges, it may decrease chances for a successful renegotiation or it may mean you need to lower expectations.
Research the software vendor’s financial standing by looking at:
Public stock records.
Websites, such as Crunchbase, for information on private equity-backed companies.
Press releases or public announcements from companies.
Social media and online forums to see what other users are saying.
Mo Mulla , founder of Parental Questions, also suggests researching alternative vendors to compare pricing to educate yourself on industry standards and to give you more leverage. “Negotiate from a position of knowledge,” Mulla says.
When comparing platforms, Mulla urges businesses to look at pricing, including licensing fees, but to also look at the quality of the product. “Remember to consider more than just cost when assessing value for money—evaluate customer service, levels of support offered, and total cost of ownership over time (including associated taxes),” he says.
These resources can help you understand not only the extent of the vendor’s own financial challenges but also what they are already doing to help their customers, all of which can help you form realistic expectations before starting the renegotiation process. Understanding how the vendor’s competitors are pricing their products can give you leverage in negotiations.
4. Know what you want out of the negotiation
Establish what you want to achieve before contacting your software vendors. It’s important to set realistic expectations for the renegotiation process based on your own business needs, the contracts in question, and potential vendor limitations.
The renegotiation process will be different for contracts you’re looking to cut versus those you’re trying to reduce.
Tools to cut
Tools to reduce
Tools that are absolutely necessary
Negotiate cancellation fees
Reduce number of users/seats
Negotiate temporary discount(s)
Downgrade level of plan (e.g., from premium to basic)
Find industry discounts (i.e., for non-profits)
You may want to cancel some contracts but reduce others, depending on how important the tool is and how much you’re aiming to save.
Shawn Breyer, owner of The Hive Law, decided to renegotiate a software contract with his law firm’s customer relationship management (CRM) platform. He was subscribed to an enterprise-level plan that was expensive and too much for his needs. “My main motivation was to reduce my overhead costs and free up more resources for growth and innovation,” he says. “When I reached out to my current vendor, I was very clear about my goal—to reduce costs without sacrificing quality.”
Breyer knew what he wanted, which made the renegotiation process easier for both him and the vendor. As a result, they arrived at a plan that worked for all parties. His new plan is saving him around $400 a month. “I'm looking forward to using this additional budget to invest in new technology and services that will help my business grow,” Breyer said.
Consider your options, what you want to get from the renegotiation, and how much you can compromise. Be clear to the vendor about your needs. It also never hurts to emphasize that you’re a loyal customer and would like to continue working with them.
5. Reach out to the right people
When you’re ready to contact the software provider, make sure you reach out to the right person—ideally someone who has the authority to discuss contract negotiations and with whom you’ve already built rapport.
Cory Dickson, founder of technology publication 3DPrintingWiz, always makes sure to contact the person who has the power to renegotiate and is familiar with the business—ideally, the person who sold him the software.
But sometimes, who a business should contact depends on the size of its account with the vendor.
“If we have a massive contract with a vendor, we always choose to talk with a senior account manager or higher,” Dickson says. “For mid-level or lower contracts, we sit down with a customer service agent.”
Contact the right person at the company about the software contract; usually, this is the person that initially sold you the software. If that is not possible, consider the size of your account with the vendor to determine who is best to contact.
Have software backups in mind, just in case
While most vendors will be willing to work something out that can benefit both parties (especially if you emphasize your long-term customer value to the software vendor), this may not always be the outcome.
Irene Graham, co-founder of Spylix, decided to be prepared in case her renegotiation attempt didn’t go according to plan. “Although many software vendors are operating hand in hand with customers to find acceptable answers, some might not be able or ready to compromise,” she says.
So, she found alternatives to the software she was using, just in case.
When renegotiating your software contracts, you should be willing to compromise, but not beyond your limits. If the vendor is unwilling or unable to work with you, look for other platforms that offer the functionalities you need.
If you’re not sure how to find alternatives to the software you currently use, we’ve compiled curated lists of alternatives to popular solutions on our resources page, in addition to software catalogs that you can filter by customer rating.
Jaden Oh, Linkedin
Jamie Miller, LinkedIn
Mo Mulla, LinkedIn