How to Renegotiate Software Contracts When Cutting Costs

By: on May 14, 2020

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.

COVID-19 has put a strain on small businesses, forcing some to close and others to reassess their software investments against their current business needs.

Cassy Aite, CEO of remote employee management software product Hoppier, decided to renegotiate software contracts when revenue dropped more than 80% as a result of the COVID-19 pandemic. His first step was to categorize the business’ current software subscriptions based on business need.

“We pulled all contract expenses into a spreadsheet and categorized them according to the business units that use them,” Aite said. “We then sent the lists to each corresponding business unit leader.”

Aite asked unit leaders these 3 questions:

  1. What can we cut completely?
  2. What can we reduce?
  3. What is absolutely necessary?

As a result of evaluating and categorizing each tool based on business need, Hoppier was able to save more than $60,000 in monthly software subscription fees.

Hoppier isn’t alone in this cost-cutting approach. According to Gartner, 36% of businesses have already renegotiated or plan to renegotiate their software contracts with vendors as a result of COVID-19, and you might be thinking of doing the same (full research available to clients).

5 steps to take when renegotiating software contracts

Categorize your business’ software subscriptions to determine if renegotiation is the right choice. 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

1. Read your contract

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)
  • Areas of flexibility
  • What would be considered a breach of the contract
  • The terms of any early-out or force majeure clauses

Sean McDermott, president and CEO of RedMonocle and Windward Consulting Group, suggested that understanding these elements of software contracts can give businesses insight into which vendors might be more receptive to renegotiation.

“I would focus initially on contacts that are in the late stages of renewal, as the vendors will be highly incentivized to get a renewal,” McDermott said. “Renegotiating is always about leverage.”

Takeaway: By reading the contract, you can see where your business has room for negotiation and use it to your advantage. If you find it difficult to understand the legalese of your software contract, consider consulting an attorney.

2. Research the vendor’s financial situation to set realistic expectations

Businesses in every industry are struggling due to the economic and social effects of the COVID-19 pandemic, and businesses with a more secure financial standing are in a better position to help their customers (full research available to clients).

“Do some research on how well capitalized these vendors are, as better capitalized companies may be in a better position of flexibility with customers,” McDermott said.

Research the software vendor’s financial standing by looking at:

  • Public stock records
  • Websites like Crunchbase for information on private equity-backed companies
  • Press releases or public announcements from companies
  • Social media or online forums to see what other users are saying
Takeaway: 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.

3. Know what you want out of the renegotiation

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.

McDermott set different goals for different contracts based on how important the tool in question was to the business.

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) Request payment deferral
Reduce functionality

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. Keep in mind that some vendors may also be struggling and applying for loans.

“We are all struggling with the impact of COVID-19, so have some empathy for their business too,” McDermott said. “Focusing on a win-win will bring loyalty to both parties for the long-term.”

Takeaway: Consider your options, what you want to get from the renegotiation, and how much you can compromise. Be mindful of the vendor’s own limitations and remember that they might be struggling too.

4. 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.

According to Tim Tesluck, founder of Field Complete, who a business should contact depends on the size of its account with the vendor.

If you have a large account with a software vendor, the best person to contact is the assigned senior account manager who likely sold you the software. Midsize accounts will likely talk with customer service. These representatives are usually measured on customer retention, so they will likely be willing to negotiate.

If you have a small account and don’t have an onboarding manager, use online sources such as company websites and LinkedIn to identify individuals with decision-making power, such as the vendor’s customer success manager or sales manager, and contact them directly.

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.

“Most companies are tracking their churn rates and would rather take a shave on revenue than have a client churn,” Tesluck said.

Takeaway: Contact the right person at the company about the software contract; usually, this is the person that initially sold you the software.

5. Identify alternative solutions in case the renegotiation goes south

Although many software vendors are working with customers to find acceptable solutions, some might not be able or willing to compromise.

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 can filter by customer rating.

For example, Ethan Taub, founder of Goalry, renegotiated a few of his companies’ contracts. One vendor, however, was unwilling to work with him, denying his request for a payment reduction or suspension.

As a result, Taub and his team have been researching alternatives and plan to switch once the contract ends.

“[We] won’t be recommending their services to anyone again,” Taub said. “Features can be replaced, good customer service can’t be.”

Takeaway: You should be willing to compromise, but not beyond your limits. If presented with a vendor unwilling or unable to work with you, look for other platforms that offer the functionalities you need.

Approach the renegotiation process with empathy

Renegotiating software contracts can play an important role in your business continuity plan. Do your research, understand what you want to achieve, but ultimately treat your renegotiation like a conversation with the vendor.

At Software Advice, we understand the challenges of business in light of the COVID-19 outbreak and want our readers to feel confident in their software decisions. Check out our Coronavirus resource hub for more information.

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