Engaging in Win-Win Negotations

While this article lays out guidance for negotiating your learning management system transaction, remember that a win-win scenario means both sides are satisfied with the terms and outcome of the deal. As the customer, you get what you want in terms of the LMS and all its requisite benefits; and the LMS vendor lands a customer that appreciates the time and resources required to produce, deploy and support the LMS for long-term success.

Some people believe the hard work is over once an LMS vendor has been picked, and all that’s left is to squeeze every last cent out of the final price. The reality is that this next phase of work needs to focus on expanding the relationship you have with your software provider beyond the sales team. You can achieve that with the effort you put into development of two important documents: the contract and the statement of work. That’s where your negotiating skills truly come into play. Only then will you be ready to finalize pricing.

First, the Contract

The contract is the legal document that will allow you to maintain a multi-year working relationship with your LMS vendor. For that reason alone, it requires due diligence. Remember: If the requirements don’t appear in the contract, there’s no obligation for your vendor to deliver it at the agreed-upon costs. Don’t just hand off the work to the legal team. While the lawyer may be responsible for making sure the terms and conditions included in the contract would stand up in court, you need to spend time understanding what you want out of the relationship with your LMS vendor and figure out how to articulate that to your attorney. Only then will he or she understand your priorities.

As you’re going through the contract process for your LMS, keep these aspects of the project in mind.

The Feature Set

Software-as-a-service LMSs are continually upgraded. That’s a definite benefit of going with a SaaS provider: New features and capabilities, bug fixes and interface improvements are being implemented all the time, and you can have them take effect without having to involve your IT team for every update. This brings up two issues: when premiums are warranted and what’s to be done about customizations.

First, frequently, you’ll hear about updates being “point” releases: version 5.1 becomes version 5.2, then 5.3 and so on. But every now and then a vendor will decide that a given set of features is substantial enough that there’s a premium to be paid. In these cases, the LMS company may choose to jump to a “version” release —5.02 to 6.0—or make the new functionality a separate module altogether. The question to resolve upfront is whether or not the version release or new module will be covered under your contract.

You may ask why you should be expected to pay anything extra for a new release. Remember: There is a lot of expense involved in developing software, including testing new features against various customizations and integrations to make sure the program works from the moment it has been installed on your servers.

Second, in software-as-a-service (SaaS) an update may be pushed out to everybody’s systems and something will break in your specific environment. Typically, that happens when you’ve made customizations with your software that you may have forgotten about.

My suggestion is always that you do all you can to stay on the vendor’s core software, which requires you to accept software updates from the vendor. Those changes are done for a reason— often having to do with security fixes or bug fixes.

Also, you should expect to pay for customizations of your version of the software, often done to accommodate integrations with other programs that are unique to your company. Again, with every variation from the vendor’s core program, expect the price tag to go higher.

During negotiations, you’ll want to address questions such as:

• What happens if the must-have feature on your shortlist that’s been promised by the vendor in an upcoming point release doesn’t appear?
• What if the next version release is set to be launched within the period covered by your contract, but it comes out later than that? Does that mean you’ll have to pay for it?
• What if the promised capability ultimately ends up being launched as a separate module that requires its own licensing altogether?

Customizations

Know that if you integrate to other systems and you customize the software to your desired workflow you could be tied to this vendor for years beyond the contract—generally six years. Clearly understand the future cost of major upgrades and how your customizations will impact those costs.

When possible do all you can to convince stakeholders to stay on the vendor’s core software, which requires you to accept software updates from the vendor. Those changes are done for a reason—often having to do with security fixes or bug fixes.

Three Contract Tips

1. Make sure your contract spells out the feature set your LMS will include.

Without that, you could face unbudgeted expense down the road. What often happens is that the original RFP contains a wish list of features. The vendor you choose isn’t promising to fulfill the entire RFP wish list—just those explicitly acknowledged. And to be honest, after your fifth vendor demonstration, what one company said gets mixed up with what another company promised. As a result, down the road, you may end up in he said/she said arguments built on little more than vague memories and undeserved accusations of bait-and-switch. For that reason, I encourage you to record your vendor presentations and prior to your contract negotiations have someone review the details for the company you are choosing to get an accurate list of guarantees or promises.

2. When you ask for references, make sure to find out what version of the program the reference organizations are running.

They may have implemented a different version of the software you’re considering or a different product altogether. (Just because the program has the same name doesn’t mean it’s the same software.) Some vendors aren’t always upfront about this and rely on obfuscation to put their best foot forward.

3. Ask for your vendor’s version history and roadmap.

That will tell you where they’ve been and where they’re going and give you a sense of how often they update their applications. This information can help inform your negotiations about what should be included in the current deal and what might incur extra cost in the future.

 

Data Location

When you work with a SaaS program, your data could reside anywhere. Depending on who your customers are, that may cause you problems, since some countries have strict regulations regarding the storage of data in other countries. Make sure you’re following the laws where you’re doing business.

Data Retention

Should you ease your organization out of a contract, you’ll want to make sure the LMS vendor doesn’t delete your data before you’ve had a chance to move it elsewhere. Give yourself at least 30 days, if not a full three months. And have the vendor spell out the charges related to those activities.

Code Ownership

Don’t let your legal department talk you into insisting on owning the code for the application you’re licensing. That may have worked in the era of proprietary software, but it doesn’t make sense in the case of SaaS.

The same goes for code escrow. That’s the practice of having a third-party hold onto the code in case the company you’re licensing it from goes belly up. In my opinion, that’s a waste of money. The truth is that the version you’re on is probably good for three years and not much more. After that you have to consider anteing up again and either renewing your current contract or finding a better solution. So what’s the point of paying to escrow code?

Renewal Ceiling

You may be shocked when renewal time comes around at how pricing has increased for your LMS in the intervening years. Some experts advise locking in a limit to how much the subscription price is allowed to be raised during the next renewal cycle even as you’re still nailing down pricing for your first licensing cycle.

The Exit Clause

Even with multi-year contracts, make sure your agreement includes an out clause. This is something that stipulates that with the proper notice (30 days is about the right amount of time), you can exit the contract without paying a penalty or incurring additional costs. And if you leave, note that you’ll be taking your data with you. With the exclusion of content licensed from the LMS vendor, that would include user data, content your company has loaded into the system and other kinds of uploads, such as media.

What should you (or the vendor) be able to terminate for? Typically, it’s missed deadlines or not meeting the terms of the service level agreement (SLA). Usually, it happens when the customer and the vendor didn’t make for a good fit in the first place and implementation has been a real struggle.

At the same time, make sure your lawyers don’t waste time trying to include text that allows you to terminate “for convenience.” What that does is make the contract moot. (I think any lawyer who negotiates hard for that is in the business of generating billable hours—and you’re the one who’s paying.)

Which Contract to Use: Yours vs. the Vendor’s 

Choosing to use your own organization’s contract may give your attorneys peace of mind, but it will also extend the time frame (sometimes up to three months) required to get it finalized. Unless time is no object, begin the contract process using the one supplied by the vendor. It’ll follow a template your legal team will be familiar with. That said, don’t hesitate to ask questions and propose changes to the document. But remember that there are customary clauses used in every reasonable SaaS contract that should not be rewritten.

When the contract has been revised on your end, send it to the vendor to make the same changes in their version of the contract using track changes per legal. Once they’ve returned that to you, run it by your legal representatives again to make sure the changes reflect what you originally requested.

Once the contract is officially signed off by both parties, make sure you get an original copy of the signed version. Don’t simply rely on a digital version emailed to you or a faxed version. Don’t rely on your legal team to maintain that copy. Keep it close at hand in your own files too.

Next, the Statement of Work

The statement of work (SOW) is a subset of the contract. Its main purpose is to lay out the description of the work in specific terms that anybody involved can follow. Then it’s usually included in the contract as an addendum or attachment.

While the initial contract heads off to the various legal experts for their review, you can start hammering out your SOW with your LMS vendor.

Again, let the vendor provide the initial SOW, based on its preferred format, and use that as an outline. The smartest vendors will get on the phone and work through the outline with you to review it and talk through the details. They know it’s just a starting point that will need to be revised before the project begins.

While the contract contains the legal terms of the agreement, the statement of work lays out in practical terms the “narrative” of the project: who’s doing what, why, when and where. It needs to be in language that’s understood by those rolling up their sleeves and doing the work—people on both the customer and vendor teams.

Drafting the statement of work and getting sign-off from both parties provides an opportunity to visualize, argue about and negotiate how the project will unfold before the various tasks begin. It doesn’t necessarily spell out how the LMS company does its work, but it will specify the outcomes expected before the work is considered well and truly done.

Here’s what you can expect to cover in your SOW:

The Project Overview

Content includes an explanation about why you need the LMS in the first place and what your objectives are for the project. It spells out the ultimate goal of the project, assumptions and how the results will be evaluated—in general—against the use cases you’ve proposed. (Details will appear later in the SOW.)

Project Management

This section lays out responsibilities by vendor and customer and details of such components as:

• A detailed project schedule (preferably in a tool such as Microsoft Project)
• Design and configuration;
• Data preparation and migration;
• Project reporting;
• Security set-up;
• User testing;
• Training;
• Implementation;
• Post-implementation support, including on-going system maintenance and performance tuning; and
• Handling of changes, missteps and delays.

Timing

The timeline section goes through the schedule. Without this, neither party will know when to commit resources, such as IT people or users to test the implementation, to get their part of the work done. After a description of the various phases of the project, ordered by milestone, the SOW will get into the particulars:

• Start date and end dates;
• Milestones and expected project hours;
• Payment scheduling; and
• Fixed term activities and time- and materials-based activities;

A couple of notes about this:

Make sure that each integration with another system has its own “mini” project schedule and incorporates everybody who will need to weigh in on the work. For example, if you have three integrations to be done, you’ll need to consider those three separate projects, which might require outreach to your website team, your webinar team and your ERP or accounting team.

Rather than plugging in actual dates, particularly when you don’t know when the contract will finally be signed, a common approach is to use time units: “Data extraction, transformation and loading will take place +2 weeks after contract signing”; “Training system administrators will take place +4 weeks after contract signing.”

Change Order Process

Changes are inevitable. This section lays out how changes— whether in scope or timing—from the original agreement will be documented, what roles are allowed to file change orders and how changes will be handled and billed.

Service Level Agreements

While the contract will lay out the terms of SLAs, the SOW will provide the details on how they’ll be measured and “remedies” (what the customer will get back if the levels of service aren’t met).

Finally, Negotiating that Price

LMS pricing has come way down in recent years, thanks to plenty of competition. If you really like somebody’s software and it comes with a higher price, there’s usually a good reason for that. Remember, companies that offer pricing that seems too good to be true may be losing money in order to capture marketshare; but that’s not always a sustainable business model. Your goal is to choose a vendor that will survive and remain healthy. Here’s how to optimize your savings without squeezing the vendor so tightly that they lose interest in keeping your business.

In spite of the fact that LMS functionality is often delivered as a subscription service, with billing on a month-to-month or annual basis, LMS contracts tend to last three years. There are a couple of advantages to that: You’ll know up front what the costs are for your LMS for the duration, and there’s more likelihood that you’ll benefit over multiple years as more users adopt the software and the software is improved.

On the vendor’s part, they may not make any money on your deal until deep into the second or third year—or even until the renewal period. So when you pick that vendor, think about it as a six-year arrangement. If the implementation is successful, you won’t want to replace the software at the next renewal, so the chances are slim that you’ll want to leave after the first term is over.

Also, don’t be surprised if that first year has higher costs associated with it, because there will be implementation expenses. (Those go by the wayside, of course, in subsequent years.)

Understand the Pricing Model

A study by Capterra, which consults with companies on their enterprise software purchases, found that pricing of an LMS can be handled in multiple ways:

• Per course, where the learner pays for the number of courses maintained in the LMS;
• Per learner (sometimes referred to as per-seat licensing), determined by how many users could possibly access learning through the LMS;
• Per active learner, set by how many people actually use the LMS during a given period; and
• Flat fee, a monthly or annual fee that lets you add as many courses and users as needed.

As Capterra advised, determining the optimal pricing model for you requires answering three questions:

• How many learners do you have?
• How often will they be accessing training through the software?
• How long will you want to use the LMS?

Craig Weiss, head of the Craig Weiss Group, has suggested that the contract include an addendum to cover future expansion of your user base. While it may be 12 channel partners this year, that could grow to 50 next year. He advises avoiding the “infamous per-seats price.” His preference: “Give me a bucket or package – depending on your vernacular—and a good price deal.”

Itemize!

Vendors tend to want to provide a lump sum total for your multi- year contract. When they do that, request that they break out the details so that you can understand what line items are making up the overall cost. Only then can you eliminate the features and services you don’t need at all (or are just plain silly) and negotiate better pricing on the ones you do.

Also, watch out for value-added features that you don’t really need. If they’re not part of your assessment program, consider them “shiny objects” meant to distract you from what really matters to your channel partner organization.

Along with a breakout on the various charges for the LMS service, you’ll want to see the discounts you’re receiving broken out too:

• Total cost, year 1
• Discount, year 1
• Final cost, year 

Work Payment Timing to Your Advantage

If it’s manageable on your end, find out what the vendor will take off the price tag if you pay up front for the entire term of the contract.

If the vendor won’t budge on pricing, and you’re absolutely committed to the product being offered, propose a payment plan that better suits the financial operations of your company.

Take advantage of vendor fiscal years too. Just as you’ll get a better price on a car when the dealer is trying to make end-of-month or end-of-year quotas, LMS vendors are the same: They have sales quotas that can help you gain more leeway in negotiating pricing and timing.

Be Direct

Don’t be afraid to broach the topic of pricing by saying, “Your pricing is high compared to the others. Is there anything you can do to adjust that?” If by that point the LMS company really wants your business, it will find a way to work with you.

The Finer Points of Negotiation

Engaging in a win-win negotiation requires give and take from both sides. If the deal you’re being offered sounds wildly out of whack from every other deal, it may be because you haven’t done a sufficient job documenting the nitty-gritty in your statement of work or the contract. Only by paying attention to those two documents will you truly achieve your requirements and strike a reasonable deal that serves both parties.