?Mark Berry received an unpleasant surprise when he began negotiating with an HR technology vendor he’d partnered with in a previous HR leadership job. “The vendor came in with prices that were three times higher for its software on a per-person basis than the last time I’d worked with them, and a higher implementation fee,” said Berry, senior vice president of people for Inari, a seed technology company in Cambridge, Mass. “They’d completely changed their operating model in the time between those two contracts.”
Berry isn’t the only one who’s had his eyes opened by new realities of the HR software market. Two recent studies show prices for HR software-as-a-service (SaaS) tools continue to rise and that the overall cost of SaaS solutions for U.S. organizations has grown 3.5 times faster than the inflation rate.
A study from London-based Vertice, an SaaS purchasing and advisory platform, found the price of HR SaaS tools increased by 5 percent on average in the past year but that some individual vendors had hiked prices by as much as 15 percent. Research from Gartner also found implementation costs for new HR software increased significantly over the last year, driven by rising labor costs and inflation.
The costs to develop and deploy popular new generative artificial intelligence tools like ChatGPT also are proving exorbitant for some organizations. Analysts say as companies continue to find new uses for these tools, the larger the fees those organizations will have to pay the creators of the tools. That’s largely due to the vast amount of computing power and specialized hardware needed to run large language models like ChatGPT.
What’s Driving Price Hikes
Joel Windels, vice president of Americas for Vertice, said a need to grow revenue to keep pace with inflation along with a desire by many vendors to attract new capital investment has led to price hikes by HR software providers.
“SaaS companies are using as many advantages as they can to try to grow revenue from a potentially dwindling number of customers,” Windels said. “That’s led to more things like automated price increases and automated contract renewals. Those tactics have been employed more aggressively in the past year than we’ve seen previously.”
Berry said he’s witnessed a new push among HR software vendors to generate more revenue from clients and reduce costs by doing things like offering user training for new systems virtually rather than in-person. “In all my years in the HR industry I’d say there’s been more of a change in that approach over the past year than in any time previously,” Berry said.
He noted that recent HR SaaS contract renewal increases appear high relative to historical levels. “In several cases I’ve seen vendors use renewals as an opportunity to completely restructure their pricing models,” he said.
Berry also said vendors are increasingly breaking out their system implementation expenses as a separate line item, a change from past practices of keeping those costs obscured in a bundled cost. “Vendors are much more specific now about calling out separate dollars around implementation, which likely is about trying to recoup rising labor costs on their end,” he said.
HR Software Tops for Auto Renewal
Vendors use auto renewal of SaaS contracts as one way to increase pricing, and the Vertice study found that of all the software categories it tracks, auto renewal was more commonly used with HR software products than any other category except e-commerce and operations software.
Technology analysts say it’s up to HR buyers and their internal negotiations teams to seek contract clauses like renewal price protection to mitigate high auto-renewal costs.
“It’s important to look at what renewal price protections a vendor might offer and contingencies for those protections,” said Brian Westfall, a principal analyst specializing in HR for Capterra, a software review company in Arlington, Va. “Clauses might say the vendor won’t raise an annual rate by more than 3 or 4 percent, but tied into that the client might have to maintain a certain amount of usage or licenses. But that should all be negotiable.”
Analysts say vendors often count on HR leaders being reluctant to move to new software providers given the time and resources needed to install a new platform and get employees trained on it. But that resistance to change shouldn’t keep HR buyers from looking hard at renewal costs, they say.
“Ultimately auto-renewal clauses are just like any other contract term, which means they are something a customer can request to modify or remove,” Windels said. “The challenge is that with decentralized buying processes growing more common, and typically split between HR, IT, legal and finance, it can be hard to have an aligned, cohesive strategy for negotiation.”
Windels said the good news is in this era of easy-to-deploy SaaS platforms, departments outside of IT can now more readily purchase any software tool they need on their own to help boost efficiency, productivity or performance. “But the drawback to that is there’s often less collaboration with other departments in the buying process, which can result in more immature contract negotiation strategies, avoidable cost increases and other issues with vendor contracts,” he said.
Westfall said in addition to seeking clarity on contract renewal increases as well as on monthly or annual software subscription fees, it’s important for HR buyers to understand other costs that can be hidden in vendor contracts. These include fees for software implementation, data migration, user training, customer support, additional data storage and early termination fees.
“These are costs salespeople may not be upfront about until you explicitly ask them,” Westfall said. “You should be aware of all of those costs before you start to negotiate with vendors.”
Tips for Improved Vendor Pricing
Analysts and experienced HR buyers say there are a handful of ways to improve your odds of getting better pricing from vendors. One way is to negotiate at the right time of year.
“Some of this comes down to timing,” Westfall said. “If you’re talking to vendor salespeople near the end of their fiscal year, for example, they’ll be more inclined to give you a discount or meet you halfway on price because they’re looking to boost their final sales numbers.”
Westfall also said partnering with startup vendors with some experience under their belts can result in more flexible contract terms and lower prices. A startup preparing to raise funding might be particularly motivated to add customers and boost revenues in advance of a series funding round, Westfall said, giving HR buyers more leverage in negotiations.
Berry said startups are often more receptive to suggestions to modify or upgrade their platforms than established vendors. One startup he worked with made a change to its platform after Berry’s team pointed out a critical-but-missing feature.
“There was a specific thing we wanted in the vendor’s product which it hadn’t yet considered doing,” Berry said. “When we asked about it the vendor said it would come back within a few weeks with a new engineering road map that included the feature. They were good on their word, and we signed a contract because of that.”
Westfall said it’s also important to choose the right kind of SaaS license to match your company’s characteristics. “Software that offers a license for unlimited users at a set price might seem cost prohibitive up front, but if you’re a growing company and you lock in that rate now you can save a considerable amount of money down the road as you expand,” he said.
Power of Win-Win-Win Relationships
In the end Berry believes it’s important to view relationships with HR software providers more as partnerships than “vendorships” to get maximum value for all three parties impacted by a transaction—employees, the client company and the vendor.
“With a vendorship your sole goal is to get the best deal you can on price, but with a partnership you want it to be mutually beneficial so it’s more of a win-win-win,” Berry said. “I don’t go for beating vendors down too much on price if I want to work with them long term. You might win on price but you’ll likely have stripped out any incentive that vendor has to provide high-quality service and support over time.”
Dave Zielinski is principal of Skiwood Communications, a business writing and editing company in Minneapolis.
