Part 2: Negotiating SAAS Contracts

Nuts & Bolts: Standard Terms of SAAS Contracts

In the first installment of this series on Software-as-a-Service (SaaS) contracts, we looked at what SaaS agreements are, and we outlined strategies to prepare you for shopping for SaaS programs and negotiating with SaaS providers. In this post, we will be discussing the common terms and provisions of SaaS agreements. Regardless of the type of SaaS program, there are several terms that regularly appear in nearly all SaaS agreements. Familiarizing yourself with these common provisions will help you know what to look out for in your own contract with an SaaS provider. While the following list is not exhaustive of every term you might see in an SaaS contract, it touches on the most vital aspects of the agreement.

1. Price and Billing

Perhaps the most important criterion for your selection of an SaaS provider is whether it is within your budget. However, even if a provider is within your range of affordability, it is still important to assess how its pricing compares with its competitors. Some providers may offer a free trial of their program, but beware of what expenses or obligations might be incurred if you accept the free trial. Also be sure not to just look at the bottom-line cost of the service, but also consider the billing structure to find out if there are any potential headaches for paying the provider, such as annual payment in advance or difficulty getting out of the contract.

Moreover, the aspect of cost is more complex than a straightforward annual or monthly amount for the use of the software. Some agreements have fixed prices throughout the term of use while others may include provisions under which the costs fluctuate according to different factors. There may be provisions for service charges and other additional costs in the contract. Other terms in the contract may increase the total cost if certain parameters of use are exceeded. These may include terms such as limits on the number of users, data storage, and the level of maintenance or support provided. Look at these terms carefully to find out whether your use of the software is likely to cost more than the annual or monthly price that the provider quoted to you.

2. Term and Termination

How long is the Agreement in effect? One year? Three years? Five years? What are the implications of terminating the service before the specified term expires? Many SaaS providers offer incentivizing discounts for longer terms, but you need to balance the savings with your business’s flexibility needs. Moreover, ending the contract is not just a matter of whether you can terminate service and how much it will cost if you do. There are other factors that are implicated in termination such as access to your data on the provider’s servers after termination, and how difficult the data will be to migrate. Take a holistic look at the agreement with an eye towards a prospective termination and analyze whether you are at risk of being practically trapped with an SaaS provider.

3. Data Security

In the context of using any SaaS program, it is highly likely that you will be integrating your business’s sensitive or personal information onto the provider’s platform, as well as that of your clients, customers, patients, or employees. In an era marked by data breach, it is vital to ensure that whatever program is being used in conjunction with sensitive information is sufficiently secure. Most large-scale providers are now compliant with the General Data Protection Regulation (GDPR), a stringent set of laws enacted in the European Union that regulate all controllers of sensitive data. Even though the GDPR is not in force in the United States, having a provider that is GDPR-compliant or provides an equivalent level of data security is important. Some states, like California and Colorado, have comparably strict data protection requirements for your provider.

4. Availability of Service

Part of the your contract will likely specify how much “down” time is permissible for the software service. For example, the provider may promise that the service will be available 99.5% of the time (which corresponds to a guarantee of no more than 3.5 hours of downtime per month). The contract will also specify the remedy if the provider doesn’t come through—typically, that you won’t be charged for the time the software is down. Most providers will not cover any other damages resulting from downtime, so you may want to check the provider’s reputation for reliability.

5. Software Support Availability

Chances are if you start using SaaS, you’re eventually going to have some issues that create a support need. Maybe you’re not able to understand how to use a particular function of the program, or maybe the platform is not talking to your computer network, or maybe the software simply has bugs or availability issues. In any of these instances, the SaaS program is useless to you if you do not have the necessary service and support from the provider to remedy the problem. If the prospective SaaS application will be highly critical to the operation of your business, then you will want a high degree of support availability. That is why it is essential to understand what level of support is included in the contract. Does the provider have 24/7 support availability? Do they provide training for you or your staff for using the program? Is there a guaranteed ticket response time? (Be aware that response time is not usually synonymous with a guarantee to fix the problem quickly.) Are there charges associated with service or troubleshooting? If these matters are not expressly set out in the agreement, you may request that they be specified in the contract. If the standard software support terms do not meet your requirements, know that most vendors offer additional support services with higher guarantees as an addon package.

6. Performance Warranty

Imagine binding yourself to a SaaS contract only to find out that the program does not work quite as well as the provider’s sales representative led you to believe. What does the contract provide for regarding a warranty of the program’s performance or the level of service? Are there measurable or objective criteria by which the effective performance of the program can be determined? If the program’s performance falls short of those criteria, will you still be bound to pay full price or to stay locked in the agreement? Make sure your SaaS contract has clear and definite warranties that will provide you with relief in the event the program or the service is a lemon. These warranties will typically let you get out of the contract or refund money—they will typically not cover your downstream damages.

7. Indemnity and Limitation on Liability

Related to the issue of data protection discussed above, imagine a scenario where your SaaS provider falls prey to a data breach, a third party’s sensitive information is compromised, and that third party wants to hold you responsible. After all, that third party entrusted your business with the protection of their information. Scenarios like this, which occur often, are the reason why it would be nice if your SaaS agreement provided you or your business with indemnities and other protections should one of your disgruntled clients, customers, patients, or employees pursue legal action against you for harm they sustained arising from your use of the SaaS program. In the best case scenario, the agreement will state that the provider will indemnify you or hold your business harmless in the event of certain legal claims arising from the use of their software?

More commonly, the SaaS vendor will not indemnify you, except as part of a large custom-defined enterprise contract, and so the agreement may leave you or your business vulnerable to liability. You should consider this as you define your business’s insurance protection needs.

Conclusion

In order to ensure that these provisions and other terms of an SaaS agreement align with your needs and expectations, you should engage with an experienced attorney to review the terms and advise you of the contract’s favorability. In our next and final installment of this series of posts on SaaS contracts, we will discuss the pros and cons of contracting with different types of SaaS providers as well as tips on what to look for in an SaaS agreement that best fits your needs while also affording you protection and flexibility.

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Featured Image by Rebecca Sidebotham.