Part 1: Introduction to SaaS Contracts

From office cleaning to paper shredding to virtual receptionist services, small businesses often rely on the services of outside entities rather than handle these tasks in-house. In many instances, the agreements between small businesses and service providers feature boilerplate, take-it-or-leave-it terms and there is little to no room to negotiate for terms like price and quality of service. However, in other cases, a business may have more leverage and might be able to bargain for better terms. One area of commercial agreements where these principles hold true is Software as a Service (SaaS) contracts. In this series of posts, we will discuss how businesses can sometimes negotiate for more favorable terms in SaaS contracts, as well as what tactics and strategies businesses can use to avoid contractual risk and to get the best deals from their SaaS providers.

A What Contract? – Introduction to SaaS Contracts

SaaS is an acronym for “Software as a Service.” SaaS involves a provider selling a packaged software program that the provider hosts and maintains and for which the provider provides initial and ongoing support services. A SaaS arrangement is different than a traditional software purchase, where a costumer simply purchases a license to use a software application and then downloads the purchased software from the internet or uploads it from a drive. Traditional software is simply the sale of a product, not of a continuing service as in the SaaS context. The essence of a SaaS arrangement is a software provider remotely hosting and managing a software application for a customer through an online network.

Most businesses today use some form of SaaS arrangement. If your business has ever used marketing platforms like Mailchimp, cloud-based data storage services like Box or Dropbox, or even integrated productivity applications like Microsoft Office 365, then you have used SaaS applications. Just like any other contract, SaaS agreements feature various terms upon which both the provider and the customer must mutually consent in order to bind one another to the agreement. Many SaaS services are obtained by customers through “click-through” agreements in which the customer, accessing the provider’s website, is simply presented with a digital version of the contract online and clicks “I Agree” to accept the terms of the contract. In other instances, a SaaS provider may have more personal means of contracting and negotiating through sales representatives.

Before You Negotiate: Purpose, Goals, and Budget

Before you start negotiating with a SaaS provider, strategically outline your company’s purpose in using the services, and the budget for such services. Why are you considering this? List the motivations for your prospective purchase. What deficiencies or limitations in your systems, processes, or operations have given rise to your need for a new SaaS program? Are you replacing an existing SaaS application? Are you replacing an on-premise software application with SaaS? Are you creating an entirely new business process? Being able to articulate the purposes behind your decision to purchase SaaS will help you make a decision consistent with those purposes.

Second, outline your goals for the proposed specific SaaS application. What are your company’s criteria for the program’s success? While this inquiry is somewhat similar to the first, it approaches the matter from a different angle. The question of purpose asks, “Why am I buying this service?” while the question of goals is “What do I want from this service?” Is your organization seeking better data security? Are you seeking to save time or costs by streamlining a process? Whatever your needs might be, try to set objective, measurable outcomes for the use of the SaaS application. Then you will be in a much better position to evaluate and negotiate for a SaaS agreement that meets your needs.

Lastly, examine your annual budget in a cost-benefit analysis of the prospective SaaS application. Does the purchase of the application make sense financially to your business? It is important to approach this determination not simply by looking at the cost of the application, but rather to analyze the value the application will add to your business. This will help you calculate a more accurate appraisal of a SaaS application’s affordability by allowing you to derive an expected return on your company’s investment. Performing such a calculation beforehand is also a powerful negotiation tool because it allows you to respond to a SaaS provider’s proposed pricing scheme by showing them specifically that their pricing is not financially advantageous to your business. Show them the numbers and they may be more likely to budge on the price.

These preliminary inquiries will make the negotiation of SaaS agreements easier and less risky by helping you spot contractual terms that don’t meet your needs and avoid entanglements in agreements that your business cannot sustain. While you may not be able to negotiate contract terms unless you are a large company, you may have a choice between multiple vendors, and unfavorable contract terms can be a deciding factor. In Part II of this series, we will discuss the standard terms of SaaS agreements as well as the pros and cons of contracting with different types of SaaS providers.

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Featured Image by Rebecca Sidebotham.