What To Know When Negotiating Your SaaS Agreement
Software as a Service (SaaS) contracts are incredibly beneficial to a business when executed correctly. For the most part, the contract can be relatively easy to implement and use and they tend to offer friendly subscription prices, which many companies appreciate. Because you are joining a pre-existing hosted environment that is already operations, the vendor often makes trial licenses readily available and when it comes time to proceed much of the technical implementation preparation and work has already been completed. When done correctly, SaaS agreements can be a godsend to a company. When they are rushed, however, SaaS agreements can be detrimental to a business.
A well-developed SaaS agreement will need to be thoroughly reviewed and carefully negotiated, to avoid unintended negative consequences. When negotiating a SaaS agreement, there are many factors that can impact your success but here here are a few of the most common issues you should consider:
- Pricing Points and Discounts
Software as a Service vendors have considerably simplified software licensing by pricing the software as a utility service. A vast majority of pricing in a SaaS model has been based on subscription usually between 1 and 3 years, which means payments are required on a monthly, quarterly or even a yearly basis. Often the net subscription fee. The payment is usually fixed and will remain the same for using the software for a predetermined period; however, given that many SaaS subscriptions are quoted on a multiple year basis, its very common to see an indexed annual Consumer Price Index increase, not to exceed a certain % often 3%.
Subscription pricing is usually based on a simple metric, such as records, projects, or users, which somehow connects subscription fees to the value of the software. For the most part, vendors will publish the pricing of their products openly. And because of the inherent nature of hosted SaaS offerings, they can rapidly expand to accommodate unexpected demand with little or no notice to your SaaS provider.
Unfortunately, even with this transparency and simplicity, buyers should remain vigilant. For instance, buyers should never assume that even when there is straightforward pricing, negotiation is not permitted. Pre-pad discounts may also be possible and many SLAs include a termination option, in the event the SaaS provider consistently fails to meet their SLA commitments. When it comes to making business, SaaS vendors will gladly provide a discount to win a company’s business. For companies seeking to make a large deal with the vendor, it may even be possible to negotiate a larger discount with the vendor.
Further, when a vendor’s metric for pricing does not align with the business model of a company, it may be possible to arrange custom pricing. In order to do this, however, it may be necessary to make a compelling argument that the metric used does not balance what is paid and the value of what is received.
- Additional Costs
In addition to reviewing the element of pricing, it is also important to assess any extra, and perhaps unnecessary costs early in the process. The pricing vendors publish often gives the appearance of being a good value but by adding extra fees, however, the price can begin to add up quickly.
Additional costs that are commonly included in published pricing can include the following:
- Training,
- Customizations,
- Extra users,
- Third-party services,
- Integrations, and
- Setting up the software
By working alongside the vendor early in the process, it will be easier to understand the additional charges, if any, that will apply to the account. In negotiating the terms of the agreement, one of the best ways to maintain the costs down is to steer clear of customizations to functionality or integrating other systems. Custom development along with data integration are inherently complex, which makes these services very expensive. It is always recommended to begin with a base system and assess the core functionality of the software. After evaluating the functionality of the program, then it will be easier to determine whether it is important to integrate any custom features to support the company’s success.
- Term
It is easy to see that when negotiating, the vendor will expect a quid pro quo. Whether the negotiation involves the vendor’s subscription metrics, pricing discounts, additional fees, or other elements, the customer may be required to provide someone in return. In general, companies are required to commit to a partnership with the vendor for an extended period, or contract term. Longer terms are usually preferred by vendors since this allows them to predict revenue forecasting. Depending on the vendor, the terms can be as long as five years or as short as 30 days.
When the vendor prefers a longer subscription, it is highly suggested for the buyer to begin with the shortest term possible, which may be up to two years long. For terms that have to be longer than that, it is imperative to seek an out-of-contract clause. This will usually provide the buyer with a window of opportunity to break free from the contract during the predetermined time frame. For instance, a buyer may be able to break the contract after a month of service, but only if it is done within the first 90 days of service. Another clause that can be added is one that will allow the buyer to break free from the agreement when the level of service promised has not been consistently provided.
- Service Level Agreement (SLA)
No matter how the system is paid for, reliability is an element that rises above all others. The Service Level Agreement is essentially the vendor’s commitment to the buyer – to ensure the system is consistently working the way it was intended to. Usually, this is expressed as a percentage of the system’s functionality, or “uptime”. For the most part, this will be expressed as 99.9%, or 99.9X (where x is between 5-9%), in an SLA but it is important to understand that there is a large variation in how this number is obtained. Generally, the vendor does the SLA reporting on a monthly or quarterly basis. Vendors typically exclude scheduled maintenance and perhaps security related downtime from the SLA metric. Often Customers are required to affirmatively make an SLA claim in order to receive the remedy. SLA remedies are typically a Service credit, expressed as a % of the Service fee, maybe 5% and if the SLA is recurring, or more significantly less than the stated SLA metric, i.e., considerably more down time, that service credit may increase to 10 or 15%. Vendors will usually begin with 100% and begin subtracting time when an internal system has reported a system error. It is important to Many SLAs will provide too much leeway for vendors.
- Renewals
Finally, it is a reflection of a great partnership when a company seeks to renew its SaaS contract with the vendor. When the renewal date comes around, however, it is important to remain cognizant that this is an opportunity for either party to exit from a substandard contract. Since it is also an opportunity to renegotiate the agreement, buyers will need to ensure they remain in control when the time comes. Buyers must be vigilant of the term referred to as “evergreen”, which means the agreement will automatically renew following the term.
If this term is in the agreement, it is encouraged for buyers to negotiate to remove it. A red flag should go up if the vendor refuses to remove the clause since the vendor will likely disapprove of having to put in the work to win the buyer’s business. A vendor that offers a quality service will be sure that the buyer will want to renew the contract based on the value, not because the buyer mistakenly forgot to cancel the contract in time.
You must also address what happened to the Customer Data upon the expiration or termination of the Agreement. It is important to have an exit plan that details the vendors duty to provide the data; provides the customer with some sort of short-term month-to month extension in the event the transition to another processor internally or another 3rd party SaaS provider. It is also common the request a right to have the SaaS Vendor assist in transition tasks at a stated rate, or at their then current rate.
Speak To A Skilled Tech Licensing Attorney
A Software as a Service agreement outlines the exact software access a buyer has for as long as the buyer has opted to be subscribed to the service. The contract will identify the service, the rights and responsibilities of the parties, and the subscription fees agreed to. While a SaaS contract can be used to protect the buyer and support its economic growth, it can also hinder the buyer and stunt its growth when the contract is not executed correctly. If you are seeking to enter into a SaaS agreement, you will need to speak to a qualified attorney who can ensure the SaaS agreement works on your behalf.
Attorney John P. O’Brien is highly skilled in Software as a Service Agreements. Every business is different; therefore, every SaaS contract should be uniquely made and designed to fit a company’s needs. As an essential part of your business, make sure your SaaS contract is done correctly. Consider obtaining the proficient support of Attorney John P. O’Brien. You can schedule a no-obligation consultation by completing the online contact form here.
