SaaS cloud subscriptions: When “on-demand” really isn’t

Large legacy on-premise enterprise software vendors, like SAP, Oracle, and Microsoft, continue to push their “on-demand” SaaS cloud products into their customer base.  To a large extent, these efforts are designed to counteract the competitive threat posed by the major SaaS cloud vendors like Salesforce, Workday, and ServiceNow.  The same could also be said about pushing their customers to their new offerings around mobility, virtualization, AI and IoT.

Organizations considering the move to the cloud or any of these other emerging technologies must keep in mind that, unless they secure the right upfront pricing and they structure their contracts properly, their cloud experience will feel very similar to their experience with traditional, on-premise enterprise software.

If not careful, the alleged highly flexible “metered” and “usage-based” pricing model that comes with cloud subscriptions will include many of the same traps – like auto-renewals and required multi-year upfront commitments – as seen in more traditional on-premise software agreements. Whether you are dealing with cloud solutions from one of the traditional enterprise software powerhouses like SAP, Oracle, and Microsoft, or one of the large cloud vendors like Salesforce, Workday and ServiceNow, usage-based pricing can be not all that it seems.  Below are a few important points to consider:

Buying on-demand

The perceived on-demand or buy-by-the-drink nature of SaaS cloud subscriptions is compelling to organizations as it implies the ability to spread out payments over time and as your users need access to the functionality. In fact, most software vendors will position “flexibility” as the prime reason to make the switch from traditional on-premise license models.

But more often, organizations must contractually commit to multi-year terms requiring upfront payments of fees for each year of the term.

Most SaaS cloud subscription agreements don’t reflect a truly on-demand highly flexible model. They are not structured for precision metering of actual consumption, rather, they look more like traditional, on-premise software contracts, with fixed fee payments for a specified set of products and a committed number of users.  What’s worse, the expected commitments are set in stone for multiple years, with obligations to make upfront payments of the fees associated with each year of the term.

This practice means software vendors, whether they are selling you a SaaS cloud product or a more traditional on-premise software solution, are still looking to protect a predictable revenue stream from their customer base.

Upfront commitments

If software vendors insist on upfront commitments, organizations must push back for meaningful additional upfront discounts in return. Software vendors must be reminded that the positioned on-demand nature of the cloud and SaaS solution is a compelling factor in whether your organization is willing to adopt.  If that benefit is diminished in any way, it may no longer be worth switching from an on-premise model. The software vendor’s ability to present meaningful additional upfront discounting will go a long way in mitigating these concerns.

SaaS cloud subscription agreements also often lack volume discounting commitments. These agreements should include clear language stipulating the option to purchase additional subscriptions at the upfront negotiated price until an established volume threshold is met and eclipsed, where at that point the go-forward price will be reduced given the organizations expanded volume commitment.

Renewal price protections

Having price certainty and protections in place come renewal time (i.e., when your subscription term ends) is also critically important. Most cloud subscription agreements include the ability to increase prices at the end of the initial term or there is ambiguity around price protections, thus an organization could be completely exposed.

• All cloud subscription agreements need to include language that specifically limits the vendor’s ability to increase prices when it comes time to renew.
• There should also be a period in which there will be no increase in pricing. This is often harder to achieve but there is precedent for this level of commitment from vendors.
• The contractual language should not include conditions like ‘increased volume’ or ‘adoption of additional cloud products’ for the protection to be available.

It is always important to read the fine print because these types of conditions often show up after careful review.

Auto-renewals

Automatic renewals are another problematic provision to keep an eye out for. Most cloud subscription agreements include default language around auto-renewals. This language should be removed from cloud subscription agreements and alarm bells should go off if software vendors are reluctant to do so. Software vendors, especially those previously mentioned, should be confident that the value received from their cloud offerings will lead their customers to renew by choice, not by contractual requirement or technicality (e.g., failure to notify the software vendor of cancellation within an allotted time frame).

The bottom line is that when an organization is considering a software vendor’s cloud offering, it is critical to think as much about how they structure the subscription agreement as the exciting potential to improve the agility and speed of the business through cloud adoption and integration.