How to evaluate SaaS agreements and the best practices to follow

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. 

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.

What is a SaaS agreement? 

SaaS businesses offer software on a subscription basis through pricing tiers or one-time payment plans. SaaS companies use contracts to lay out the terms and conditions of how end-users can access and implement the cloud service. The SaaS agreement is legally binding for the vendor and the consumer. Cloud software contracts might seem similar to licensing agreements but there are a few differences.

How are SaaS contracts different from licensing agreements?

Licensing agreements cover hardware and software that must be physically installed on a company’s premises. Under the agreement, the provider delivers the actual software to businesses typically for a monthly fee. 

SaaS agreements, on the other hand, provide services that can be accessed through the cloud as software. No physical goods are exchanged and the SaaS companies do not provide physical products or installation services. 

SaaS agreements also differ from software license agreements. For SaaS services, the provider hosts a cloud system and grants the customer access to the service remotely. Whereas in a software license agreement, the customer is granted intellectual property rights to enable them to create copies of the product or software. Check out the ultimate guide to software license agreements to learn more.

Companies can use cloud software according to the terms of their SaaS agreements. Each contract contains specific components that a business should be aware of. Let’s take a look at the most important elements of a SaaS software agreement.

Related Read: Complete SaaS agreement checklist

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:

1. SaaS provider’s obligations which include user support, data security, technology updates, data backup, and other essential services.
2. License scope which details the rights and responsibilities of the vendor (licenser) and the business (licensee.)
3. Service Level Agreement (SLA) also called performance standard that establishes the cloud provider’s minimum performance obligations and the customer’s level of access to the SaaS service.
4. Acceptable Use Policies (AUC) are used by cloud providers to establish the customer’s levels of access.
5. Contract value that covers the platform fee, payment method, invoicing details, billing frequency, and implementation fee (if applicable.)
6. Subscription term which states when the agreement starts, when it ends, renewal dates, and penalties for early termination.
7. Subscription termination that details the early closing of a contract and if a customer will face additional charges for termination.
8. Transition rights that mention the vendor’s level of transition support, the cost of such services, and the transfer of data.
9. Data ownership section that mentions how the vendor stores the customer’s data and whether it is shared with third parties.

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10. 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.
11. 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.
12. The indemnification section allocates and manages both parties’ risks related to breach of confidentiality, intellectual property infringement, and issues related to compliance with the law.

These are the components of a good SaaS agreement. Cloud contracts can safeguard the rights of the vendor and the company. Let’s understand the importance of a SaaS software agreement.

What are the benefits of a SaaS agreement? 

A cloud contract spells out important information about licensing agreements, SLAs, data security, and payment terms. Here are a few of the reasons why a SaaS agreement is important for businesses and SaaS providers:

1. Sets terms and conditions 

The contract clearly outlines customer and vendor obligations and holds both parties accountable for appropriately using the SaaS service. Businesses receive clarity about the duration of the contract, usage capacity, and their level of access to the service. The contract also details the vendor's role in customer support and software implementation.

2. Guarantees vendor support

SaaS contracts help businesses get support from vendors during software downtime, migration of services, and data breaches. It details the time frame for the software provider to fix bugs, errors, and latency issues. The SaaS agreement also clarifies the kind of vendor support provided for each pricing plan.

3. Creates payment transparency

SaaS companies provide several subscription tiers. Businesses receive different software features and services based on their payment plan. The SaaS agreement identifies which pricing tier the customer has chosen, their rights and responsibilities at that level, and additional charges (if any). 

4. Clarifies ownership of data

When businesses use a new SaaS service, the data is stored in the cloud. That’s why SaaS security should be a top priority. SaaS agreements clearly define how a company’s data is backed up, stored, and protected against data breaches.

SaaS agreements are useful for laying out the terms and conditions for end-user access and vendor obligations. Despite these benefits, there are still a few areas where SaaS contracts fall short, and businesses must keep an eye out for them.

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What are the limitations of SaaS agreements?

A Deloitte survey found that 91% of Americans don’t read a product’s terms of service when clicking ‘agree.’ Companies that sign SaaS services might find it simpler to accept the terms and conditions without reading them. 

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Even though most contract clauses are fairly straightforward, it does not mean they are all the same. Businesses need to be aware that:

• Vendor contracts tend to be one-sided and favor the provider
• Vendors might waive liability for data security breaches, loss of data, or service interruptions
• The cloud provider might set support limitations during service downtime or system disturbances

These are a few of the limitations of cloud service agreements that end users should keep an eye out for. It can make a big difference while evaluating the SaaS contract. To make the process easy, consider the most important points to look out for when evaluating a SaaS agreement.

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:

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:

• 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

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:

• 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.

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. 

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:

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?

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?

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?

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?

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?

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.

6. Security risks

• What kind of data does the provider store?
• Where is the data stored?
• Will customers' data reside on the vendor’s platform?
• Does the vendor have relevant security and privacy policies in place to safeguard data?
• Does the provider delete the data periodically and can it be erased on request?
• Do they comply with data protection laws?
• Can businesses opt out or terminate the contract in case of data breaches?

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7. Breach notifications

• Does the vendor have provisions in place to notify the company in the case of a data breach? 
• Does the SaaS provider’s data breach policies fit the General Data Protection Regulations (GDPR)?

8. Contract termination 

• Does the vendor grant extra time for businesses to shift from one service provider to another?
• Will the SaaS provider delete all customer data from their infrastructure after termination?

9. Recovery policy

• Does the vendor allow data to be downloaded once the contract is terminated?
• Is the recovery of data free or a paid feature?
• Where is the data backup stored?

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. 

Manage SaaS agreements better with Spendflo

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.

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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. 

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

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