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 Chuck SchaefferHow to Best Negotiate CRM Software Contracts

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Summary

  • CRM software negotiation is about ensuring success, avoiding surprises and lowering cost, in that order. If the implementation or post-production system is not successful, it doesn't matter how much money you saved.

  • CRM software negotiation is less about getting the lowest acquisition price and more about getting the fastest payback, lowest total cost of ownership and highest ROI.

  • A successful CRM software negotiation will achieve a fair and discounted price, and gain vendor services that will most aid your CRM implementation and operation success.

Negotiation is a process built on compromises or exchanges to create mutual benefits.

Customer Relationship Management (CRM) software negotiation is about finding the right exchange of money for software and services. The CRM buyers goal is to lower total costs, mitigate project risk, increase benefits and maximize ROI.

I've previously written about CRM negotiation strategy so in this article I'm going to get more tactical.

CRM software price is always an important factor. But it is only one factor in the Total Cost of Ownership (TCO). That's why you need to consider all factors when negotiating your CRM software purchase.

Looking at the Big Picture – Total Cost of Ownership

The CRM pricing components that should be calculated as part of the TCO include the following.

  1. The CRM software subscription. And to be blunt, most CRM software pricing is unnecessarily complex and used as a vendor sales tool. CRM pricing based on named users, concurrent users, types of users (i.e., read-only users), transactions volumes, data storage and a mix of other variables force diligence to calculate the complete total cost and avoid surprises.

    Vendors that publish easy to understand monthly pricing are far more transparent but may still create confusion as it can be unclear what features are in or not in each tiered pricing model or product edition. As many customers will tell you, one of the biggest pricing surprises is a forced move to a higher priced product tier. After getting to a production environment, many customers have learned the hard way that to get needed features, or to use a third-party product, they are required to upgrade to a higher priced product edition that can increase the annual CRM pricing subscription by around 50 percent or more. Especially with agile MVP deployments, it's important to fully consider your longer-term requirements to avoid unintended subscription tier creep.

  2. Third party software applications, sometimes called Independent Software Vendor (ISV) solutions, tend to add significant cost and may require the customer to upgrade to a higher priced CRM software subscription tier, thereby creating a double whammy. CRM ecosystems such as Salesforce AppExchange and Microsoft Dynamics AppSource can provide valuable add-ons but licensing terms must be carefully reviewed, and pricing protections negotiated. Like the CRM software, these third-party products create a recurring expense so any price reductions, or protection from price increases, will result in significant and recurring cost savings.

  3. Software maintenance fees cover product updates (i.e., bug fixes, patches and performance enhancements) and upgrades (i.e., new versions or releases). Cloud applications vary on whether they charge an additional fee for annual software maintenance. Many don't as its just built into the subscription fee. Others stack the maintenance fee on top of the subscription. For this later group it is essential to understand exactly what you are getting for the additional money.

    Many times, CRM software apps such as Salesforce and Microsoft Dynamics don't charge additional maintenance fees, but the third-party applications used with them do. Savvy CRM software buyers often negotiate the first year of maintenance for free and put price caps on additional years. Most companies tie maintenance price increases to no more than the consumer price index (CPI).

  4. Customer support is an area that differs significantly by vendor. Most vendors use a Service Level Agreement (SLA) to guarantee CRM software availability (i.e., uptime) and customer support. For most vendors the uptime guarantee is better than 99 percent. One caveat though. Many vendors exclude maintenance periods from the uptime calculation. And a few vendors use the guise of maintenance to hide downtime. It's a good idea to find out how much maintenance time was incurred during the last 12 and 24 months so that you clearly recognize how much downtime your users are going to incur.

    SLAs should also define customer support response and resolution time. Response times should be dependent upon the severity of the problem. The Agreement should state the escalation provisions, based upon problem severity, for when such guaranteed response times are not fulfilled. Most vendors will provide guaranteed response times, but some will not. For those that don't, at least identify their historical average response times.

    Most but not all SLAs include financial penalties for variances. Without penalties there is no incentive and SLA assurances become aspirational goals more so than committed obligations. Make sure the vendor provides clear and recurring SLA reporting and insist upon financial credits for failing to meet uptime guarantees. It's also a good idea to insist upon optional early contract termination if multiple violations are incurred.

    Lastly recognize that if you acquire third party applications you need assurance that you won't get the all too common vendor finger pointing when diagnosing the source of problems.

  5. CRM implementation fees are significant. For most companies, the consulting fees for CRM software implementation will exceed the software subscription so any help from the vendor that can lower implementation time will deliver cost savings. Many vendors will supply architects or subject matter experts for a limited period to assist in the design and planning. That's helpful because poorly conceived or designed implementations are a top cause for cost overruns, poor ROI and failed CRM software implementations.

  6. Cloud delivery reduces but doesn’t eliminate support or operational resources such as system administrators, business analysts and IT staff which will be needed to manage the system. Agile shops may designate part time or full time Scrum Masters and Product Owners. Management time for governance should also be considered.

    Some tasks such as data migration, system integration, software customizations and other technical activities are typically handled by IT professionals. Other tasks such as onboarding and recurring training, provisioning software upgrades, and creating information reporting can be handled by either business users or IT staff.

    Large companies routinely use third party managed services for expertise and cost savings. These services are not as common but no less valuable for small and midsize businesses. Typically, managed service providers have some minimal onshore or local presence but are mostly comprised of near shore or offshore resources. With the offshore labor cost arbitrage these managed services can often lower total CRM resource cost by about 40 percent.

When working with clients we generally create a five-year TCO pricing model. That allows us to manipulate the variables in the model while negotiating and ensure we're achieving the best overall result. It also shows how changes in one investment area impact other areas, and how price differences that initially seem small can suddenly appear large when calculated over a longer horizon.

Okay, now that we've reviewed the main investments that calculate TCO and will impact ROI, we can get to the next question you may be thinking about.

What's a Good CRM Software Discount?

The CRM software discount question is the number 1 inquiry we get near the end of the CRM software evaluation.

The size of the CRM software discount is based primarily on five factors:

  1. Size of the deal. As you might expect, the larger the deal the bigger the CRM discount. To be candid, small purchases by small companies often do not get much of a discount. On the flip side, very large companies negotiate discounts well in excess of 50 percent. We recently assisted in the negotiation a global CRM purchase that achieved an 81 percent CRM software subscription discount. Additionally, the vendor agreed to provide some of its senior resources to assist with the planning and proposed architecture design. This was an exceptional discount but shows what can happen when you approach the purchase strategically.

  2. Brand value. It's not fair but the reality is marquee brands can get higher discounts, particularly if they are willing to be a reference or publicly cited by the vendor.

  3. Level of competition. The CRM software discount will be smaller if the preferred vendor believes they are uniquely strong and will win the deal irrespective of a discount.

  4. Time of the year. Many of the CRM leaders are public companies that do the most business in the fourth quarter of their fiscal year. That's not a coincidence. They get much more aggressive on price and CRM software discounts just before the close of the fiscal year end.

  5. First of a kind. Large discounts are granted to CRM buyers considering something new or unproven from the vendor. This could be a new software module or industry edition. Or it could be a new geographical territory if the vendor is expanding. The bigger CRM discount must be objectively weighed with the increased risk.

Another common question is "What’s the most difficult part of successful CRM software negotiation?"

The answer is walking away from a bad deal or non-compromising vendor. The truth is that if you are a very large company, the vendor will negotiate any and every item in the agreement. You won't secure everything you want, but you will engage in meaningful dialogue and ultimately reach a compromised consensus.

Unfortunately, if you are a small business, there are several vendors who will choose to play strong arm tactics and provide few compromises to assist you in reaching your objectives. Common sense and repeated industry experience clearly show that if you have no bargaining power during the CRM purchase negotiation you will have no voice after the sale.

Walking away from a preferred vendor solution because you are unable to negotiate items which reduce risk or enhance success is a difficult, albeit correct, thing to do. There are several great CRM products, so if the preferred vendor cannot negotiate or accommodate items important to you, it's likely time to move to a new preferred vendor. End

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CRM software negotiation is about the exchange of money and services to lower total costs, mitigate project risk, increase benefits and maximize ROI.

 

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