Should you Sign a Multi-Year Contract for your HCM?
Congratulations! You’ve done the hard work of finding the right human capital management (HCM) system that meets your company’s evolving needs. Now, it’s time to finalize the deal. Typically, vendors offer two contract options: one-year or multi-year. Which one should you select?
The contract length is often the last consideration.
When you began searching for an HCM that would be best for your company, you most likely had a steep learning curve. Most HR leaders don’t specialize in evaluating HCMs, so they have to educate themselves along the journey. And there is a lot to consider, such as:
An evaluation of what problems exist that indicate the need for an HCM?
How will the HCM address those issues?
What functions are most needed in the HCM you select?
How will it integrate with your current technology?
How long is the implementation time?
What degree of tech support does the vendor provide?
How much does it cost?
With all of these decisions, selecting the length of the contract may seem less consequential, but there are definite benefits to looking at the options closely. Most HCM vendors, like the majority of software-as-a-service companies, offer two options to customers who sign on: a one-year contract or a multi-year contract. A multi-year contract is anything longer than 12 months. Typically, however, a multi-year provision lasts three years.
Benefits of a Multi-Year HCM Contract
A multi-year contract provides several advantages, such as higher discounts, protection from price increases, saving time and resources, and better long-term insight. Let’s walk through each of these for more detail.
Higher discounts: this is the primary reason customers select a longer-length contract. While discounts vary, some can range from 10 - 20%. Vendors offer these discounts to encourage fixed volumes and repeat business, but this also helps HR leaders negotiate terms.
Protection from price increases: As markets go up and down, so do prices. SaaS vendors use different pricing models and tactics to set their rates, so a multi-year contract protects you from increases during that time. For example, Salesforce’s Master Subscription Agreement indicates they add a 7% price increase each year. That’s a lot for just one year, and even more, if you renew every year for three years.
A multi-year- contract offers protection from those increases and makes it easier for you to anticipate and plan expenditures.
Time and resource savings: While your HCM contract is critical to your function, it is probably only one of hundreds that your company must review. In fact, according to The State of Business SaaS Spend 2019 report, the typical 800-person U.S. company uses 141 SaaS vendors. As each contract approaches its end date, procurement must review and negotiate it, as well as take the time to research and onboard new SaaS vendors. In other words, the process can get bogged down.
Signing a multi-year contract lets the procurement team focus on strategic initiatives instead of preparing and managing annual renewals.
Beyond the administrative headache, having a more extended contract gives you and the vendor more time to build relationships and work together. Considering the effort and expense that goes into implementation, training, and change management, the additional contract time and relationship building gives you more opportunity to recoup your investment.
The benefit of staying with the same vendor is also evident when you want to monitor your progress long-term. With multi-year data and performance monitoring, you can see trends over three or more years, which allows you to make better evaluations and corrections.
Before you sign...
For all of the benefits of signing a multi-year contract can offer, there are some aspects to be clear about. As with any contract, it is critical to understand every part of the agreement, and it’s even more essential when the agreement is for a longer period. You may want to include a clause that provides for early termination if the vendor doesn’t meet agreed upon key performance indicators.
Take one final look at your prospective HCM system and review the reasons you considered this prospective new HCM. Does it meet your company’s unique needs and allow flexibility as your organization changes? Does the vendor prioritize continuous innovation that will keep your HCM current throughout the length of the contract? Can the HCM help you pull insightful, accurate data for employees and positions at any point, that ultimately enables you to make better business decisions?
If the answer is yes, it may be worthwhile to sign a multi-year contract, developing a win/win in your long-term relationship with your HCM vendor.
Interested in speaking with a SyncHR HCM expert to see what sort of options may best fit your organizatinos? Let's chat!