Part 3: Go Big or Go Home-Based?: The Pros and Cons of Different Types of SaaS Providers

Introduction

In Part I 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 Part II, we discussed the common terms and provisions of SaaS agreement so you could know what to look out for when negotiating contracts. In this third and final installment of the SaaS series, we discuss the pros and cons of contracting with different types of SaaS providers as well as tips on how you can negotiate an SaaS agreement that best fits your needs.

Just like in many other industries, when it comes to SaaS providers, there is a significant degree of variation in terms of size and level of sophistication. There are providers who are large-scale corporations whose stocks are traded on NYSE and Nasdaq, there are providers who are mom-and-pop start-up software developers operating out of their garage, and there are providers from every point of the spectrum in between. When it comes to the size and sophistication of your prospective SaaS provider, there are pros and cons associated with the kind of provider with whom you chose to do business. For purposes of our discussion here, we will divide SaaS providers into three categories in graduated degrees of size, and we will examine the pros and cons for engaging with providers in each category.

Three Tiers of SaaS Providers

1. Megacorp Large Providers

Megacorp providers include large SaaS companies with 5000+ employees who have done or are doing an IPO. The pros of electing to go with a large provider relate to the sheer degree of resources such companies have. Megacorp providers will likely give you the highest level of service availability and reliability, and their products and services are tried and tested by the best research and development teams money can buy. Moreover, since large scale providers have big reputations to maintain, you can bet that they invest in the highest level of security and reliability for their products. And while their contracts will likely tend to be rather lengthy and highly technical, the agreements have been thoroughly vetted by an advanced legal team that has anticipated virtually every contingency imaginable.

However, the downside of going with a large provider is that while their agreements provide for every circumstance, they also tend to be boilerplate, take-it-or-leave it arrangements that leave prospective customers with little to no capacity to negotiate for better terms (unless they are themselves very large enterprises). Also, you can reasonably expect that an SaaS product from a megacorp provider will come with a higher price tag.

2. Funded Mid-size Providers

This category of providers includes companies with 20-1,000 employees that have done multiple rounds of funding and have sufficient capital to stay afloat while operating on a decently large scale. The pros of engaging with mid-size providers include the fact that they often have enough resources to provide a fairly sophisticated service but are not as unwieldy in negotiations as are megacorps. They will usually have much more flexibility on pricing and packages and you can sometimes get VIP treatment if you are a large or important customer. Moreover, companies in this category are often the most innovative. Having broken out of the lowest tier and entered into competition with larger providers, they are driven to have the most advanced software possible.

The cons of dealing with mid-size providers are associated with their advanced, but risky level of development and sophistication. They may have grown their enterprise substantially and developed a very impressive product, but often they have not been operating long enough to develop the grade of security and risk prevention found at the megacorp level. Moreover, because mid-size tech firms are up-and-coming and can present a competitive threat to the megacorps, providers in the medium echelon are in a volatile space of the market and are much more likely to be bought out or cannibalized during the tenure of your contract with them.

3. Small Boutique Start-ups

Last, but not least, we consider the category of small-scale providers. This category includes bootstrapped startups with 5-20 employees. Should you go with a smaller-scale provider, you might have to settle with a lower level of service availability as well as a less-developed product with less well-tried security features, but what you would likely gain is the leverage to bargain for terms that more appropriately fit your needs. Moreover, with a small-scale provider, your small- or mid-size business is much more likely to get VIP treatment than with medium or large scale providers. Dealing with boutique software companies where you can speak directly with just about anybody at the company, possibly including the owners, it might be much easier to get customized service tailored to your business’ unique needs. You stand a much higher chance of success in calling up the software developer at a small SaaS provider and asking him or her “Could you make this program be able to [fill in the blank],” than you are in approaching an upper or middle tier provider with such a request.

Negotiation Tips

We conclude this series on SaaS by offering some key tips that will help you in your selection of SaaS programs and your negotiation with SaaS providers. First, know your needs. Following the preliminary steps set forth in Part I of this series, perform a comprehensive assessment of what you need from an SaaS application. This will help you not only to better assess competing SaaS programs but also to better be able to communicate to and bargain with representatives from SaaS providers.

Second, know your options. Shop around and find your alternatives before selecting a provider. This will help you not only to find out the best deal on the market, but it will also enhance your bargaining power with SaaS providers when you can show them that you know their competitors’ advantages.

Lastly, know your rights. Before you sign any contract or agreement with an SaaS provider, engage with an experienced contract or commercial law attorney to review the agreement and advise you as to your rights and duties under the agreement. With these tips in hand, we wish you the best in your dealings with SaaS providers.

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Featured Image by Rebecca Sidebotham.