An essential guide with best practices
SaaS is simple to run, super flexible, and scalable on demand. But it also comes with risk. If you stop using a SaaS provider, you may lose your operations or even your data. That’s why understanding SaaS contract management and how to negotiate SaaS contract terms is so essential.
So what you’ll find here is a guide to negotiating SaaS contract terms, understanding SaaS contract management software, identifying SaaS costs, defining SaaS contract details, and preventing potential SaaS contract issues.
What is a SaaS contract?
“Software as a Service” (SaaS) is a software solution that is hosted in the cloud and managed outside your organization by a third party vendor. To store your data, run an application, or handle any necessary IT work, you will need to pay a subscription fee to the SaaS provider. Pricing models vary based on the service provider and the SaaS applications or tools they provide. To gain access to these services, you will of course, need to sign a contractual agreement. With less IT and oversight comes less control and leverage. If a SaaS provider tries to raise the cost for your license or charge you for non-negotiated fees, you have three options, but none are great: You can pay the fee, you can quit the provider, or you can negotiate.
→ If you pay, you must decide to accept contract terms that you consider unfair.
→ If you quit, you have to start all over and rebuild with a new provider.
→ If you negotiate, you’ll need to make quick decisions under pressure before your current contract runs out.
For this reason, it’s essential to be very specific and detailed from the start about the exact terms of your SaaS contract. Thoroughly negotiating SaaS contracts may limit potential cost increases for services, usage, data handling, and even cancellation later on. Let’s talk about 10 common SaaS contract issues and the best SaaS contract negotiation practices to overcome them. Here's our SaaS contract checklist for foolproof contracts!
01 | SaaS Contract Renewal
Learn how to negotiate and renew SaaS contracts! Negotiate a price cap in case of a SaaS contract renewal to maintain expectations and keep your future SaaS costs within budget.
If you don’t put a cap on the SaaS contract renewal price, service providers can increase your pricing as much as they want when your SaaS contract ends. At that point, you will face the difficult choice of quitting the provider, which can lead to additional expenses and turmoil, especially if they are used to run a critical service. It’s important to balance a big price increase against the effort and cost to leave the provider.
This is why we recommend negotiating SaaS terms in your initial SaaS contract, with a permissible cap of three to five percent on the increase when you renew your SaaS contracts.
USU Stories
30% increase for Creative Cloud
For an enterprise customer, our consultants saw Adobe set a 30% increase for the Creative Cloud Suite at the end of a three-year contract. This was a $3 million contract that would have added another $1 million per year. How did this happen? Adobe offered a big discount for that first contract. The customer was excited and didn’t think about renewal terms. Happy ending: The final negotiation with Adobe brought that increase down to 10%.
CRM database growth
We witnessed a similar situation with a USU customer using a CRM solution that generated increasing expenses every month. Their database was getting bigger due to the continual increase in new customers, new data, and new orders to the CRM. To renew their SaaS contracts, they had to pay extra each time they went beyond their allowed consumption. The customer had neither negotiated nor budgeted for this unpredictable expense. Their only recourse was to regularly clean up the database in order to limit or reduce its size.
Example: Microsoft 365 renewal
Microsoft 365 is used to run and store Outlook emails, Teams messages, and business docs in Word, Excel, and PowerPoint. If Microsoft changed the renewal terms tomorrow and increased the price by 25%, what would you do? Move your emails to Gmail and fire up Google Apps? It would probably be a hard administrative decision.
03 | SaaS Contract Length
An essential aspect of SaaS contract management is planning the terms and duration of your SaaS contracts; make sure you keep both the present and the future in mind during the process. Negotiate for flexibility in the SaaS pricing model to meet the current and forecasted needs of your growing business.
When negotiating SaaS contract terms, try to anticipate your company’s growth and only purchase licenses you need at that time. You can also include an increase or decrease in SaaS license volume across the SaaS contract length. This is especially cost-effective if you anticipate a long rollout of the SaaS product. You can’t change all licenses immediately, instead transition your employees over a period of time. One negotiation tactic is to set up a multi-year SaaS contract in which you buy an increasing number of licenses each year.
USU story: Know about the true down function
An enterprise company once sold an entity in their group which amounted to 10% of their total users. This action required a corresponding decrease in licenses. Microsoft has always allowed users to “true up” or increase licenses at the one, two, and three year mark of a three-year contract. Recently, they added a contract term that allows you to “true down” or decrease the quantity of licenses at the point of your contract renewal. Subsequently, we advised our customer to consider this option for their next contract review.
Examples
Deploy Office 365 in POC
Let’s say your company runs perpetual licenses for HCL Domino and HCL Notes, but wants to move to Microsoft 365 subscriptions.
You have 50,000 employees but only plan to deploy 15,000 licenses in the first year as a POC in limited regions to check for bugs.
Microsoft offers a huge discount for buying all 50k upfront, but you’d be spending money on almost two-thirds of unused services while you’re still paying for Domino and Notes as well.
Extra OneDrive storage space
A Microsoft 365 subscription entitles the user to two terabytes of storage on OneDrive. If you need more space, you have to buy a new license to increase your OneDrive storage by either 200 gigabytes or one terabyte. The typical user won’t need this option, but it comes as a surprise for those who do.
04 | SaaS Contract Service Details
During SaaS contract negotiations, include detailed descriptions of the services included in the SaaS contract to fully define your rights and limitations.
When negotiating your SaaS terms, it’s important to understand that a SaaS subscription entitles you to a service description. You’ll need to proactively inquire about each limitation on the services included until you’re confident that you fully understand. Are there restrictions on your database, your applications, or number of users per license? Generally speaking, these topics are not what most sales reps will voluntarily disclose; once again, a classic case of the challenge of hidden fees!
This scenario itself may sound familiar because it also applies to on-premise licenses. However, these charges could become much more expensive and spiral out of control in a SaaS contract.
05 | SaaS Contract Terms
Incorporate any term descriptions (including URLs) in your SaaS contract to avoid the risk of reduced services or security standards.
SaaS providers change their pricing and product use rights on a regular basis, sometimes from quarter to quarter. You need to fully understand the SaaS contract lifecycle, including all the SaaS contract terms and their exact definitions, such as the contractual definition of the services provided and product user rights. Include those details in the SaaS contract to prevent the provider from changing their own definitions over time.
Don’t sign the SaaS contract based on definitions that are referred to as a URL, since that information on a webpage can be edited at any time. One simple (but effective) SaaS contract practice to freeze the descriptions is to print the URL at the time of signing, attach it to the SaaS contract as an addendum, and make sure the account rep signs off on it.
Examples
Paying for size or quantity
Sometimes a license is based on database sizes.
But how is that measured? Do we take into account the log file size as well? Is obsolete data also counted?
Sometimes the license is based on the quantity of mails sent.
But how is that measured? Do we consider a per month vision, or an annual cumulative? Are test emails also counted?
→ These are key questions all customers should consider when drafting SaaS contracts based on a metric that is more complex than one user, one device, one license.
Avoid these security scenarios
A data leak of customers’ personal data would be an absolute nightmare for any insurance company. For a pharmaceutical company, a worst case scenario would be something like a vaccine formula being leaked to one of their competitors. If you work for a software company, on the other hand, you will need to lock down accessibility and ensure complete confidentiality around new product designs.
→ Get your security team involved to identify and test compliance protocols while the contract is being written to determine any additional terms that should be added to the SaaS contract or modified.
06 | SaaS Data Security Policies
Carefully review the SaaS provider’s data security and privacy agreements to ensure compliance with your data requirements, including GDPR.
Non-compliance is a risk that plays a highly consequential role between SaaS and security. If you have a SaaS contract, this generally implies that your data is hosted in a third-party cloud environment. During your SaaS contract negotiation, you need to make sure that your data is and will remain fully protected. This includes the security and privacy of both your data and your customers’ data.
Ideally, you should involve your security team during the SaaS contract negotiation process. The security team might look at the POC to see how secure the connections between your system and theirs are; or they might perform penetration tests to approve the kind of data that will be hosted by the SaaS provider.
If safeguards are missing in the SaaS contract, the purchasing team might not willingly identify that problem afterward, and the SAM team might not see it because they are focused on what is purchased and deployed. However, the security team will be unbiased in their review and assessment.
07 | Liability of SaaS Subcontractors
As part of your SaaS contract negotiation, establish and define that your SaaS provider will accept responsibility for their subcontractors.
Anyone running a SaaS environment may have subcontractors. These third-party people or companies might analyze and host data, or provide support for cloud infrastructure.
In your SaaS contract, you will need to specify all SaaS contract terms and security definitions on behalf of your SaaS provider. Ask your SaaS contract attorney to make sure the subcontractors will respect the same requirements, and that you can hold your SaaS provider liable for their subcontractors’ actions and errors. This is especially important for data privacy and data security, and in respect to government regulations like GDPR.
Examples
Who to sue in case of a breach?
Let’s say you are a pharmaceutical firm based in France that has a SaaS contract with Microsoft. Microsoft informs you that they are working with an external consulting firm to manage your servers in Asia. If there is a data breach, you can directly sue Microsoft instead of having to go after their subcontractor.
99% availability SLA
A company is running Microsoft Power BI Premium on a Microsoft Azure host. Sometimes data imports have problems due to a network issue or bug in the system. Microsoft has promised 99% availability, but your console shows 96% availability on a particular day. Your contract states that if availability is between 95 and 98.9% then you are entitled to a refund of 1% per day. This means you are owed a credit from the provider for the downtime.
08 | SLA Remediation
Ask your SaaS contract attorney to include a definition of each service-level agreement and the penalties and recourse if it is not met.
A service-level agreement (SLA) sets the expectations for products or services to be delivered by the SaaS provider, and the metrics to monitor and approve their effectiveness.
To prevent any SaaS contract issues, every SLA has to be included and defined in your SaaS contract. In addition, fully define the penalty and remediation should the provider not meet their agreed level of service.
Oftentimes, this SLA is required by your purchasing team because they want to be sure they can access the systems and data they might need for future negotiations. But the infrastructure or consulting team will need to enforce the penalties because the SaaS provider won’t proactively review your account for mistakes.
So, remember two steps: negotiate the SLA remediation in the SaaS contract, and follow up when it’s been triggered.
09 | SaaS Contract Negotiation: Data Extraction Fees
Don’t assume your data will be easy or free to retrieve, especially with smaller SaaS providers. Protect yourself against fees and the hassle of renegotiating SaaS contract terms and conditions. There are two types of data that you may want to extract from a SaaS application: user data regarding accounts, licensed users, and their usage – all information used for compliance; and business data that you’re working with regarding your suppliers, customers, transactions, plants, warehouses, such as customer lists from a CRM or product features from a PLM.
This data might require approval to retrieve it from the provider portal. With big SaaS providers, it is generally much easier to extract your data. But it could be more difficult with smaller SaaS providers. They might have developed features you need operationally, but not features to easily extract data from those operations.
It should be on your SaaS contract checklist to include contractual terms that establish that you won’t be charged for data retrieval. For instance, if there is a built-in feature, your SaaS contract must specify that there won’t be a fee for running the extraction. Or if the functionality is poorly implemented, and you need help, there won’t be a fee for the provider supporting that feature or completing a manual extraction for you.
USU story: Adobe buys NeoLane
What happens when your SaaS product is purchased during your contract period? We saw this exact scenario play out with NeoLane, a CRM company that was purchased by Adobe. The application was redesigned by Adobe and the new version was offered as a paid upgrade. Our customer who did not have contract limitations in place was asked to suddenly pay twice the price of their contractual maintenance.
Example: Salesforce data to SAP ERP
Imagine you are the manager of customer deals in the sales force and when a deal closes you want to export and store those invoices in SAP ERP. You’d like to run reports on their monthly spending, then extract that data and put it on an Excel spreadsheet. If you’re in Europe, interoperability is regulated by law: any application must be able to send data to another application. However, there might be hidden fees – yet another example of that prevalent challenge! – if you do not specify the terms in your contract.
10 | SaaS Contract Checklist: Transition & Extension Fees
Include contractual terms for transitioning your data to a new SaaS provider and extending your subscription to an acquired company or tool.
Let’s say you got a large discount on an initial three-year contract, and now you’re ready to renew your SaaS contract and extend it for a fourth year. However, when you negotiate the new pricing, the SaaS provider will likely propose a big increase, such as Adobe trying to triple the cost of Creative Cloud in our example under the first point.
If you decide to cancel the SaaS contract and transition to another SaaS provider, there might be other challenges. Does your existing SaaS contract stipulate that all data sets, system connectors and tool configurations will be retrievable and easily transferred to another application? If they are retrievable, does your SaaS contract protect you from transfer fees?
To avoid any SaaS contract issues, specify details in your SaaS contract that cover scenarios in which your SaaS provider or their product is purchased. If you are forced to negotiate your next SaaS contract with a different provider, they might try to charge you for moving to their re-released product. During SaaS contract negotiation, consider the following aspects: access to support, rights to updates, rights to upgrades, and rights to new versions that changed under the new provider.
Conclusion
SaaS contract management and negotiation is about preventing worst-case scenarios. You want to ensure your SaaS contract covers all of them, or enough detail that you are comfortable with the risk.
SaaS applications can be powerful and efficient tools for your business. Your subscription might include upgrades and updates, access to customer service and maintenance, as well as administration and hosting. You can pay the SaaS provider to handle technical functions that will free up your internal IT team, such as providing a server, installing a database on the server, or maintaining the server OS.
But less IT means less control and less leverage. And that can result in unexpected fees and budget overruns.
That’s why the professional oversight of your SaaS contracts is so important. It’s crucial to know how to identify and negotiate missing SaaS terms, stay on top of changing SaaS contract terms, and have the support of a SaaS contract attorney to insist with the agreement. This is where licensing specialists such as our team of consultants at USU are there to help. Contact us any time!