What to Consider When Negotiating SaaS Contracts

The market for software-as-a-service (SaaS) continues to grow rapidly, with global spending expected to rise 17.9 percent in 2012, to $14.5 billion, and to reach $22.1 billion by 2015, according to the market research firm, Gartner.

Increased awareness of how SaaS works, growth in related technology (e.g. platform-as-a-service), and the low upfront licensing and capital costs are driving this increase, said Gartner research director, Susan Mertz.

But as many enterprises transition to SaaS, they’re often unsure of how to find and negotiate service contract terms that best suit their business needs. Many enterprises don’t adequately review the contract terms of the SaaS vendors they are considering, and even more never try to change the terms in their favor.

In a July 2012 article on CIO.com, Thomas Trappler, director of software licensing at UCLA and SaaS contracting instructor at the school, urges enterprises to be more aggressive in seeking terms that will provide the most benefit.

“Be prepared to explain your needs to them and ask them to make changes in order to align with your needs,” Trappler says. “You may not get everything you ask for, but you definitely won’t get it if you don’t ask.”

Before ever beginning discussions with potential SaaS providers, enterprises should determine exactly what goals they have for SaaS—and they should be clear about which items in a contract are necessary to fulfill those goals. Then they can articulate their specific performance and security requirements to potential vendors.

Contract Flexibility

Whether a SaaS vendor will be willing to negotiate contract terms will largely depend on two factors:

  1. The size of the enterprise. SaaS vendors are far less likely to negotiate non-standard changes with small and medium-sized companies than they are with large well-known enterprises with considerable buying power.
  2. The type of contract. Some SaaS contracts can be entered online with a credit card; others are slightly more complex, but remain essentially a commodity purchase. There is no negotiation in these cases. The more complex a SaaS application becomes, the more likely the vendor will be willing to negotiate and provide service level agreements. But even for mission-critical applications, some vendors may be reluctant to deviate from their contract wording.

Price

SaaS services take advantage of standardization, so the reluctance by vendors to modify service terms is natural. If a vendor is unwilling to make changes, that leaves price as the point of negotiation. A vendor that won’t make the contract changes you want may be agreeable to lowering the price instead.

Shopping Around

An enterprise actually has the greatest power to control terms and price before ever sitting down to the negotiating table. To find the best SaaS vendors for their needs, it’s essential that enterprises thoroughly research all competitors’ specific contract terms and how they relate to price. Yet a surprising number of enterprises fail to adequately conduct this due diligence. They might be wasting time negotiating for terms they could have gotten without negotiation, and at a lower price, if they had searched the market better.

Managing the Contract

Another aspect of controlling cost and performance is the monitoring of a SaaS contract after the deal has been negotiated and closed. All too often, even with the desired contract terms, enterprises fail to monitor compliance and measure performance — resulting in additional cost and service problems that should not occur under the contract.

Contract management software (itself available as SaaS) can be used to ensure that all the terms of the contract are followed — enabling enterprises to realize the full benefits of the contract they’ve so carefully searched for and negotiated.