10 Ways to Write Airtight SaaS Contracts

SaaS is simple to run, darned flexible, and scalable like heck. But there’s risk built in. If you stop using the SaaS provider, you might lose your operations and even your data. That’s why your contract terms are so essential.

“Software as a Service” is a software solution that is hosted in the cloud and operated outside your organization by a third party. You pay a subscription fee to that SaaS provider to store your data, run your application, and handle the IT work with it. And of course, you sign a contractual agreement for these services. 
With less IT and oversight comes less control and leverage. If a SaaS provider tries to increase your license costs or charge for non-negotiated fees, you have three options and none are great: You can pay the fee, you can quit the provider, or you can negotiate.

If you pay, you must decide to be satisfied with contract terms that you consider unfair. 
If you quit, you have to start from the beginning and rebuild with a new provider. 
If you negotiate, you’re making decisions under pressure before your current contract runs out.

Let’s talk about 10 common risks and the best practices to overcome them and write airtight contracts.

Negotiate a price cap for the contract renewal to keep your future SaaS costs within budget and expectations.

If you don’t cap the renewal price, at the end of your contract, the SaaS provider can increase your pricing as they want to. Then you have the difficult choice of quitting the provider which can cause cost and upheaval, especially if they run a critical service. You have to balance that big price increase against the effort and cost to move away from the provider. 
This is why we recommend that in your initial contract, you negotiate an allowable cap on the increase for your next contract, such as 3% or 5%.

Example: Microsoft 365 renewal

You use Microsoft 365 to run and store your Outlook emails, Teams messages, and business docs in Word, Excel, and PowerPoint. If Microsoft changed your renewal terms tomorrow – and increased the price by 25% – what would you do? Move your emails to Gmail and fire up Google Apps? It would be a hard decision from an administrative view.

Negotiate for flexibility in the SaaS pricing model to align with your business growth, both estimated and actual.

When you’re negotiating the contract, try to anticipate your company’s growth and purchase only the licenses you need at that time. You could build in increasing or decreasing the volume over the contract length.

This is especially cost-effective if you anticipate a long rollout of the SaaS product. You can’t change all the licenses immediately and instead transition the employees are over a period of time. A negotiation tactic is to set up a multi-year contract in which you buy an increasing number of licenses each year.

Example: Deploy Office 365 in POC

Your company runs perpetual licenses for HCL Domino and HCL Notes, but wants to move to Office 365 subscriptions. You have 50,000 employees but plan to deploy only 15,000 licenses in the first year, as a POC in limited regions to check for bugs. Microsoft offers a huge discount for buying all 50k upfront, but this means you’re spending on almost two-thirds of unused services, and you’re still paying for Domino and Notes.

Define in the contract that your SaaS provider takes responsibility for their subcontractors.

Anyone running a SaaS environment may have subcontractors. These third-party people or companies might analyze the data, host the data, or provide support on  infrastructure. 

You need to specify all terms and definitions of security on behalf of your SaaS provider in your contract. You have to make sure the subcontractors will respect the same requirements, and you can hold your SaaS provider liable for the subcontractor’s actions and errors. This is especially important for data privacy and data security, and in respect to government regulations like GDPR. 

Include a definition of each service-level agreement and the penalties and recourse if the agreed level is not met.

A service-level agreement (SLA) sets the expectations of products or services to be delivered by the SaaS provider, and the metrics to monitor and approve their effectiveness. 

Every SLA has to be included and defined in your SaaS contract. In addition, you must fully define the penalty and remediation for the provider not meeting their agreed level of service.

Often this SLA is a requirement from your purchasing team because they want assurance of access to the systems and data they might need for future negotiations. But it’s the role of the 
infrastructure team or consulting team to pursue the penalties because the SaaS provider won’t proactively review your account for their mistakes. 

So, you must remember two aspects: To negotiate the SLA remediation in the contract, and to follow up when it’s been triggered.

Build in contractual terms for transitioning your data to a new provider, and extending your subscription to an acquired company or tool.

You got a big discount on an initial three-year contract and you’re ready to extend into a fourth year. But when you negotiate the new pricing, the SaaS provider proposes a big increase, such as Adobe trying to triple the cost of Creative Cloud in our Best Practice #1.

If you decide to quit the contract and transition to another SaaS provider, there might be challenges. Does your existing contract stipulate that all data sets, system connectors and tool configurations will be retrievable and easily sent to another application? If they are retrievable, does your contract protect you from transfer fees? 

You should also have contract details that cover scenarios in which your SaaS provider or their product is purchased.  If you must negotiate your next contract with a different provider, they might try to charge you for moving to their re-released product. Some aspects to cover are you get access to support, rights to updates, rights to upgrades, and even rights to new versions that changed a lot under the new provider.

Contract negotiation is often about worst-case scenarios. You want to ensure your contract covers all of them, or enough of their details that you are comfortable with the risk.

SaaS applications are powerful and efficient for your business. Your subscription might include upgrades and
updates, access to customer service and maintenance, or the administration and hosting. You can pay the SaaS provider to handle technical functions that will free up your internal IT team, such as provisioning a server, installing a database on the server, or maintaining the server OS.

But with less IT comes less control and less leverage. And that leads to unexpected fees and budget overruns.

That’s why the professional oversight of your SaaS contracts is so essential. It’s essential to know what terms are missing in your contract, keep on top of changing contract terms, and have the negotiation experience to recognize that you can insist on a term. This is where licensing specialists like our USU consultants can help – please contact us any time!