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How can I best negotiate for cloud HCM tools?

The concepts of price cap and price lock can help you better navigate negotiations with a vendor for your chosen cloud-based HCM tools. Here are the essentials you need to know.

Two tools that are critical to successfully negotiating the best price on cloud-based HCM software are price lock...

and price cap. Being aware of -- and understanding the difference between -- these two concepts is crucial before speaking with a human capital management software vendor. Price lock refers to securing the price of a given module, now, even if the actual purchase will take place one or more years down the road. Price cap refers to the practice that prevents a vendor from freely increasing the price of its software at the end of a contract.

Before you can determine what services you'll need price lock to cover, you first need to have a clear sense of implementation scope. What will the cloud-based HCM system cover? Core HR only? Payroll? Expenses? Benefits? Talent modules only?

There is a balancing act at work here: You need to decide what the best price is based on what you need now balanced against the ways in which you expect those needs to grow. While you'll definitely want to include the modules necessary for the human capital management functions you'll be automating as part of your current implementation, you don't want to start being billed for a feature you will not be using for years. Remember that in the brave new world of software as a service (SaaS) you get billed from day one, as soon as the functionality is made available to you. Just like with a rental car, you get billed from the moment you are given the keys to the car, regardless of whether you actually drive the car or not. So negotiate for what you need now, but also use price lock for your anticipatory needs, so that when the time comes to activate a feature, you can do it at a reasonable price.

The same balancing act holds true for geography considerations. If you are going to expand into new territories and some HCM tool modules are country-specific, for example, benefits or payroll, it's worth taking that into account early on so as to avoid paying full price later on. Decide on what HR processes you need handled by the software and what countries you need, and then negotiate the price on that basis. That sounds straightforward, but figuring out exactly what you need is not always easy. As one example, project scope will depend on your detailed analysis, which may not be finalized by the time the contract signing is scheduled.

As with the aforementioned areas, figuring out employee count is also a balancing act. Your company is likely to have a headcount increase throughout the contract's lifetime, for example, normal hiring flows and acquisitions. You'll want to factor those projections into negotiations with an HCM tools vendor. With a cloud contract, the more employees you include, the lower the price per employee. Have a good sense of what your headcount will be. If you think you will grow from 2,000 employees to 2,500 within the year, negotiate a rate on that basis. That doesn't mean you will pay that right away. But when you hit 2,500 you will gain the lower per-employee price. If you hadn't anticipated the headcount increase, you wouldn't get the price break.

Price capping is also critical to negotiating the best price for cloud-based human capital management software. Let's say that you agreed on $50 price per employee -- the metric for a SaaS contract is always per employee per year, PEPY for short -- for a 3-year commitment. Once you've reached the end of that period, the contract is up for renewal, and unless you've thought ahead, your vendor can demand whatever price increase it deems appropriate -- whether that be 10%, 20%, 30% or even higher -- and you have no legal or contractual right to counteroffer. Instead, you are left with the decision of whether to renew or whether to begin looking for another vendor, which is rarely feasible. Better think about this at the outset to ensure your PEPY cannot go beyond the inflation rate and is capped at a reasonable percentage.

Next Steps

Tips on SaaS security during vendor negotiations

Navigating the HCM buying process

What to know about HCM vendor support

This was last published in April 2016

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Two tools that are critical to successfully negotiating the best price on cloud-based HCM software are price lock and price cap. Being aware of -- and understanding the difference between -- these two concepts is crucial before speaking with a human capital management software vendor. Price lock refers to securing the price of a given module, now, even if the actual purchase will take place one or more years down the road. Price cap refers to the practice that prevents a vendor from freely increasing the price of its software at the end of a contract.
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