White Paper

What Does a SaaS Contract Include?

Published on

June 8, 2020

By

by

Juston Michealson

The change in business-critical software from traditional on-premise to cloud has made contracts important. In the past, you would install the software in your own server environment, giving you more control over how your own data was managed. Previous software licenses were owned by the customer and could run for years without updates. Minimal maintenance fees could keep the software operational, but the software publisher had very little influence over an individual deployment of their software in most cases.

Modern software is subscription-based and increasingly being hosted in a cloud environment. Where customers were previously used to utilizing their own IT staff for business software maintenance and provisioning, today’s reality is putting that onus back on the software publisher and the cloud provider. This is incredibly valuable for the customer as it allows them to focus on operating a lean, focused business and reallocate staff to value-add functions. This also means that the software itself is running closer to enterprise-grade in availability and performance. The tradeoff is that the data and ongoing support are owned by the cloud provider, partner, or publisher. In some cases, the responsibilities are spread across all three!

While this frees up customer resources to focus on the core of the business, it does mean customers need to be clearer on how their data can be accessed, what happens if they want to change solutions, and how billing works. All of these items should be discussed openly throughout the selection process, and specifics should be determined by the customer buying team. This paper will dive into how to ensure your SaaS contract is protecting you in these areas.

Hidden Fees

As more and more software publishers embrace and move to the subscription model, understanding fees can become a significant issue. In the traditional software implementation model, fees were larger during the implementation process as customers were purchasing the license outright. On an ongoing basis, fees were small as they covered minor maintenance to support the publisher’s providing minor updates and patches. Customers considered software as a product to be purchased and then rarely thought about again.

Modern software, however, is more involved after implementation, with increasingly important updates in an increasingly connected world that relies on software integrations to support businesses. A closer review of the software contract should highlight what is covered and what will require additional fees.

Here are few of the scenarios to consider:

  • Upgrades, Updates, and Ongoing Maintenance. These details need to be discussed thoroughly throughout the evaluation process before any contracts are signed. Understanding how a software publisher’s license addresses recurring billing is crucial to identifying hidden fees. No matter what a well-meaning partner will tell you throughout the evaluation process, no modern software will be without recurring fees, and these will be well structured for every existing and potential customer. Most contracts will address this with language around annual billing, recurring fees, maintenance fees, or some combination of these terms.

  • Implementation Change Orders. This is one of the most familiar ways for any project to exceed an agreed-upon budget, and software is no exception. Any customer that has gone through a major system implementation will be familiar with change orders. In their simplest form, these are changes to the initial scope that are required or requested and have an additional cost to complete. It is near impossible to predict a specific potential change order in a given project even for veteran implementation firms with well-known software systems. That said, it will always (or should always) be well documented how either a publisher or implementation partner will address any potential change orders in their contract. This is another segment that requires review and understanding to avoid hidden fees.

  • Discounts and Promotional Pricing. First year free, zero-dollar installation, free upgrade to higher tier of service—do these sound familiar? They should, and they should also indicate a yellow flag and are not to be taken at face value. There’s no such thing as a free lunch and, as your year 3 cable bill will attest, no such thing as an ongoing promotional price rate. With more business software moving to subscription pricing, customers are seeing lower entry costs. The math is simple for software publishers here: They get more money for having customers and can risk more capital to get a 3- to 7-year average customer. If you hear a deal that sounds too good to be true, review the contract to understand the specifics. It’s true that you don’t get something for nothing, and this extends to service for your business software.

Here are some of the common fee trends and how to ensure your contract protects you:

  • First Year Free, or Sign Up for 3 Years and Get One Free. This promotion is a simple “agree to certain terms of being our customer, and we’ll throw in a year or so of that service.” This sounds and looks great when you sign (as does the next pricing structure we’ll discuss), but check your SaaS contract for language around auto renewal and estimated annual fees after the term outlined. Also, check how this “free” term is seen on your bill. Is this a waiver on charges, so you’re not paying until one year after signing into the agreement, or is it a percentage discount over the term covered? The mechanism by which they provide this promotion will be outlined specifically, and if you don’t see it, you are well within your rights as a customer to confirm the nature of any claims of free service.

  • Zero-Dollar Implementation. Just like it sounds, this promotion translates to only paying the annual fee for a given software offering. This is a go-to offering for very large publishers or implementation partners as they can absorb the cost for this for the sake of gaining a new customer. When you discuss this option with your sales rep and review it in your contract, it is important to understand the nature of the implementation you are receiving for “free.” This model works for a company by providing a large volume of these projects and by the same token a very repeatable implementation. This typically leads to change orders as most companies don’t strictly adhere to the implementation guidelines as written. Review the contract for specific details around the implementation and what services by omission or specific language will require change orders to complete.

  • Free Upgrade to a Higher Tier of Service. As with the previous promotions, this one also serves to get more users signed up to a software license and expects to either drop that higher level or more commonly begin to charge for the higher service being provided. When reviewing a contract, look for language that outlines the term this higher service will be provided and for any associated fees or automatic enrollment into said level of service (as well as the associated cost).  

The bottom line on special promotions and “Free” services being provided for business SaaS licenses is that they are dedicated to getting more customers. This is not to say these promos are useless, but be very careful and understand what you are agreeing to by understanding the contract.

Data Access

With business critical systems being moved to cloud licenses, one of the largest areas of concern, and certainly with accounting systems, is how data is managed. The good news about this situation is that modern software publishers anticipate the customer’s interest around their data in a new system and have specific language available on their website frequently asked questions section (in most cases). The other place to look is the SaaS contract itself. Look for terms like data access, termination criteria, data management, or some combination of these in the contract. This whitepaper will dive deeper into termination criteria in the Offboarding section, but we'll take a closer look at data access and data management here.

A standard SaaS contract will have sections dedicated to the components of Data Access. This term refers to how a customer accesses their data, and the cost associated with any services around accessing their data in the contract. When reviewing the contract, the customer will want to first ensure that there is stated access to their data. The next step is understanding how to access that data. Some companies will only allow you to access it after submitting a request while others will walk you through downloading your data or provide a snapshot of that data. All of these options allow for the customer's system to keep operating the day-to-day functions while ensuring them that their data is available at any time. The final step to data access is understanding any costs associated with that access. In the contract, it will say specifically if there is a fee associated with that access and either explicitly outline the costs or say that the number is available on request.

The other component of data access to consider is Data Management. This can get technical, but at a high level, the SaaS provider will have a Service Level Agreement or SLA specific to the performance of their cloud. The cloud is just a delivery mechanism supported by a datacenter, so this refers to the performance of the datacenter. One of the big reasons cloud SaaS is beneficial for business software is that software publishers can provide enterprise-level datacenter performance for customers that previously may have found that level of service cost-prohibitive. In a SaaS contract, the customer will want to identify and understand what availability, uptime, and security measures are in place, as well as how any potential data breach will be addressed. Cyber security is a massive consideration for anyone moving to a cloud environment and even more so for those with accounting, human resources, and other business critical operations hosted over a SaaS platform.

Offboarding

There comes a time in every business relationship to evaluate current solutions and potentially move to those more suited to the specific operations. In such an event, it is imperative that the terms for accessing customer data to be prepared for a move to a new system is clearly outlined. Put simply, when a customer needs to end their relationship with a current SaaS partner, the terms for leaving that platform need to be understood. There are software publishers and vendors that will charge large fees or otherwise make it difficult to leave their platform, and any customer needs to understand those limitations, preferably before entering into contract with them and certainly well before they need to end their license agreement to avoid any potential data loss. This restrictive access during termination is known as "ransom" in the software industry, and while it still happens, most reputable and modern SaaS licenses have clearer paths to access.

When reviewing the contract, the customer wants to look for terms including termination, user data, customer data, subscriber data, or any combination of these words. In this section of the contract, there should be clear guidelines for accessing data upon termination of an agreement. Be aware of any terms including fees, availability, and specific time-bound language. Use this to coordinate with the implementation process and go-live date of a new system to ensure there is no gap in business critical performance.

Summary

Modern business software is increasingly moving to SaaS licensing, and with that model, there are many considerations any business needs to understand. We discussed reviewing the SaaS contract for hidden fees, data access, and offboarding situations that will protect the customer and help them avoid critical mistakes we see customers face every day. As always, this whitepaper does not replace a good legal review of any contracts that affect a business, and as always, please refer to your legal team for situations specific to your business.

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