10 SaaS contract best practices used by top companies
- As SaaS stacks grow, some of the fastest-growing companies have implemented best practices to enhance their SaaS contract management.
- Best practices like turning off auto-renewal, monitoring usage, and outsourcing your tail spend will help make your SaaS contract management more manageable and more successful.
- Stellar management of your SaaS stack can drive millions of dollars of value to your company.
As companies are growing rapidly, software-as-a-service (SaaS) contracts are growing linear to headcount. But with dozens of SaaS providers and contracts, who is staying on top of renewals, usage, and getting the best pricing? Who is monitoring data protection, disaster recovery, and business continuity?
Managing SaaS relationships, contracts, and service-level agreements (SLAs) has become a full-time job for IT, finance, procurement, and engineering leaders. At Vendr, we think that’s a problem. Part of my job is to partner with leaders to understand the challenges they experience as their tech stack grows. And then, we help them find solutions so they can save both time and money on SaaS applications.
While helping some of the fastest-growing companies in the world overcome these challenges, we’ve found 10 SaaS contract best practices that the smartest organizations are using to manage their SaaS stack, saving themselves millions of dollars and headaches in the process.
10 SaaS contract best practices
Although there are many ways to improve your SaaS contract management, I’ve narrowed them down to the top 10 best practices that are tried and true for success. As you read through each best practice, think about how it might apply to your company.
1. Create a system of record
I talk to big companies every day who have 100-plus SaaS applications, owned by different stakeholders, with little visibility into how those products are being used or managed. While decentralization can help a company scale, it can also hurt you if it’s not organized. Renewals can slip through the cracks, and you can end up spending your budget on products your employees aren’t actually using.
Or you can simply start organizing your products in a spreadsheet that includes the following for each product:
- Current spend
- Contract renewal date and expected spend for the renewal
- Sales rep or account manager’s email address
- A high-level overview of functionality and usage
Getting systematic about tracking and organizing your SaaS applications can help you identify product overlap and monitor spend. It's also a great opportunity to stay on top of data security and periodically assess internal security needs compared to what the SaaS provider offers. But it also frees up leaders to think strategically and focus on building teams and products, not worrying about SaaS contract management.
2. Turn off auto-renewal
Auto-renewal seems to be in the contract terms for the majority of SaaS contracts. High-growth companies move really fast, and resources are stretched, so catching this and acting on it isn't usually a top priority — until it's too late.
One Gartner report revealed that it's extremely common for companies to run with at least 25% of their top SaaS subscriptions unused. One forgotten SaaS agreement auto-renewal could cause your rate to automatically increase dramatically. At worst, you could be auto-renewing an expensive piece of software you don’t even want to use anymore. Don’t let auto-renewal turn shelfware into a big hit to your budget.
Luckily, there’s a simple solution. When conducting an audit of your renewals, turn off auto-renewal by emailing your sales rep or account manager and requesting different renewal terms.
3. Get 90 days ahead of renewals
Some IT, finance, and engineering leaders I talk to wait for SaaS providers to tell them that the product is up for renewal. And if it’s still set to auto-renew, a lot of suppliers won’t even give you that courtesy. The problem is, suppliers are unlikely to give you enough notice at the end of the contract for you to have time to evaluate and install an alternative product.
This isn’t an accident. SaaS companies know you’re busy and growing quickly, and it’s in their best interest to not give you the opportunity to meaningfully look at what you’re spending with them and figure out if it’s the right investment. That’s why you should be proactive and get at least 90 days ahead of the end of the contract date. Give yourself time to understand the future costs and potentially evaluate other suppliers if necessary.
4. Use invoices, not credit cards
A lot of decision-makers are paying for SaaS on company credit cards. If this is part of your current business model, consider eliminating it across the board.
Instead, there should be one company credit card for small SaaS purchases, and it should be controlled by one person. If multiple stakeholders have the ability to put SaaS on a credit card, managing overall spend and provisioning licenses can become a nightmare. Not to mention the potential legal risks and security risks that can result from SaaS agreements that have not been properly vetted.
If you can afford to pay an annual contract upfront, the supplier often provides a financial incentive. Moving to annual invoices allows you to have more control of your overall spending, can eliminate overages, and keeps your spending organized.
5. Ask about overages upfront
Another SaaS contract best practice has to do with usage limits. True-ups are one of the biggest SaaS headaches that growing companies deal with. You signed an annual contract, and in month eight, you are already over your usage limits or have exceeded your license count. This happens all of the time.
That’s why it’s important to remember that when you sign a contract, you’re entering a partnership. It’s important to partner with SaaS companies that don’t penalize you for growth during your contract period and that want to grow with you. Make sure this is checked off upfront when you're negotiating SaaS agreements.
6. Save with multi-year agreements
For products that your team loves or ones that drive critical infrastructure, like AWS, Salesforce, or other enterprise SaaS solutions, you should consider a longer-term partnership (e.g., a two-year renewal at a fixed license count/rate). Growing companies will absolutely benefit financially from longer-term agreements, but we typically recommend testing it for one year before engaging in a two-year term.
If your organization is unable to commit to multi-year agreements, you may want to consider putting in cap rates for your upcoming renewals — for example, agreeing with your supplier that the price will only increase within a certain percentage range.
7. Focus on economies of scale
At a rapidly growing company, it’s important to future-proof your contracts. It's critical to think about what this contract could look like in 12 months and make sure that the suppliers you partner with take your growth into consideration for future renewals.
The largest suppliers often take this into consideration, but growing companies should be seeking economies of scale for the tail spend as well. Companies that fail to do this are either accepting the fact that they are grossly overspending on software contracts, or they are put in a position to cut tools that their teams find valuable.
8. Monitor usage. Better yet, have the SaaS company do it for you
Before renewing a software license-based contract, make sure you know who needs it. But the last thing you want to do is send stakeholders on a wild goose chase to track down team members to see if they truly need each tool you renew.
So, a rule of thumb before every renewal is to have the supplier produce a three-month usage report. This should include who has used the product in the last three months and how often.
For your net-new purchases, make sure your supplier will be able to produce this information for you at the end of your term. For usage-based contracts, you’ll find that in some cases you are underutilizing the tool, which means you are probably paying too much. This may also trigger your team to find ways to cut or shift your most expensive product usage.
To make this SaaS contract best practice even better, consider including the usage-report requirements in your procurement negotiation process.
9. Invest in relationships
Oftentimes, you’re in a position to leverage your logo, a customer testimonial, or co-marketing efforts in order to secure a more favorable rate. Whether it’s critical infrastructure or an app that your team is getting a lot of value from, it’s important to invest in supplier relationships.
10. Outsource your tail spend
IT, engineering, and finance teams are already spending a ton of time managing the most critical enterprise SaaS supplier relationships. But growing companies we talk to with over a few hundred employees are finding that their tail spend is likely made up of 100-plus products adding up to well over $1 million.
The average time spent on one contract renewal is five hours. If you have 100 products in your stack, 500 hours of your calendar year will be allocated to software salespeople. Outsourcing SaaS supplier relationships can provide material savings and will give your engineering, IT, and finance teams a lot of time back for more productive tasks.
Any single contract is followed by a wide range of recurring commitments, deliverables, and obligations. By simply harnessing economies of scale, vendor management experts can streamline and improve these processes. Giving away full control is difficult. But, the results are worth it.
Driving value to your company through SaaS contract best practices
These best practices help companies become more thorough in negotiating SaaS contracts and help them maintain a better grasp on SaaS contract management entirely. Any time you can save your company headaches and, potentially, millions of dollars, we call that a win. I've seen companies do this simply by making these SaaS contract best practices an important part of their business models, and you can, too.