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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. To understand this in-depth, let’s first take a look at SaaS agreements.

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What is a SaaS agreement? 

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A SaaS agreement is a legally enforceable contract between a software-as-a-service provider and a customer. It stipulates the way the customer will be able to access and utilize the cloud-based software, as well as the responsibilities of the vendor to deliver the service, protect the data, and also maintain the service.

As opposed to the traditional software licenses, which give the owner or installer the right to own or install the software, SaaS agreements offer access to applications on the cloud by subscription. Such contracts usually include:

• Pricing and Subscription Terms - customer payment (monthly, annual or multi-year).
• Service Levels (SLAs) - uptime commitments, response times of support, and performance levels.
• Data Rights - The identity of data owners, data storage and deletion or transfer.
• Security and Compliance - vendor compliance to standards including GDPR, HIPAA or SOC 2.

Termination and Renewal - exit rights, automatic renewals and support in the event of service termination.

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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.

Key Differences Between SaaS Agreements and Licensing Agreements

Related Read: Complete SaaS agreement checklist

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What are the components of a SaaS agreement?

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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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1. 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.
2. 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.
3. Data ownership section that mentionData 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.s how the vendor stores the customer’s data and whether it is shared with third parties.
4. SaaS contracts have warranties that guarantee adherence to performance, compliance, security and non-infringement by the vendors and the indemnity clause provides that risks are shared should problems occur. Together, these clauses help safeguard customers against downtime, data breaches, or lawsuits.Buyers are advised to bargain concise warranty terms and restrict vendor disclaimers to enhance liability and minimize risks in the long run.
5. 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:

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.
  

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.

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.

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.
  

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).

What are the benefits of a SaaS agreement? 

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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.

Here’s how the benefits break down:

1. 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.

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.

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.

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.

2. 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.

2.Predictable Revenue Model

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

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.

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.

3. 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.

2. Risk Management

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

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.

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

1. Operational Risks

1. Service Downtime and Limited Support
   Sellers can limit the extent of assistance provided in outages or maintenance periods, resulting in business disruption.
2. 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.
3. 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.
   
   

2. Contractual & Customization Issues

1. 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.
2. Limited Customization
   Vendors may not offer custom features or integrations, forcing businesses to adapt their workflows to fit the software.
3. Rigid Renewal Terms
   Multi-year contracts with unfavorable pricing may be entrap companies with evergreen clauses or automatic renewals without proactive management.
4. Hidden Costs
   Training, implementation, and overage can not be clear upfront leading to budget overruns in the future.

3. Control & Dependency

1. Vendor Lock-In
   It may be expensive and difficult to change the provider because of proprietary systems and exit clauses.
2. 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.‍
3. 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.

Elements you should not overlook while evaluating a SaaS agreement

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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.

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.

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
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• Security and compliance information
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• Performance metrics and Key Performance Indicators (KPI)
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• Response time for customer support
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• Penalties are levied against the vendor if guarantees are not met

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.
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• Usage-based / consumption-based pricing - this is also called the pay-as-you-go      model since businesses pay based on their usage level.
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• Tiered pricing - businesses can pick multiple service packages at different price points.
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• Per-user pricing - companies pay a fixed monthly price per SaaS service user.
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• Per-active-user pricing - regardless of the number of employees, companies have to      pay based on their monthly active users.

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.

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. 

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.

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.

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.

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.

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.

Related Read: SaaS Renewal Management

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.

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
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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?
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• What is the full SaaS subscription term?
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• What sort of license is being granted for using the SaaS service?

2. Service level agreement

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

3. Pricing plans

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

4. Tier boundaries

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

5. Renewals

• Do businesses need to renegotiate terms before a renewal?
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• Is the company locked into the original price, or will there be a new rate after renewal?
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• 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. 

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 evaluating SaaS vendors, security risks go beyond where data is stored. Procurement and legal teams should assess the following components in detail:

Type and Location of Data Stored

Know what types of customer or business data the provider accesses and what infrastructure is shared or dedicated. Also affected by the data residency (e.g., EU vs. US) is the adherence to such regulations as GDPR.

Vendor Security and Privacy Policies

Assess the vendor with strong information security policies, frequent audits (SOC 2, ISO 27001), and transparent data deletion habits. Determine whether or not data can be deleted irreversibly when requested or at the end of the contract.

Limitation of Liability Clause Analysis

SaaS contracts in many cases limit the liability of a vendor, in some cases, to the value of the subscription fee. Firms ought to agree to an increase in the number of critical services particularly where a data breach or regulatory failure might lead to a major loss.

Risk Allocation Between Parties

Risks such as loss of data, downtime or regulatory fines should be clearly spelt out in the contracts on which side risks fall. This helps to distribute the responsibility fairly and prevents conflict in case of any problems.

Business Continuity and Disaster Recovery (BC/DR)

Review vendor disaster recovery plan, redundancy and recovery time objectives (RTOs). A poor BC/DR plan will compromise business operations in the event of an outage.

Security Breach Notification Procedures

Make sure that agreements contain certain deadlines concerning breach notification (e.g. within 72 hours, according to GDPR). Vendors are also expected to give response procedures on incidents and points of contact in detail.

Vendor Insurance and Financial Stability

Confirm that the vendor has cyber liability and professional indemnity cover. In addition, check their financial status; a shaky vendor might not pay as agreed, and your business is at risk.

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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

• 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.

• 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).

• 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.

• 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.

• 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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Manage SaaS agreements better with Spendflo

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Spendflo is a SaaS buying and management platform that centralizes purchase requests, approvals, and contracts. Knowing what to look out for in a SaaS contract can prevent companies from missing out on critical details. Here’s what you can do with Spendflo:

1. Complete approvals easily

Spendflo makes the SaaS procurement process more efficient with the help of a streamlined approval workflow. All departments receive notifications for contract approval and can use Spendflo’s Slack bot to communicate fast.

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2. Find SaaS agreements with ease

Spendflo collects all of the company’s SaaS software agreements in one spot. Businesses can find documents by category, saving countless hours and manual energy. This data repository makes it easy to keep track of all critical information, search for contracts, and fast-track approvals.  

3. Receive timely reminders for renewal

Spendflo provides regular renewal reminders so that companies can assess the efficiency of their SaaS stack. Renewal reminders save businesses from getting locked into cloud services that don’t serve their requirements anymore.

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4. Achieve transparency during the negotiation process

Spendflo keeps all stakeholders in the loop during the negotiation and approval process. Businesses can save countless hours with Spendflo’s centralized dashboard.

5. Understand your employee’s sentiment

Spendflo helps you gather insights from your employees - the actual end-users of the SaaS you buy. It launches surveys for each SaaS tool and creates a sentiment grid that ultimately helps you how to renegotiate renewals. 

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Get in touch with Spendflo to understand how you can manage your SaaS agreements more efficiently.

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.