Key Considerations when negotiating a SaaS agreement

A key step in any company’s software purchase is the negotiation of the software license agreement. But negotiating contracts can be a difficult task. It can be difficult to make sense of the legalese, server reliability guarantees and scaling options. Negotiating a Software as a Service (SaaS) agreement presents other unique challenges. Unlike traditional license agreements, SaaS contracts need to spell out the terms of data storage, backup, and retrieval. Dealing with all of these issues can rapidly become confusing.

To help buyers, ERP Software Advice has put together a list of 9 key considerations to take in to account when negotiating a SaaS agreement. The list contains really helpful information on standard clauses such as the contract term and renewals. Key considerations also include a few clauses unique to SaaS like service level agreements and data retrieval.

To get an idea of the advice offered by ERP Software Advice on these topics, here is an excerpt from the article:

1. Pricing and Discounts

By pricing software as a utility service, SaaS vendors have simplified software licensing considerably. Most SaaS pricing is based on a subscription – monthly or annual payments for using the system during that period. The subscription pricing is typically based on one simple metric (e.g. users, records, projects) that roughly ties subscription fees to the value of the system. Finally, SaaS vendors tend to publish their pricing openly.

Even with this simplicity and transparency, there is still a need to be vigilant as a buyer. For one, don’t assume that straightforward published pricing means there isn’t room for some negotiation. Many SaaS vendors will discount up to 20% to win your business. The bigger the deal, the bigger the discount. Moreover, if the vendor’s pricing metric doesn’t fit with your business model, you might be able to negotiate custom pricing. Of course, you’ll have to make a cogent argument that the standard metric fails to balance price paid and value received.

2. Additional Costs

Another key component to pricing is ferreting out any extra costs early in the process. Published pricing may appear to be a good value, but extra fees can add up quickly. Common additional costs include extra users, customizations, integrations, third-party services, training and set-up fees. Work with your sales rep early in the process to understand what additional charges might apply to your account.

By far the best way to keep the additional costs down is to avoid customizations to functionality and integration with other systems. The inherent complexity in custom development and data integration makes these services expensive. We recommend that you start with the base system, make use of its core functionality and then assess how important the custom features or integrations are to your success. Start small, think big, grow quickly.

3. Term

If you are negotiating with a vendor over pricing discounts, subscription metrics and additional fees, expect to give something in return. Oftentimes, this means committing to an extended contract term. Vendors like longer terms because it provides more predictability in their revenue forecasting. Terms can be as short as 30 days or as long as five years. If the vendor wants a long-term subscription, we recommend that you start with the shortest – probably one or two years.

If you do agree to a longer term of three to five years, make sure you have an out clause. Typically this would provide a window of opportunity to break the contract during a specific time window. For example, it might allow you to walk after one month of using the system but before 90 days. Another example might be the ability to break the contract if certain levels of service are not provided consistently.

4. Service Level Agreements (SLAs)

Regardless of what you pay for the system, reliability is paramount. The SLA is the vendor’s commitment to keeping the system up and running. It is typically expressed as a percentage of “up time.” You will almost always see the SLA represented as 99.9% or thereabouts. However, there is wide variation in how that number is calculated. Many vendors will simply start with 100% and subtract time during which their internal systems reported an error. Most of these SLAs leave far too much wiggle room for vendors.

If this new SaaS system is mission critical, push the SLA issue to see who is really ready to stand behind their service. The SLA topic is far too detailed to delve into all the considerations here, so we’ll refer you to this great blog post on SLAs. However, we’ll suggest you focus most on the penalty for breaking the SLA when negotiating. Usually these penalties are paltry discounts paid out against future purchases. Just pushing for bigger penalties will provide great insight into the reliability of the system.

For anyone who is thinking about subscribing to a web-based software system, I recommend this as a must read. The full article can be accessed by visiting the ERP Software Advice blog post at: 9 Key Points to Negotiate in a SaaS Agreement.