Comprehensive Software Reviews to make better IT decisions

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Prepare Now for Your ServiceNow Renewal

ServiceNow’s growth and product diversification clearly indicates the areas in which it needs its customers to engage, grow, and expand. To obtain the best possible renewal pricing and terms, ServiceNow customers must understand what is important to ServiceNow as the first step.

ServiceNow’s Current Market State

ServiceNow started out like many of its SaaS predecessors by providing a one-size-fits-all license called the ITSA Unlimited. The ITSA Unlimited provided unlimited access per user to all of ServiceNow’s capabilities. Those days are over! Oh, you still have ITSA licenses on your contract? Then it’s time to proactively prepare for likely licensing changes when your renewal comes due.

Whereas ServiceNow started out as an IT service tool, the company has broadened its product line dramatically. Core product lines now include:

  • IT Operations Management
  • IT Business Management
  • Software Asset Management
  • Security Operations
  • GRC
  • Customer Service Management
  • HR Service Delivery
  • Now Platform App Engine

With Q4 2018 revenue of ~$660M and growing at 30% YoY coupled with a gross margin of 86%, it is clear that ServiceNow is dominating the market within its many product offerings. In fact, 19 out of 20 of its top new deals in the quarter span 3+ different ServiceNow products. So where is ServiceNow spending all of this money?

Yes, it does invest heavily in R&D for new products and product updates such as the recent Madrid release. However, a closer look unveils that the majority of its free cash flow is being re-directed to sales and marketing parts of the business. While R&D headcount has increased from 1,400 to over 2,000 over the past years, R&D spending accounts for 27% of expenditures vs. 37% for SaaS operator Workday.

This heavy spend in the marketing realm uncovers a critical aspect of the ServiceNow strategy. It is investing in moving the conversation from a tactical IT purchase to a more strategic and broader sale to the C-suite and the line of business (LOB) directly.

ServiceNow wants to be your strategic partner during your journey to the cloud vs. the tactical IT vendor of days gone by. This transition is tricky, however, as many of the contractual and sales tactics it employs are, well, tactical and not strategic by nature.

Negotiation Preparations

A golden rule of negotiation is that one must first seek to understand the other party before looking internally at their needs. So what does ServiceNow care about the most?

  • Accounts that generate $1M+ in annual contract value (ACV)…size matters!

In fact, ServiceNow reports on this number during its earnings calls. In Q4 2018 it reported 51 transactions of $1M in ACV with over 600 customers falling into this category. Of note, ServiceNow also reported it has 74 customers with ACV of $5M or greater.

  • Multiple product adoption.

ServiceNow employs a land and expand model so its growth is intrinsically tied to its customers’ adoption of additional products. If you are a single product consumer of ServiceNow brace yourself for an aggressive price increase.

  • Emerging product adoption.

Quick uptake and adoption of new products is a core indicator by which ServiceNow is measured by Wall Street. Seeking out opportunities to include ServiceNow in the RFP process for new capabilities carries weight in your renewal discussions.

  • C-Suite engagement in a meaningful manner.

ServiceNow wants to sell to the business, not just IT. If you have executives who are willing to meaningfully engage in product demos, roadmap previews, and other senior leadership activities such as the Knowledge conference, this will reflect positively on your deal.

  • Extended term commitments.

There are many organizations with upcoming renewals set to renew for a one-year subscription term. ServiceNow wants to extend these terms to a three-year or longer agreement. This provides ServiceNow with higher billings and deferred revenue and supports its growth thesis.

Recommendations

  1. Allocate proper time for the renewal.
    Customers should start thinking about the ServiceNow renewal about a year in advance with earnest planning and preparations starting 6-9 months ahead of the term expiration.
  2. Understand your usage.
    It is critical that organizations clearly understand and communicate where the solution is providing value vs. where it provides on shelf-ware. A detailed understanding of feature and product usage is essential to demonstrating to ServiceNow that you understand where it falls short.
  3. Prepare your story for ServiceNow.
    It is imperative that your organization has a narrative that complements the ServiceNow journey noted in the points above. The delivery of this story and the timing of delivery can serve to engage ServiceNow in a way that yields beneficial terms and conditions.
  4. Speak with one voice.
    Organizations must ensure that the C-suite and the other internal stakeholders are telling the SAME story! Inconsistencies in the narrative will open up the negotiation to exploitation by the sales team. Credibility is gained by everyone being on the same page and yields a more efficient dialogue.
  5. Structure the deal for the long term.
    Many organizations obtain beneficial pricing for the initial contract term. Far fewer obtain terms that allow for price stability, product swaps, and price holds which can enable them to sustain and extend the value the solution provides.
  6. Assess the deal size carefully.
    If you are close to the magic $1M in ACV or can justify a path to reach that spend threshold, doing so will open up the door to greater discounting and more flexible terms.

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