While Salesforce will present these agreements in a way that may seem extremely advantageous to the customer, the truth is they’re rarely a good fit.
In this article we are going to explain:
What is a SELA Agreement?
A SELA Agreement is a Salesforce Enterprise License Agreement.
What is the difference between a Salesforce Enterprise License Agreement (SELA) and a Salesforce Subscription agreement?
A Salesforce Enterprise License Agreement (SELA) agreement is different from a Salesforce Subscription Agreement in one key way. A SELA is meant to provide “Unlimited Access” to the platform, while a standard Salesforce Subscription Agreement includes set prices for a set number of products.
Yet while SELA began as an “Unlimited Access” promise, that is not quite what SELA agreements look like today.
To understand SELA’s and why your company probably doesn’t need one, it’s helpful to understand the history of SELA’s and how they may have looked when your company originally signed one.
How SELA’s looked in the early days of Salesforce
In the early days of Salesforce, there was a massive focus on market penetration. Like any typical SaaS company, all they cared about was volume.
In the early days of Salesforce, the CRM market was extremely fragmented with small players and disparate homegrown solutions. Arguably, at the beginning, the largest competitor to Salesforce was Microsoft Excel. As a result, Salesforce hit the market precisely at the right time and acquired new customers relatively easily.
But given that Salesforce was in such a high-growth mode, they wanted to leverage their existing client base to grow organically both internally and externally at the client organization. In other words, they wanted to pursue any strategy that enabled new endpoints whenever, and wherever, possible.
Under this premise, they created the first SELA which conceptually provided unlimited access to the platform. This would ensure that Salesforce could land and expand as fast as possible within a new account without any barriers, paperwork, governance, or red tape.
The MO of an early SELA deal summarized would be:
This unlimited access approach was the foundation for Salesforce’s growth by 100x in the early years. By signing one of these deals, and then expanding into a large enterprise organization, they were able to show massive growth rates on all of the SaaS growth metrics such as users, retention, growth rate, turnover rate, etc.
Because they were signing customers onto SELA’s, their growth metrics went through the roof which gave all of the signals for additional funding, press, and market share.
The goal of SELA in the early days was simple. Achieve as much penetration as possible into the corporate world.
How present day SELA’s have changed
While SELA’s once provided “Unlimited Access” to the platform, that isn’t always the case today. Present day SELA agreements look quite different.
Today’s SELA Agreements are full of floors and caps on the quantity of specific product sets that you can use. While old agreements were “Unlimited”, the new agreements come with added restrictions, usage ceilings, and massive financial growth commitments.
Salesforce’s objective with SELA’s is to give you an agreement that fits your current needs, but has the potential to break if you’re not careful negotiating both the commercial and legal terms and conditions.
When your organization grows/declines past the commercially allowed threshold within your specific SELA, there will be significant financial consequences. Subsequently, without the proper legal terms and conditions protecting you from changes within your business, you are setting yourself up for significant financial and legal risk.
Why a SELA is a bad idea for most companies
A floor/cap on your product usage initially may not sound like a large risk for your company, especially if you are comfortably within the allowed threshold at the time of contract execution. That being said, there are 3 major problems that commonly arise from this scenario. Here we are going to dive into the three fundamental problems:
Problem 1: SELA caps are built based on your current needs
A SELA agreement will often be on a 3-5 year term, and the caps are negotiated based on the needs of your organization at the signing of the contract. This may not sound like a major risk, but for high volatility (growth and/or decline) companies, or anyone in an active M&A industry, this can be a major issue.
When you break the caps of your SELA Agreement, it’s not as simple as “buying extra licenses” to make up the gap. Instead, it will trigger an entire sales event with Salesforce that is going to have them coming back to you for more money.
Additionally, you may only trigger your cap in one single product category (Ex. Pardot), but if you break your SELA caps in that space, they can use that as grounds to raise prices across the board.
These caps are dangerous because as soon as you break one, it puts the power of the contract back into Salesforce’s hands.
Problem 2: SELA Agreements are manipulated by Salesforce’s changing product line
The second problem with a modern day SELA is the ever-changing product line from Salesforce.
Salesforce is a master of releasing and repackaging products. They are constantly rolling out new products into the market, as well as repackaging existing products, while retiring old products.
While innovation at Salesforce is great, the new products and services that are organically (or inorganically) created are rarely contemplated as part of your organization’s SELA. If your organization wants to use those new products and/or services, they will likely need to be paid for separately as an additional expense.
Additionally, some products may “retire” or become a “carveout” of an existing product. Continued usage of these products may actually trigger a contractual breach of your SELA.
This sounds ridiculous, but Salesforce does it all of the time, and it’s very expensive for the client. Naturally, most Salesforce clients are not aware of these inherent risks until they’re sent an invoice for this incremental out of compliance usage.
Here is a recent practical example of how they pull this off...
Repackaging Example: Sales & Service Cloud
Up until recently, Sales Cloud & Service Cloud were two separate products from Salesforce.
Sales Cloud was for Sales Reps while Service Cloud was for service department technicians. These two products came at two different price points. Sales Cloud was cheaper, and Service Cloud was more expensive.
Eventually, Salesforce decided to roll these into “Sales and Service Cloud” as a single commercial product even though they technically operate as separate infrastructures (clouds). This provided Salesforce a commercial opportunity to financially uplift those existing clients that had both products (Sales and Service Cloud), historically with two different price points, now as a single price point that matched the more expensive line item as part of Customer 360. The logic being that both clouds are integrated harmoniously whereas the entire client organization is able to review all of its omnichannel touchpoints with their customers. This “additional value” was largely the basis for this product and price convergence.
The targeted outcome is typically around a 30% revenue boost within the existing customer base. This revenue boost was predicated by a simple repackaging of services.
Problem 3: You are likely paying 41.3% more than you should be with SELA
We renegotiate a lot of SELA deals at The Negotiator Guru (TNG), and on average, we identify a 41.3% cost reduction opportunity when switching to a standard Salesforce Subscription Agreement.
The reason behind this is that most SELA’s are priced extremely high (on a price per unit, per month basis) and commit the client to much higher usage (products & quantities) than is actually being used, creating conceptual shelfware.
At TNG, we leverage a proprietary Right Size, Right Price approach to drive efficient and long lasting savings for our clients.
We first understand what your organization actually needs and build a roadmap to support you based on your specific global business. Instead of buying everything through a SELA Agreement, we leverage our Right Size framework to ensure you’re leveraging the appropriate products and services at the Right Price.
We are able to easily identify Right Price information based on our industry leading price benchmarking database that is minimally rationalized based on your Annual Contract Value, Industry, and Company Size. We say “minimally” because there are other factors that determine product pricing such as product mix, your roadmap, Salesforce quarterly interests, etc.
Then, we leverage our unmatched expertise negotiating with Salesforce either as a covert silent advisor, or an overt legal agent, to extract maximum value for you at the lowest possible cost.
Those two simple components alone have generated our SELA Agreement customers 41.3% in savings.
We’ve worked with Fortune 100 companies paying $25M+ per year to Salesforce whose actual contract value should have only been $10M.
The savings potential is real and worth the time to renegotiate.
When a SELA is a good idea
Most of this article is spent sharing why SELA’s are a bad idea for most clients. That being said, there are a few select cases where they may be temporarily beneficial to a client.
Every year, we speak with hundreds of Salesforce Customers. Since the inception of TNG in 2015, we have only had one customer where a SELA was actually a good fit for their needs.
While we always keep our clients confidential, this specific company was a high-growth IT firm with rapid-growth aspirations (500x), large amounts of equity funding, minimal IT resources, and a technical architecture that required Salesforce to act as the backbone for their outreach strategy. They were in a very unique situation.
Here are the required conditions to even consider a SELA:
When a SELA is a bad idea
99% of the time, a modern day SELA Agreement is a bad idea. In almost all cases, it just doesn’t make sense.
Here are (only some of) the conditions where a SELA does not work:
Why “you don’t have to manage it” rarely justifies a SELA
Yet, even with everything we shared, many companies still sign up for new, or keep renewing their existing, SELAs. Perhaps that’s because they haven’t read this article!
The most common reason we hear from our clients on why they have a SELA is that “We don’t have to manage it. There are no order forms, compliance, or governance. We just signed the deal and originally, didn’t have to worry about it.”
While that is great in theory, you can achieve nearly the same benefits with a standard Salesforce Subscription Agreement by negotiating specific terms and conditions into your Order Forms. We will share two of these terms below for your awareness and utilization:
Request language be added to your Order Forms that protects you in the event of an extraordinary corporate event like Merger and Acquisition (M&A) Activity. Adding in the appropriate language for M&A activity can provide huge benefits to your organization. Specifically, ensuring that an acquisition or divestiture can be brought in or taken out of your environment without commercial recourse will proactively avoid painful legal headaches and financial synergy slippage.
Product Swap Language
As we discussed, Salesforce likes to change up their product line to create disruption in the marketplace and in your contract. Introducing product swap language that enables you to swap products and services freely as long as you maintain the same annual contract value provides a huge value that is similar to that of a SELA.
What happens if I exceed the caps on a product in my SELA Agreement?
Salesforce will use this overage as leverage against you in your upcoming negotiation. They will either charge you an overage fee or push a net new product on you in exchange for waving your overage fee. This net new product helps them achieve additional revenue, new products, and a larger footprint inside of your organization.
When you exceed the caps on a product in your SELA Agreement you are naturally placing yourself in a vulnerable position with Salesforce.
Many organizations who have an active SELA Agreement with Salesforce don’t have an internal software asset management (SAM) team. As such, these organizations won’t know they have exceeded their cap limit until Salesforce informs them. Even with an active SAM team inside multinational organizations it can be very easy to exceed your caps.
In general, 6 months prior to your contract renewal, Salesforce will conduct an audit on your account to look for any overages. If your organization is not already aware of these overages you’re naturally going to be on your heels trying to fact check information internally. Either way, Salesforce will use these overages as leverage against you in the upcoming renewal negotiation.
There are two scenarios that commonly play out within this situation:
First, if you notice you have exceeded the cap limit, you can take corrective action to decrease your quantities of specific products so that you are back in compliance. Your organization will technically be obligated to pay overage fees for the time those overages were occurring within your environment. The standard language within Salesforce agreements indicates you will be liable to pay the “published retail rate.” In other words, the rate that Salesforce publicly publishes on their website without your organization’s discount.
Second, if Salesforce notices that you have exceeded the cap limit, then you will be hit with a heavy overage fee in a similar manner as discussed above. However, Salesforce will likely use this opportunity to push new products within your environment in exchange for some of the overage fee. The net outcome, if not properly negotiated, will be a higher total cost of ownership over the term of your new contract than paying the overage fee by itself.
It’s important we state this again: Standard Salesforce MSA and SELA Agreements (aka all agreements) include a standard clause that any license overage will be charged at the then current retail price. That means instead of paying for additional seats at your discounted rate, they will charge you the retail price for the product that is currently listed on their website.
This is a very dangerous situation as the retail price can often be 2 -3x your standard rate.
We recommend negotiating specific contractual language that limits your financial liability to that of your organization’s reduced rate vs. retail.
How do you approach negotiating an existing SELA Agreement?
When renegotiating a SELA Agreement, we leverage our best-in-class and proprietary approach that we always use when Negotiating with Salesforce.
Create a Salesforce Roadmap
First, you want to build a roadmap of specific products and services that you will need from Salesforce over the next 5 years. Create a list of both your needs and your wants.
With a SELA agreement, it is very important that you build a 5-year game plan instead of a 1-3 year plan. The reason is that the 5-year roadmap will help you decide if a SELA agreement is right for you. If you are forecasting rapid growth or large M&A activity, then a SELA may make sense, assuming the proper legal terms and conditions are in place. But without either of those two components, a SELA rarely provides the differentiated and intrinsic value one would expect from its large price tag.
In most situations, a SELA Agreement will not make sense for most organizations. Putting together a Salesforce Roadmap will help you see this clearly. When you have a clear roadmap of what products you need, in what quantities, then you can use that as a benchmark on price.
Benchmark your SELA Spend with Right Price Data against your roadmap
Once you have your roadmap, the next step is to gather Right Price Data for what rates you should be paying for each product on your roadmap.
At The Negotiator Guru, we have the largest database of Salesforce rates as a result of reviewing hundreds of Salesforce contracts for organizations that span literally every industry. We can tell you what you should be paying for each product or service.
While firms out there like Gartner can provide directionally correct information, they are not able to provide prescriptive insights for your specific situation. To access our Right Price Data for your account, contact us at email@example.com.
When you take this Right Price Data and line it up against your roadmap, you can see an estimation of what your Salesforce spend should be in a total cost of ownership view.
Now simply take that total number and compare it to the annual spend of your SELA Agreement to see just how much of a savings potential is available for your organization.
Based on our real client data, we find there is typically a 41.3% opportunity available when switching from a SELA to a standard MSA & Order Form contract and pricing structure.
Examples of SELA Negotiations
Through our work at The Negotiator Guru, we have helped hundreds of organizations reduce their Salesforce expenses. Our firm is the industry-leading expert in negotiating with Salesforce.
Here are two recent examples of SELA negotiations we have completed with, and for, our clients. All company information has been redacted for client confidentiality.
Negotiating a $75M SELA Agreement down to $32M (57% savings)
One of our clients came to us with a 3-year term on a SELA Agreement valued at $25M per year. This was a total contract value of $75M over a 3 year period.
We worked with the client to create a Salesforce Roadmap and shift the organization over to an MSA & Order form contract and pricing structure.
This simple shift produced a material reduction of their annual spend down to $10.7M per year for a 3-year term.
That is over 57% in savings and $43M in cost savings over a 3 year period. This example shows just how much SELA Agreements can be overpriced.
$30.5M in savings by negotiating a SELA Agreement that no longer made sense post M&A
This particular organization was on a 5-year SELA Agreement. The SELA was designed based on the company footprint at the execution of the SELA Agreement.
There was one major problem… this specific organization was in the telecommunication industry which was experiencing heavy disruption. As a result of this disruption, the company divested several business units for financial and regulatory reasons.
When these business units were divested, everyone assumed that their Salesforce contract would adjust accordingly… but that was not the case.
The response that came back from Salesforce was essentially, “It won’t be possible to reduce your spend because you have committed to this agreement for a total of 5 years.”
This meant that the telecom organization was now paying for products and services that were used by companies they divested, and they were committed to continuing to pay for those products for an additional 3.5 years.
In total, this would be $36M in wasted expense over a 3.5 year period.
Through negotiations with Salesforce, we were able to reduce that down to a $5.5M breakup fee for a total savings of $30.5M over a 3 year period.
This example shows just how important it is to structure in proper M&A language into your SELA & all Salesforce Agreements.
What is the typical SELA (Salesforce Enterprise License Agreement) annual spend?
The typical customer on a SELA agreement is a multinational organization doing over $10B in annual revenue with a total spend of $15M+ per year with Salesforce.
How long does the process take to renegotiate a SELA Agreement?
The process to renegotiate a SELA Agreement typically takes 2.5 months. That being said, to properly prepare for the negotiation we engage our clients a minimum of 6 months prior to your natural renewal date. Remember, 80% of negotiation is done through thoughtful and intentional planning.
In a best case scenario, you want to plan for your SELA renewal 1 year in advance.
Who is involved in a SELA Agreement negotiation?
On your organization’s side, the following individuals should be involved in your core negotiation team:
From The Negotiator Guru, the following individuals are involved:
Do I need to switch off a SELA or just negotiate a lower price?
In most cases, it will make sense for you to switch from a SELA Agreement to a standard MSA & Order form agreement with Salesforce.
While you do not have to switch, it is often the most advantageous for you as a customer of Salesforce.
There are several material reasons for this, however, the most prominent being that it’s very difficult to proactively measure the value you’re receiving from Salesforce based on the products and services that you’re utilizing. Said differently, when everything is bundled into an annual feel it becomes much more difficult to benchmark individual product prices. This, of course, is by design from Salesforce. As a result of this lack of transparency, your Salesforce account team will use this opportunity to do some creative accounting within the specific price points of your products, to their benefit.
When you convert to an MSA & Order Form contract structure, you can compare your specific needs with Salesforce directly with our Right Price Data to understand exactly what you should be paying. In every single client engagement, this price transparency has delivered opportunities to drive significant cost savings for our clients.
My company’s workflow is seasonal, and a SELA allows us to adjust licenses as needed. How do we accomplish this with a Salesforce Subscription Agreement?
You can achieve the same flexibility of a SELA by adding in Seasonal Worker Licenses within your subscription agreement. These licenses largely produce the same flexibility as they are intended to be used for seasonal contingent workers that increase and decrease throughout the year. Another common use for these licenses would be for college interns, factory workers, etc.
In some cases, Salesforce will tell their customers that this product option does not exist. This is simply not the truth.
Recently, one of our customers did not believe that a “seasonal worker license” actually existed. Through multiple conversations with Salesforce, he was told this simply was not an option.
We pulled up a screenshot of another client’s invoice, redacted all of the confidential information, and shared the invoice with “Seasonal Worker License” as a line item.
The client was blown away. You can achieve a Seasonal Worker License...you just have to ask...perhaps more than once. 😀
Should you renew your SELA Agreement?
After reading this article, take a long hard look at your current SELA and make the self-determination if a SELA is right for you. Ask yourself the question “Am I receiving intrinsic value from a SELA vs that of any other contracting option?”
Ready to explore joining the TNG family?
Contact us today to set-up a client intake assessment where we identify your cost savings opportunity for free!
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