SaaS Contract Negotiation Essentials: What Terms Should You Be Negotiating?

Last updated: 25 November 2020

Estimated reading time: 10 minutes

Your business will need many different types of commercial contracts to operate smoothly and to minimise the risk of commercial litigation with third parties. And with the ever-increasing reliance on technology in most industries the likelihood is that you may acquire and use IT software on a Software as a Service (SaaS) basis. It is important to carefully review and negotiate any SaaS contract you enter into in order to ensure that there are adequate protections for your business, especially if you are transitioning business critical systems.

Here we’ll be covering:

  1. What is a SaaS contract?
  2. Examples of SaaS contracts
  3. How do SaaS contracts work in practice?
  4. What is the SaaS ‘one to many’ model?
  5. Can you negotiate your businesses SaaS contract?
  6. Reviewing and negotiating SaaS contract standard terms
  7. Checking your planned business software use is permitted usage
  8. What are the key elements of a SaaS contract?
  9. What additional protective steps should a business take with a SaaS contract?

What is a SaaS contract?

The acronym SaaS stands for ‘Software as a Service’. Put simply, a SaaS contract usually means the provision of packaged software that is hosted and maintained by a software services provider. In addition, the software service provider usually offers initial and ongoing support services as part of a SaaS contract.

Examples of SaaS contracts

The types of SaaS contract that your business may come across as part of its day to day business activities are:

  • Payroll
  • Human resources
  • Accounting and finance
  • Client relationship management
  • Email

How do SaaS contracts work in practice?

With a SaaS contract most businesses will access software that normally resides on the SaaS provider’s servers and not on your business computers. The required HR, payroll or other system is then accessed by your employees using a generic piece of software, such as a web browser. That means that when your SaaS contract comes to an end your businesses subscription should also end and, with it, your ability to use the software.

What is the SaaS ‘one to many’ model?

A standard software product is often referred to by digital and commercial solicitors as a ‘one-to-many’ model. That means that the software provider is providing your business with a standard software product that will be confidentially accessed and used by lots of different businesses. For example, if you are a start-up business you may only need a generic HR software package and even a large multinational company may not need anything other than generic software for its payroll system.

Generic or multi-user SaaS isn’t tailored for a specific customer or their business requirements, although with some software packages there may well be room for a degree of configuration to suit individual business needs. However, the more customised the software offering, the more your business moves away from the ‘one-to-many’ model and its associated cost-benefits arising from multi-users.

Can you negotiate your businesses SaaS contract?

The economic and financial reality is that when it comes to a SaaS contract your room for contract negotiation depends heavily on the provider. Smaller or industry specific software providers may be more open to changes to the SaaS contract than the larger providers, such as AWS. That said, there may well still be room for negotiation and it is important to discuss your specific business concerns with your potential software providers.

Reviewing and negotiating SaaS contract standard terms

If you are looking at different software provider options or running a competitive tender process, it is best for you or your commercial solicitor to review and assess each provider’s standard contractual terms as part of your software provider selection process.

Whilst price is always a key factor in any contract it should not wholly determine your choice of software provider as signing up to standard terms with the cheapest provider may end up costing you more in the long run. That’s because their standard terms maybe more onerous than other providers or they offer less support or they don’t offer the level of disaster recovery you need.

If you do have issues about the software provider’s standard terms then it is important to present your key contractual concerns and try to gauge how much room for negotiation you have on each issue. As many SaaS providers are start-up companies that won’t make a commercial return until they have gained market share they may be willing to negotiate on price or terms.

Even where you are negotiating with a more established SaaS provider, the existence of other providers willing to undercut their prices may influence the level of the charges or the provider’s willingness to make changes to standard contractual terms. However, some software providers will increase prices if you ask for additional contractual protections or for changes to their standard terms. That’s because they argue that their assumption of greater contractual risk needs to be factored into their financial models at increased expense to your business.

When reviewing software bids, consider what contractual assurances the software providers are able to give to your business as part of their bid price and ask yourself the following questions:

  • Are they offering service levels?
  • What is their contingency and disaster planning?
  • Are the service levels comprehensive?
  • What remedies do you have if something goes wrong? Does the software provider simply offer service credits as their sole recompense if things go wrong?

Checking your planned business software use is permitted usage

A software supplier will normally restrict your businesses use of its software under the SaaS contract. It is important that you check the permitted use to ensure that it meets your current and projected business software needs. For example, there could be the following permitted usage issues:

  • The identity of your business – this may be an issue for you if you are or plan to become part of a group of companies, as the software supplier will normally say that use of the software is restricted to the company with which it is contracting through, preventing sub-licensing and assignment under the software licence. It may also be an issue for you if you are outsourcing work or working with third parties, for example on a teaming agreement or joint venture, and want them to temporarily be able to access your software. These issues are solvable if addressed in the SaaS contract. For example, the software provider could grant your business the right to sub-license the use of the software provided that you ensure the terms of the sub-licence mirror those of your head licence. Alternatively, the software provider could reserve the right to approve sub-licences in advance to limit the use of the software to the agreed number of permitted users or machines or processing amount.
  • The identity and number of machines on which the software is loaded.
  • The geographical location of the machines on which the software is loaded. If workers are homeworking or based overseas, then this may be an issue.
  • The number of concurrent users of the software.
  • The volume of processing that is handled by the software. If your business plans to expand will you exceed permitted usage and what would the financial implications be?

A business ignores permitted use issues at its peril. That’s because use of the software in breach of permitted use restrictions will constitute a breach of the software licence. It may entitle the software provider to:

  • Damages and/or
  • An injunction preventing use and/or
  • Termination of the SaaS contract. 

What are the key elements of a SaaS contract?

 When considering the key terms and conditions of a potential SaaS contract, you’ll need to look out for certain things, and negotiate them if possible. Consider:

Contractual ProvisionThings to look out for in your SaaS contract
PriceYour SaaS contract should clearly set out the service charges and the basis of their calculation, such as limits on the number of users (and the cost of additional users as your business may grow in size), the location of users (would this be an issue if your workforce is remote working?), data storage limits and the costs of additional storage space, if the contract price covers configuration assistance to adapt the software to any specific business needs (and if not, how much this would cost as an extra add on), the level of maintenance/support provided and what this includes, and if it includes transition services at the termination or expiry of the contract (and if not, how much this would cost).  

Are prices fixed throughout the term of the agreement? If not, how are price increases to be agreed or controlled? Is there an agreed price increase formula in the contract? Are prices inflation linked?
TermSaaS providers normally offer further cost discounts in order to encourage customers to sign up for longer contractual terms. Your business will need to balance the cost drivers and benefits against your need for flexibility. Generally people caution against becoming tied to a long-term arrangement which may no longer meet your changing business needs or match developments in software offerings. However, a long term may not be an issue if the termination clause enables you to leave the contract early by giving notice.
Termination clauseA key question is not only if you can terminate your SaaS contract and when (and if any financial penalties apply if you do so early), but also how easy will the software provider make it for you to exit or terminate the contract? The practicalities of moving software provider can effectively tie your business into a SaaS contract for longer than your business would ideally want.

One often-overlooked element of SaaS is the risk of lock-in. For example, if you have to back up all of your data on your own servers to ensure that you will have access to it if you seek to terminate your SaaS contract then this would negate much of the cost benefit of SaaS and you might be better using a slightly more expensive provider who won’t lock you in.
InfrastructureSaaS contracts usually specify that the business owner customer is responsible for the purchase of additional equipment. However you should look to agree a minimum infrastructure specification that the provider warrants will be fit for purpose.
Service LevelsThese provide objective and measurable assessments of key elements of the software service. They will not always be included in the providers standard form contract, and if not, you need to ask that they are added in. The adequacy of the service levels depends on the provider and your negotiation skills. You need at least basic commitments on, service availability, system response times, service, and helpdesk response times.
Service CreditsService credits provide a financial mechanism for you to ensure that your provider meets the service levels.

SaaS providers will often state in their standard SaaS terms that service credits are the customer’s only remedy in the event of a service level failure. This should be resisted, and the option to terminate (and sue for damages) for the most serious service failures should be included in the SaaS contract. Consider also whether it might be more beneficial in terms of incentivising your SaaS provider, to allow for a bonus or uplift in fees in the event of exceptional service, rather than a service credit in the event of sub-standard service.
Intellectual PropertyIt is standard practice for SaaS providers to provide customers with an indemnity in the event that that a third party claims that the use of the SaaS software by the customer infringed the third party’s intellectual property rights (IPR).   Where SaaS arrangements are established on an international basis, the IPR indemnity needs to be sufficiently broad to protect your business in all jurisdictions in which the software will be used.
Data ProtectionIt is vital that comprehensive GDPR-compliant data protection provisions are included in your SaaS contract. These should include an indemnity from the software provider in the event of their breach.

For more information on what should go into a SaaS agreement view our webinar on key terms in SaaS contracts from IP, Commercial & Technology Associate Ed Kilner.

What additional protective steps should a business take with a SaaS contract?

Preliminary work and due diligence are the key to a successful contractual relationship with your software provider. In addition to checking that the software fits your practical business needs, find out:

  • What steps have been put in place by the provider in case of emergency? Does the service provider have a disaster recovery plan?  Ensure that your technical team have reviewed it in detail and have confirmed its adequacy for your business needs.
  • What is the service provider’s back-up processes? How frequently does your business data get backed up and how does it get backed up? What can you do internally to ‘fill the gap’ between scheduled back-ups?
  • Does the software provider have software escrow arrangements in place?
  • Where are the software provider’s data centres located? Is data kept within the EEA?  If not, is it being transferred outside the EEA in a way which is compliant with data protection legislation?
  • How are the provider’s data centres protected? Protection should be in the form of both technological and physical measures.
  • What network security credentials do they have?
  • Testimonials should be offered, preferably from businesses in a similar industry or size to your own.   

Where you are transitioning business critical systemsit is especially important to use a test environment. This also allows you to verify the interoperability of the service with your other APIs.

Once you have sourced your SaaS provider it is best practice to appoint somebody internally from within your business as the ‘Contract Owner’. That person is responsible day-to-day for managing the relationship with the software provider, reviewing performance and ensuring any issues are ironed out before they escalate. Without this clear point of contact and sense of accountability, issues may not be prioritised as they arise. It is the Contract Owner’s role to ensure, throughout the length of the contract term, that your business gets the most out of your SaaS contract and product.

If you need support with your SaaS contract or other type of commercial contract then get in touch with our experienced IT & Commercial Technology solicitors and they will support you every step of the way with your commercial law requirements.

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