The software landscape is changing, and as technology evolves, so do the pricing models and negotiating power customers have when entering a new contract with a vendor. And, as if software contract negotiations weren’t already hard enough, Artificial Intelligence adds yet another complex layer with usage and platform considerations. In the modern age of technology, how do businesses get the best deal on their software contracts?
Join the enterprise software experts at ERP Advisors Group when they divulge the industry’s best-kept secrets to getting the most out of your software contract now and for many years to come.
The software landscape is changing, and as technology evolves, so do the pricing models and negotiating power customers have when entering a new contract with a vendor. And, as if software contract negotiations weren’t already hard enough, Artificial Intelligence adds yet another complex layer with usage and platform considerations. In the modern age of technology, how do businesses get the best deal on their software contracts?
Join the enterprise software experts at ERP Advisors Group when they divulge the industry’s best-kept secrets to getting the most out of your software contract now and for many years to come
Software Contract Negotiations
Software contract negotiations are challenging. Vendors use different pricing models, technology is constantly evolving, and many project sponsors lack experience overseeing these efforts. Additionally, an enterprise software decision will affect an organization for many years after an organization signs the dotted line.
While negotiating software contracts can be one of the most intimidating parts of an ERP project, organizations have the most leverage during the initial negotiation. Once a contract is signed, it can be difficult to renegotiate pricing, terms, or renewals. That makes the initial negotiation an important opportunity to establish contract terms that support your organization’s needs now and as you grow.
In this blog, ERP Advisors Group provides an overview of the dos and don’ts of software contract negotiation, AI’s impact on contract terms, and best practices for contract renewal.
Dos and Don'ts of Contract Negotiation
Contract negotiation is tricky, but enterprise software contracts add an extra level of complexity because software is intangible. Unlike purchasing a physical product, it can be difficult to conceptualize exactly what you are purchasing, which capabilities are included, and what may require additional costs later.
Before entering negotiations, you should clearly understand your business requirements, your “must have” capabilities, and the total investment required to implement and maintain the system. These standards will guide the entire process.
What Not to Do:
Don't ask for too steep a discount upfront.
Trying to significantly lower the price right out of the gate risks overlooking other capabilities that will be important to your system’s long-term viability. A lower price doesn’t mean a better contract if critical functionalities, implementation services, training, and support are excluded.
Don't lock in a discount too quickly just to meet a deadline.
Discounts are appealing, especially when vendors offer limited-time sales or end-of-quarter incentives. However, rushing to accept a discount can prevent you from negotiating other terms critical to the project’s long-term success or evaluating other available solutions.
Don't give up your leverage too early.
You will never have as much leverage as you do before the contract is signed. Once the vendor knows you are committed, your ability to negotiate discounts, additional capabilities, or other favorable terms may diminish. It’s imperative that you understand what you want and need from the software before giving away that leverage.
What To Do:
Plan for the total cost of ownership.
Contract negotiations involve more than the cost of the software itself. You must account for implementation, customization, data migration, internal resources, consulting services, training, additional modules, and future software upgrades. Planning for these costs upfront provides a more accurate estimate of the total price and gives you a clearer understanding of what to address during negotiations.
Strategically negotiate discounts.
Software vendors expect some level of negotiation, but not every vendor offers the same flexibility. Rather than focusing solely on the discount, consider the contract's overall value. What is the vendor expected to deliver? What implementation services are included? What capabilities are included in the basic subscription? How long will implementation take? What happens if additional services are required?
While some vendors might promote implementation as “free,” everything has a cost. It’s important to understand what is and isn’t included and whether the vendor can support your unique needs during implementation.
The initial price is only part of the equation. You must consider what happens to that price when your contract renews. Negotiating caps on annual increases, locking in pricing for additional users or modules from the start, and clearly defining renewal terms can help prevent unexpected increases later.
The Levers to Pull During Software Contract Negotiations
Pricing is only one aspect of a software contract. Depending on the vendors and your organization’s needs, you may need to negotiate implementation terms, payment schedules, additional functionality, support, renewal protections, and more.
Establish Change Order Rules
Before signing anything, clearly define what constitutes a change order and what happens when one is required. This includes the approval process, hourly rates, inclusions and exclusions, and how additional work will be addressed. It’s valuable to set these rates upfront so you can lock in the price for the entire term. Without clear change order rules, unexpected costs can quickly accumulate as the project progresses.
Negotiate Payment Terms
While you might not go live with the software for several months, vendors still expect you to pay once you sign the contract. This is the ideal time to negotiate payment terms that better align with your project timeline. For example, if you will not begin using the software for six months, you may be able to negotiate a discount, a delayed payment schedule, or other terms to offset the time between signing the contract and going live with the software.
Ask for Additional Modules or Bundles
When negotiating software, it’s important to think beyond the capabilities you currently need. As the business grows, you might need additional modules, users, locations, or functionality to support your evolving needs. Some vendors might include favorable terms in the initial contract, while others might structure the contract so that those same capabilities would cost considerably more if purchased later at list price. If you anticipate needing certain capabilities in the future, it's best to ask about pricing and terms during the initial negotiation to ensure consistent pricing across the board.
How AI is Changing Contract Negotiations
AI is changing the capabilities available in enterprise software, and with change comes evolving pricing and contract terms. Most major software vendors have an AI strategy and are introducing AI-powered functionality into their ERP systems. However, “AI” means different things from one vendor to another. This is why it’s important to understand what is actually included in your contract and the impact AI has on pricing, rights, and privacy.
New Pricing Models
The variety of AI models and tools has resulted in differing pricing models. Vendors now offer consumption-based pricing, credits, user-based pricing, hybrid models, and other, less common, structures to choose from. Some vendors may include a certain amount of AI functionality in the base subscription, while others charge additional fees once usage exceeds a certain threshold. Before signing a contract, it’s important to understand how AI usage is measured, what functionality is available, and how the vendor plans to charge you.
Understand What AI Capabilities Are Included
Not all AI capabilities are the same. One vendor might use AI for basic automation, generative AI, or predictive analytics, while another deploys copilots or autonomous agents that act on users’ behalf. When a vendor says its software “includes AI,” ask what that actually means.
Ask questions like:
- What AI capabilities are included?
- Which features are available today?
- Are these included in the initial price, or will there be additional costs to use them?
- Are there usage limits?
- Who has access to this functionality?
The more specific you are during the negotiation, the easier it will be to understand the entirety of your purchase.
Data Rights and Governance
AI often requires access to your data, making data rights and governance a key part of the contract.
You need to understand how your data will be used, stored, processed, and protected when enabling AI features. You should also understand whether your data will be shared with third parties, used to train models, and who will have access to your data before implementing any AI solutions.
Conclusion
A successful software contract negotiation is about more than securing the lowest price or the biggest discount. The goal should be to establish an agreement that provides the capabilities, services, protections, support, and flexibility your organization needs to succeed with the software long term.
Taking the time to understand the different aspects of a software contract and negotiate the terms that matter most can ensure you get value from your software long after the initial contract is signed. If you’re undergoing ERP software negotiation, reach out for guidance. You can schedule a free consultation with one of our experts today!
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