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Buying human resources software: The negotiation phase

In this third article of a seven-part series on buying HR software, two experts offer insight into the questions to ask as you negotiate a contract with your vendor.

You've evaluated a human resources product and worked with the sales team on your HR technology purchase, and now...

you're ready to enter the negotiation phase. You're jazzed by the product your team has settled on, and you're getting a good vibe from the vendor. Entering this phase of buying human resources software, you need to battle two misconceptions about negotiating successful purchases: It's all about the money and it's all about you.

The keyword here is "successful." Plenty of buyers can negotiate software purchases and feel really good when they sign on the bottom line. Unfortunately, they may not feel that satisfaction when processing their first hire or when running their first custom report -- possibly because they didn't negotiate for the right features. Remember, you have all the power in the world before your John Hancock hits the page. After that magical moment, not so much.

To get to where you need to be, we have compiled questions we suggest you ask during negotiation.

1. How does the vendor make money? Specifically. We know how hard it is for folks to talk about money -- we get that, but it's critical to understand how a vendor profits from the relationship. Why in the name of all things HR tech does this matter? Because if you negotiate a contract that doesn't allow the vendor to make money, you're part of their problem, not their solution. How?

  1. You'll wear a black mark as you transition from sales to professional services. They talk. You might get a less qualified implementation team. That can best be illustrated by the number of resource planning sessions where the words "we really want to knock this one out of the park" have been uttered. They won't say that about you. You'll get, "Sorry, these guys were really tough."
  2. Financial viability of your vendor is in your best interest. It allows the vendor to support and enhance the product. That's not to say you should let them take you to the cleaners, but it should be an equitable negotiation.

Back to the question at hand. Simply put, a vendor makes money by selling deals that are profitable over the course of the client relationship, which breaks down as Figure 1 shows.

Vendor-client relationship
Figure 1. The flow of the vendor-client relationship.

It used to be easier to say that vendors made money implementing and then on the subsequent licensing and support fees. Today, where a vendor makes money is tougher to pinpoint with many vendors either making implementation a loss leader, or in some cases giving it away for free. So what do you do? You ask them. "Is 400 hours an accurate number of hours to get this done, or do you plan to take more or less time?" If you're bold enough, start to get a sense of their margin; in other words, how much does $70K translate to in profit? Same thing goes for the Per Employee Per Month (PEPM) cost most vendors are charging for the most common delivery of cloud-based solutions. Does $10 PEPM make you money? And do you expect to sell to me post-implementation? If so, what?

Much of this speaks to when the vendor receives its profit. It might make sense to negotiate a deal that is well balanced -- that way, you don't have to worry about them being both software experts and cash managers.

2. Am I giving up things (features, reporting) that are important to me? You do this in your personal lives and in buying human resources software. You give up the leather at the last minute even though it would have felt so silky smooth throughout the life of the car. You give up recruiting; you give up metrics. You settle for the normal number of business processes and custom reports. Worse yet, you pay no attention to any of these and sign a Scope of Services that completely limits your ability to get the most out of your software. Spend more time negotiating here. Ask people who have seen what vendors do to try to trick you. Think back to the timeline. The less they have to do during implementation, the more profit they stand to make.

That's the bonus question: Is the implementation fixed or variable cost? Fixed means they can leave features on the table for them to come back and sell you later. The problem is, you might not be getting the return on investment you sought during normal use of the product and you'll bolt before they get to that point. Variable implementation cost means they can make sure you get everything you remember you needed, for whatever it costs and however long it takes to get there. And CFOs hate variable costs.

3. Who owns the data and how do you get out of the contract? Best answer: you, and easily. Why does this matter most? We all know the marriage and divorce statistics; no need to bring them up. Relationships go bad. When that happens, you want the easiest path to the exit, with all of your belongings. That not only means that the data goes with you, but that it goes with you in the easiest format possible. The best case scenario is a usable database. The more common scenario is data dumps from the current system in formats such as comma separated values. A good negotiation includes understanding the data ownership during the client relationship and the physical transition after it ends.

We've just dipped our toes in the water. Like the 140 characters in a tweet, 750 words isn't nearly enough to get it all across, but it is a good start. Now go make sure you're asking the questions you need to ensure a successful negotiation.

The seven points of satisfaction
in buying HR tech

Each article in the series addresses one of the steps in the purchasing process that is a key determinant of buyer satisfaction.

  1. Product selection
  2. Sales process
  3. Negotiation
  4. Implementation
  5. Training
  6. Adoption
  7. Support

About the authors:
Jeremy Ames is co-founder of Hive Tech HR, a consulting company based in Medway, Mass. He is a 15-year veteran of IT implementation projects and sits on the HR Management and Technology Expertise panel of the Society for Human Resource Management. Email him at Jeremy.ames@hivetechhr.com or follow him on Twitter @jeremyallynames.

William Tincup is principal analyst and co-founder of Key Interval Research, which is based in Occidental, Calif. He is a contributor to HRExaminer.com and other media outlets and sits on the boards of several technology companies. Email him at william@keyinterval.com or follow him on Twitter @williamtincup.

Next Steps

Deciding which features matter when buying HR software

Learn more about cloud financials

Review three cloud HR products

This was last published in February 2015

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What are your best negotiation techniques when buying HR software?
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We make sure to have a list of essential features and a list of non-essential features. No in between, we know how we weigh things and have a "cost-effective" and "full-service" offer to make. Basically, we will purchase a bunch of HR software with all the features we need, at a lower-than-market rate, or let go of some features for a huge discount. Data ownership can also play a factor in negotiating on HR software.
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You have to investigate to find best alternatives, assemble the information that supports your position, discuss your goals then come to a closure.
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Based on my experience, it is better to opt for a SaaS based solution, where maintenance charges and efforts are minimal and these are hassle free to handle. We use SutiHR software which is a cloud based HCM solution.
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