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Growing companies have increasingly been moving to Software as a Service (SaaS) to meet their needs. Managing the expanding list of cloud contracts, subscriptions, and Service-Level Agreements (SLAs) has become difficult for IT teams. SaaS contracts are growing almost linear to headcount. 

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The annual growth rate of the SaaS market is currently 18%.

Companies need to stay abreast of their tech stack agreements in order to be aware of renewal dates, usage metrics, and the best prices for renegotiation. Spendflo simplifies this process with centralized SaaS management, helping teams reduce complexity and improve cost efficiency. To understand this in-depth, let’s first take a look at SaaS agreements.

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What Is A SaaS Agreement? 

A SaaS agreement is a legally enforceable agreement between a provider and a customer that spells out the way in which cloud-based software can be accessed and utilized. These agreements are centered on access through subscription as opposed to ownership transfer as is the case with traditional licenses. They usually include pricing terms, level of service guarantees, ownership of their data, data security levels and renewal and termination terms.

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How Are SaaS Contracts Different From Traditional Licensing Agreements?

Traditional software licensing and SaaS agreements both govern how businesses use software, but they differ significantly in delivery model, legal rights, and risk allocation.

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Key Differences Between SaaS Agreements and Licensing Agreements

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Related Read: Complete SaaS agreement checklist

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What Are The components Of A SaaS Agreement?

Vendors provide access to SaaS software through a public, private, or hybrid cloud. The SaaS contracts cover how the technology is used, distributed, and paid for. SaaS agreements are generally similar, however, the specific services, SLAs, and requirements might vary based on the service or technology being offered. A SaaS software contract contains information about the:
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• SaaS provider’s obligations, which include user support, data security, technology updates, data backup, and other essential services.
• License scope which details the rights and responsibilities of the vendor (licenser) and the business (licensee.)
• SLA establishes the minimum performance criteria of the provider, including uptimes and response time guarantees and resolution guarantees. Other favourable conditions are uptime >99.9, fast bug fixes, and downtime credits. Unfavorable terms may limit liability excessively, exclude maintenance windows from coverage, or offer inadequate remedies, leaving customers vulnerable to service interruptions.
• Acceptable Use Policies (AUC) are used by cloud providers to establish the customer’s levels of access.
• Contract value that covers the platform fee, payment method, invoicing details, billing frequency, and implementation fee (if applicable.)
• Subscription term which states when the agreement starts, when it ends, renewal dates, and penalties for early termination.
• Subscription termination that details the early closing of a contract and if a customer will face additional charges for termination.
• SaaS contracts must specify portability of data, transition support provided by vendor and exit costs. They should describe the process of secure deletion or destruction of customer data, as well as business continuity during migration. Enforced commitments minimize risk, eliminate vendor lock-in, and smooth the process of switching to a new provider.
• Data and intellectual property ownership should be outlined in SaaS deals. Contracts should specify data storage, deletion policies, and conditions under which customer business information may be shared with third parties. The rights belong to vendors of platform and software. Any custom features or integrations should mention ownership to avoid any kind of disagreement, as well as ensure transparency between the two parties.

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• Data security which covers the SaaS provider’s network security protocols and how they plan to protect the customer’s data from intrusion, viruses, and other cybersecurity concerns.
• Disaster recovery policies address what the vendor will do to recover the company’s data in case of service bugs, hacking, general cloud downtime, or other service interruptions.
• SaaS agreements usually contain warranties where the software is within agreed performance standards, adheres to regulations and is unattached by third parties to interfere with infringements. Other providers also undertake to ensure that they are secure and available to their services. Together with warranties, the indemnity clauses distribute the risk in case of problems, data breach, or downtime. To the buyer, you should negotiate the warranty conditions, reduce general vendor disclaimers and get remedies in the form of service credits or right of termination to reduce the risks in the long term.

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Insurance Requirements And Vendor Qualifications

Contracts should clearly state if the SaaS provider has sufficient insurance coverage, like cyber liability, errors & omissions, or business interruption insurance. It's also helpful for them to include details about their vendor certifications, compliance with regulations, and proof of financial stability. This way, everyone can feel confident that the provider can handle any challenges that come their way.

A good SaaS contract establishes terms, SLAs, data security, pricing, and ownership, along with addressing insurance concerns and vendor qualifications- ensuring certainty, reduction of risks and customer and vendor protection.

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Legal Requirements & Compliance In SaaS Agreements

SaaS contracts should not only describe the terms of payment and service, but must also guarantee that data protection legislation, industry regulations, and legal distribution of risk are adhered to. The main legal components are as follows:

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1. GDPR And CCPA Compliance Requirements

• GDPR (EU): Vendors have to process personal information legally, disclose breaches within 72 hours and enable data subjects to enforce their rights like access and erasure.
• CCPA (California): The customers should learn about data gathering, use, and sharing. Vendors are required to respect opt-out and deletion.
  

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2. Industry-Specific Regulations

• HIPAA (Healthcare): There are stringent regulations on the use of the protected health information.
• SOX ( Finance): Recordkeeping and audit trails are required.
• PCI-DSS (Payments): Oversight of the secure handling of credit card information.
•  Contracts : should include how the vendor will follow these structures and should prove certification.

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3. Legal Best Practices For SaaS Agreements

• Data Ownership: Explicitly mention that the ownership of customers to their business data is retained.
• Warranties: Vendors are to ensure the performance of services, legal compliance, and safeguard against infringement of IP.
• Termination Rights: Incorporate data portability, deletion, and transition support requirements.

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4. Jurisdiction And Governing Law

• Contracts must indicate where contract laws apply and where disputes will be adjudicated.
• In the international operation, make certain that the governing law is preferable and enforceable in areas where data processing takes place.
  

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5. Indemnification Clauses In Detail

• Vendor Indemnities: Indemnify customers against third party claims, including IP violations or data theft by the vendor.
• Customer Indemnities: Provide liability to customers on misuse of the platform or violation of acceptable use rules.‍
• Risk Allocation: Establish the maximum liability, exclusions and carve-outs (e.g. unlimited liability in the event of breach of confidentiality or IP rights).

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What Are The Benefits Of A SaaS Agreement? 

The crucial points in a SaaS contract are described in the areas of licensing, service levels, data security, and payment conditions. It eliminates confusion through definition of roles and authority and also protects the client and the provider.

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Here’s how the benefits break down:

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A. Benefits For The Customer

1. Clarity On Terms And Usage

Customers gain clarity on service terms, contract termination clauses, license restrictions, and their rights to use the service.

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2. Guaranteed Vendor Support

The contract binds the providers to fix outage, fix bugs and guarantee the agreed uptime (e.g., 99.5%), which assists in safeguarding business continuity.

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3. Payment Transparency

Subscribers will be able to get a glimpse of the subscriptions, features included and additional costs. This prevents the unnoticed expenses and can help in the budget planning.

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4. Data Ownership And Security

The way customer data is stored, backed up as well as the protection of data is described in the contract with the businesses being assured that it is done in a compliance and privacy manner.

B. Benefits For The Provider

1. Precise Customer Responsibility.

The providers can easily state acceptable use and can easily state licensing restrictions and customer obligations to reduce misuse or disagreements.

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2. Predictable Revenue Model

There are predictable recurring revenues with tiered pricing and a payment schedule set by the providers.

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3. Reduced Liability Exposure

Contracts help the providers to set a limit of liability and areas of responsibility in case of failure of services or data leakages.

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4. Operational Efficiency

The providers have the opportunity to normalize SLAs and support processes across-customers and streamline their operations, and reduce ad-hoc negotiations.

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C. Shared Benefits For Both Parties

1. Mutual Accountability

There are some requirements, which are imposed on customers and providers, and they promote trust and minimise misunderstandings.

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2. Risk Management

Provisions on liability, data security and service levels stated clearly reduce the operational and legal risks of both parties.

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3. Increased Long-Term Relationship.

Clear agreements establish a foundation of collaboration, streamline future negotiations, and allow service adjustments as business needs evolve.

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What Are The limitations Of SaaS Agreements?

According to a Deloitte survey, only 91 percent of Americans actually read the terms of service of a product when they agree to it by clicking. The same is true in B2B SaaS purchasing: most companies take vendor contracts at face value and continue without them reading the fine print. Although SaaS agreements may appear straightforward, they often contain hidden limitations that impact operations, budgets, and governance.

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Below are three key categories of limitations every business should evaluate:

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1. Operational Risks

• Service Downtime and Limited Support
  Sellers can limit the extent of assistance provided in outages or maintenance periods, resulting in business disruption.
• Data Security Gaps
  Most contracts do not provide the vendor with much liability to breach or to lose data, which forces customers to bear the financial and reputational losses.‍
• Performance Constraints
  SLAs may provide minimum uptime guarantees (e.g., 99.5), but there are no hard remedies, so when performance is not met, there is not much that businesses can do.

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2. Contractual & Customization Issues

• One-Sided Liability Clauses
  In the majority of SaaS arrangements, the liability is limited by the subscription rate, which is considerably lower than possible losses in case of security or compliance breach.
• Limited Customization
  Vendors may not offer custom features or integrations, forcing businesses to adapt their workflows to fit the software.
• Rigid Renewal Terms
  Multi-year contracts with unfavorable pricing may be entrap companies with evergreen clauses or automatic renewals without proactive management.‍
• Hidden Costs
  Training, implementation, and overage can not be clear upfront leading to budget overruns in the future.

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3. Control & Dependency

• Vendor Lock-In
  It may be expensive and difficult to change the provider because of proprietary systems and exit clauses.
• Limited Data Portability
  There are contracts that do not grant total access to download or migrate data on termination resulting in dependence on the infrastructure of the vendor.‍
• Overreliance on Vendor Stability
  Customers can be caught in price, support or product plans changes due to financial unsteadiness or acquisition on the side of the provider.

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Elements You Should Not Overlook While Evaluating A SaaS Agreement

SaaS agreements contain important terms and distinct clauses. These clauses are tailored to the company’s industry type, products, and services offered. Businesses need to make sure that these points are present in their contract:

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1. License Scope

Each SaaS contract should include the limits and scope of the service. This includes the number of authorized users accessing the SaaS application, the extent of usage and licensed access, and the terms for accessing and operating the service.

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2. Start And End Date

The start date of the agreement happens when an end user will be granted access to the cloud service. The end date helps companies prepare for renewals and renegotiations. Businesses need to stay on top of these dates so that they don’t accidentally get locked into a SaaS contract for longer than required.

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3. Service Level Agreement 

This can be a part of the SaaS vendor agreement or a stand-alone document. Nowadays most SaaS contracts include an SLA. It defines the minimum responsibility of the SaaS vendor to the customer. SLAs should include:
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• The billing and pricing structure
• Security and compliance information
• Performance metrics and Key Performance Indicators (KPI)
• Response time for customer support
• Penalties are levied against the vendor if guarantees are not met

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4. Pricing

The SaaS agreement should contain details of the company’s subscription plan. Most SaaS solutions are billed monthly, semi-annually, or annually. The SaaS pricing models are:
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• Flat-rate pricing - companies pay a standard rate for a product, a set of features, or a      service.
• Usage-based / consumption-based pricing - this is also called the pay-as-you-go      model since businesses pay based on their usage level.
• Tiered pricing - businesses can pick multiple service packages at different price points.
• Per-user pricing - companies pay a fixed monthly price per SaaS service user.
• Per-active-user pricing - regardless of the number of employees, companies have to      pay based on their monthly active users.

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5. The Total Value Of The Contract

This includes all the SaaS subscriptions across a company’s departments. Businesses that keep track of the total contract value have a good grasp on their total SaaS spend and can spot inconsistencies when comparing billing and contract data. The total contract value is useful for measuring SaaS spend over time, reducing costs by opting out of upgrades, and detecting price changes.

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6. Total Number Of Licenses

Businesses can benefit from knowing the type and total quantity of SaaS licenses allocated to the organization. This helps avoid overspending if employees do not use the software or if team members exit the company. 

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7. Liability Limitation

This is a service agreement that protects SaaS vendors from legal difficulties. A liability limitation restricts companies from recouping losses that might occur if the software is not performing well. Most liability clauses favor vendors disproportionately. Companies need to check all disclaimers, including the total amount a vendor might be liable to pay for damages.

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8. Ownership Of Data

SaaS agreements should clearly outline who owns the company’s personal data on the platform. Since the SaaS vendors are responsible for hosting the data, ownership might be a gray area. It is crucial for businesses to clearly define how their confidential information is being stored and transmitted.

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9. Data Privacy Policy

Storage of data needs to come with essential security restrictions. SaaS agreements should include a privacy policy that covers how the provider is backing up data, storing data, protecting against a data breach, and whether any information is being shared with a third-party service. It is the responsibility of the business to determine whether the vendor’s data protection policies meet company standards.

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10. Vendor Support

The service agreement should clearly outline the SaaS provider’s support services. This includes their response time during data breaches, termination, or other service challenges.

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11. Contract Tenure And Renewal

Most SaaS contracts are renewed annually. Some businesses might extend it for 3-5 years. Organizations that cannot commit to multi-year agreements should put a cap rate on renewals. Companies need to keep a record of SaaS contracts to stay ahead of renewals.

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Related Read: SaaS Renewal Management

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12. Usage Limits

When businesses exceed their software usage limit, they might get penalized. That’s why companies need to know all about SaaS usage penalties. Rapidly growing companies need to future-proof their contracts by taking charge of their SaaS agreements.

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You can start doing this by learning about the 9 clauses in SaaS contracts that companies should watch out for. Once companies know what to keep track of in SaaS agreements, they can begin negotiating and drafting a good contract. 

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How To Draft And Negotiate A SaaS Agreement‍

SaaS agreements have binding obligations for the vendor and the businesses. That is why it is important to negotiate and draft a SaaS contract that suits your company's needs. Here are some relevant questions to help you get started:

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1. Contract Terms

• When is the effective date that the contract comes into force?
• What is the full SaaS subscription term?
• What sort of license is being granted for using the SaaS service?

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2. Service Level Agreement

• What support is provided with the chosen pricing plan?
• What concessions will the business receive if the SLAs are not met?
• Can the vendor ensure over 99.5% SaaS product uptime?
• What is the approved time frame to fix errors or bugs?
• What is the approved time frame to solve performance speed and latency issues?

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3. Pricing Plans

• Will the provider be allowed to change the payment terms in any circumstance?
• Is the pricing fee scalable as the business grows?
• Will the company get discounts for more users?
• Does the price include charges for training, support, or implementation?
• Are the payments inclusive of tax?
• When should invoices be issued?
• What is the interest rate for late payments?

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4. Tier Boundaries

• Is there any penalty if the business exceeds the cap on its SaaS service?
• Will the company be notified if they exceed the feature usage limit?

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5. Renewals

• Do businesses need to renegotiate terms before a renewal?
• Is the company locked into the original price, or will there be a new rate after renewal?
• Has the vendor set up an evergreen contract that automatically renews?
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Automatic renewals can lock a company into a SaaS agreement they no longer wish to continue. It is important to set up a standardized process for managing contracts. 

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Check out how Tabby, a BNPL platform, was able to streamline contracts, renewals, negotiation, and standardize SaaS agreement templates with Spendflo.
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6. Security Risks

When assessing SaaS vendors, security goes beyond data location. Procurement and legal teams must confirm what data is accessed, storage compliance with GDPR, and adherence to frameworks like SOC 2 or ISO 27001. Contracts should clearly outline risk-sharing, liability limits, and breach notification timelines. It’s equally important to review continuity plans, recovery objectives, and the vendor’s financial stability, including cyber liability insurance, to ensure obligations can be met during a crisis.

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Step-By-Step Process For Preparing A SaaS Negotiation

1. Define Internal Needs

• Indicate what features, support levels, and security requirements can you not afford to trade-off in your business.
• Get procurement, finance, and IT stakeholders on track before discussions commence..

2. Conduct Market Research

• Benchmark vendor pricing against industry averages.
• Gather competitive quotes or case studies to use as leverage.
  

3. Assess Vendor Dependencies

• Identify how critical this vendor’s service is to your operations.
• If switching costs are high, focus on securing flexible exit clauses.
  

4. Develop Negotiation Leverage Points

• Make long-term commitment potential (deals over more than a year) prominent.
• Be willing to purchase a higher volume of licences in case of discounts.
• Negotiate on competitive substitutes.
  

5. Plan Concessions In Advance

• Negotiate which conditions are flexible (e.g., payment period, implementation costs) and which ones are not (e.g., information safety).
• Expect typical vendor concessions, like volume discount or free delivery or limited price increases.
  

6. Simulate Scenarios

• Establish best case and minimum acceptable results regarding pricing, SLAs and renewal terms.
• Prepare fallback points to each clause.
  
  

Key Clauses To Address During Negotiation

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• Pre-Negotiation Preparation Strategies

 Enter with clear standards, competitor substitutes, a walk-away point. In the absence of this, sellers are at the upper hand.

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• The SaaS Points of Leverage In Negotiations

 Bargaining chips include use commitment length, user volume, and the capability to demonstrate the vendor internally (e.g., case study partnership).

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• Common Vendor Concessions

 By negotiating with standard contract template drafts, businesses frequently negotiate reduced onboarding costs, no-charge training, or limited price increases per annum.

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• Multi-Year vs. Annual Contracts

 The multi-year contracts may open more discounts but decrease the flexibility. Annual contracts are more agile but can be subject to a greater risk of renewal. Prudence versus opportunity.

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• Volume Discount Negotiation Tactics

The vendors may also provide a discount of 10-30 percent when the organization buys more licenses at once. Request step-down pricing with rates decreasing with usage.

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These are important questions that businesses should ask while negotiating a SaaS contract, to make sure that they are receiving the best service. Learn more about negotiating SaaS agreements to make better SaaS purchases. A SaaS contract management platform can help businesses streamline the process and focus on what matters. 

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Conclusion

Inappropriately handled SaaS contracts are likely to result in wasted budgets, lack of compliance and missed renewals that expose businesses to risks. A fast-growing SaaS company is one of Spendflo clients and they reduced more than half a million dollars of software on an annual basis, and realized 3x ROI merely by centralizing contracts and automating renewals using the platform.

The absence of the right system might make the finance and procurement teams lose control over the expenditures that result in security and legal liabilities of the organization. Spendflo addresses this by becoming your one-stop-shop of SaaS purchasing, approvals and renewals, saving up to 30 percent on your software stack and redeeming time to teams. Are you willing to gain control of your SaaS agreements? 

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‍Book a demo with Spendflo today.

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Frequently Asked Questions

How does GDPR impact SaaS agreements?

GDPR obligates SaaS providers and customers to specify the particulars of data gathering, storage and processing of personal information. The SaaS contract should contain data protection and breach notification policies, as well as a clause on whether the vendor functions as a data processor or controller. To the procurement teams, this translates to checking the compliance requirement of the vendor before he or she is signed. Failure to comply may impose hefty fines and reputational risk and thus legal and procurement leaders must take note of these conditions.

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Are SaaS agreements subject to specific industry regulations?

Yes. SaaS deals will have to conform to industry-specific compliance standards depending on your industry. As an example, a healthcare organization should have vendors who are compliant with HIPAA, and financial institutions might require SOC 2 or PCI-DSS compliance. In entering into contracts, companies must ensure certifications and audit rights, and non-compliance with these models may create operational and legal difficulties.

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Are SaaS agreements subject to specific industry regulations in procurement?

Absolutely. The procurement executives need to extend beyond the terms of the standard contracts to assess the adherence of the vendors to the regulations of the sector. This will include the demand of compliance reports, security certification and audit trails in the procurement process. A strong procurement process helps you to recruit only those vendors that fulfill the regulatory and security demands of your industry, limiting the compliance risk throughout your organization.

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How should pricing escalation be handled in multi-year SaaS agreements?

Pricing escalation clauses define how subscription prices may increase over time. A best practice is to limit annual price increases to a predefined percentage (e.g., 35-5 percent) or to align increases to an objective index such as CPI. Businesses in the absence of such caps may run into budget overruns. The procurement and finance departments are recommended to discuss the escalation terms early and get renewal checkpoints to have a control over long term SaaS expenditure.

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