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Are enterprise software agreements a critical foundation for SaaS adoption success?

21 Mar 16

Article by Stephen White, Gartner research director

As application software publishers progressively transition their business models to SaaS subscriptions, conventional licensing programmes and contracts remain a key mechanism for clients to agree commercials and commitments beyond a single year.

Rather than being put out to pasture EA, ELA, ETLA and their unlimited cousin the ULA live on and may be more important for clients than ever. Whilst publishers take advantage of subscription annuity and associated renewal rates in their SaaS models, the high value multi year contract model provides a one-off opportunity to leverage buyer power and negotiate required terms.

In the perpetual model where optional maintenance prevails, many organisations have re-evaluated inclusions leading up to renewal, a shift to subscription however means the buyer’s approach leading up to renewal will change significantly. One might position the impact of losing scope to drop maintenance as an outcome of a ‘Subscription Treadmill’, given potential for consumption to create dependence and the ongoing cost characteristics of subscription models. Accordingly, the initial commitment and negotiation of SaaS terms will likely be more critical than any similar enterprise software negotiation.

Decision makers and stakeholders must be mindful not to ‘sleepwalk into the cloud’, a phenomenon where initial minor commitments without negotiated terms expand gradually or even exponentially with limited buyer protection, inherent risks of escalating costs and one sided contractual terms. Actions classed as ‘Shadow IT’ are a well documented example of  this phenomenon, however transnational procurement and licensing models also contribute to heightening this risk.

The scale of commitment of an EA or similar contract provides exposure to the degree that sign off levels required may lead to a more considered decision. An assumption that decision will be appropriately made does not necessarily follow however, it is now even more critical to allow necessary time to evaluate options and impacts.

Negotiation of the contract provides an opportunity to craft agreement terms, but agreement characteristics may lack scope for clients to leverage all cloud computing attributes as shown in the diagram below, principally bi-directional elasticity of costs and metered pay per use.

Where quantities in the agreement are not eligible for reduction through the entire term, the risk of unwanted shelfware increases. Adobe pivoted much of it’s business from perpetual to cloud subscriptions, and may act as a prototype for other vendors to follow. Adobe’s ETLA contract with it’s non-reducible up-front standard commitment being an example where terms and pricing have been negotiated by clients, however the paradigm of benefits delivered by that negotiation is very much dependent on matching commitments to genuine requirements.

Similarly full year commitments without scope to pro-rata reductions and publisher bundling strategies all can lead to costs in excess of usage. Given each of those elements contribution to cost risks, preparation and prioritisation must allow for detailed analysis of usage – facilitated by a project which works through metering data for the existing on-premises / perpetual solutions being replaced as well as forward looking projections of usage.

Consider that the SaaS subscription enterprise deal has the potential to be the last negotiation of it’s kind with any degree of buyer power. Be sure to avoid over-committing and make use of your leverage before moving forward. In short – Make it count!

Article by Stephen White, Gartner research director

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