Workday TCO Risk is Greater Than You Think


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We recently published a blog discussing how you have the greatest leverage during your first Workday negotiation and why it is so important.  As a follow up, we thought it would be helpful to illustrate how this plays out strictly from a pricing perspective in three different scenarios.

We took three different Workday deals that were of relative similar size and normalized them as if they had purchased the exact same cloud services and quantities with the same list pricing.  Then we applied the actual pricing terms achieved from each of the three deals to illustrate the disparity in total cost of ownership over a 12-year period.  This is based on a typical initial term duration of three years and includes three subsequent renewal terms.

For purposes of this illustration, it is worth pointing out the following:

  • Company 1 – Negotiated alone without any third-party support or advice
  • Company 2 – Brought in third-party support after initial negotiations
  • Company 3 – Utilized third-party support from the outset, prior to and throughout negotiations

All three companies started the evaluation and negotiation processes with very similar leverage, as these were all first time Workday deals.  While having strong leverage is important, what matters more is knowing how to appropriately use that leverage to establish a strong executive-level relationship and negotiate a highly competitive commercial construct that enables long-term success.  Let’s look at the results.

Initial Term Subscription Fees

As you can see in the chart below, Company 1 achieved the lowest discount of the three and paid the most overall.  However, in Year 1 the difference between Company 1 and Company 2 is only just under $150K, which would appear to most as a negligible difference.  Company 2 already had positioned some initial positions; so, when they brought in third-party advisory support, they had already given up considerable leverage as it relates to the initial discounting.  A word of caution – once pricing has been proposed by a vendor and deemed relatively acceptable by the customer, it is extremely difficult to achieve any further pricing concessions, which is what happened here.

Cumulative TCO: 1-3 Years

 

Cumulative TCO: 12 Years

 

Company 3, however, paid just under $400K less in year 1 than Company 1, and just under $250K less than Company 2.  Many organizations would deem this savings considerable relative to the fact that Company 1 paid just under $1.25M in year 1.  That’s well over a 30% price differential.

Renewal Term Subscription Fees

Now let’s turn our attention to the outer years and the renewal term price protections that were negotiated.  You can clearly see the gap widening between the three companies as the cumulative TCO grows over time.  However, in year 4 the first renewal term kicks in, and in years 4–6 you can see the gap widening at an increasing rate.  This increase in rate is a direct result of the competitiveness of the renewal term price protections.

Company 1 achieved Workday’s standard terms, whereas Company 2 achieved slightly better renewal term price protections and Company 3 achieved the best protections.  Company 2 was able to leverage third-party advisory support, and since the initial price in year 1 remained relatively flat, there was enough leverage to improve the renewal term pricing as Workday was a bit more willing to offer more competitive terms to close the deal.

Please note that there are additional renewal term inflection points in years 7 and 10, which also increase the rate at which the TCO gap is growing between the three companies.

But let’s take a look at Company 3.  Utilizing third-party advisory support prior to commencing any discussions with Workday, they were able to do a few key things the others could not.

  • First, they were able to get a benchmark assessment of what a highly competitive commercial deal would look like and, therefore, establish a target goal for negotiations.
  • Second, they were able to develop a detailed negotiation strategy and communication process to execute against that was based on prior proven success.
  • Third, they had the validation, support, and discipline required to withstand the many times Workday said no to a request and to keep pressing the various commercial terms in accordance with their defined strategy.

In short, they had a proven plan and were able to stick to it even when their initial instincts at times may have been to accept something less.

The results speak for themselves.  For the same Workday cloud services and quantities, after 12 years Company 1 will have paid slightly under $20.5M (to fit our graphic, we used a cutoff at $20M which does not show the line peaking above this threshold in year 12.)  Company 2 will have paid just over $17M and Company 3 slightly below $11.2M.  Those are some substantial differences!

While going it alone may seem like a good idea, in this scenario Company 1 will have paid $9.3M more than Company 3 and $3.5M greater than Company 2.  Also, Company 2 will have paid $5.8M more than Company 3, which illustrates the value of not only utilizing third-party advisory support but doing so at the outset.

Future Price Protections – New Solutions

What is not shown in this example, but you should also factor in, are additional purchases made throughout the relationship.  This could be adding quantities to current cloud services to account for growth, adding new cloud services along the way, or most likely a combination of both.

These additional future purchases will in all likelihood be in accordance with the previous pricing gap established in year 1 between the three companies, and possibly even wider gaps if purchased during the subsequent renewal terms.  So there is much more money to be saved for Company 3 over the 12-year period, as it is an almost certainty that additional purchases will be made over this extended time horizon.

Summary

Initial pricing and discounting, renewal term protections, and future pricing and discounting protections are critical components to negotiate in any cloud agreement with Workday, but there are others as well.  We recommend taking a holistic approach, not only as it relates to pricing and the overall commercial deal construct.  The overall relationship and on-going support from Workday should be factored in to provide a foundation that will better enable you to realize all of your business case benefits and extract the most value from your Workday cloud services.

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