Special Feature
Part of a ZDNet Special Feature: Cloud - How to Do SaaS Right

Managing a software-as-a-service vendor relationship: Best practices

Here are eight tips to make sure your company gets the most out of a SaaS vendor, from the beginning to the end of the relationship.

When you engage a cloud-based software as a service (SaaS) vendor, you are entering a business relationship that's deeper than just contracting for commodity processing or storage in the cloud. This is because SaaS vendors provide more than software and hardware. They also deliver expertise in a specific area that companies feel can augment their businesses, or even their IT.

Examples of popular SaaS offerings include full-service online banking systems and support for smaller community banks and credit unions, supply chain services with pre-certified suppliers in a centralized system that companies with larger supply chains can subscribe to, and accounting systems especially configured to the needs of the oil and gas industry so that payments are made on time and late fees are avoided.

Because SaaS vendors offer business and cloud solutions, you'll want to create a business partnership that is mutually beneficial to you both, and that ensures that your SaaS vendor will meet your needs on an ongoing basis.

Here are eight best management practices for companies engaging SaaS vendors:

Make service level agreements (SLAs) part of your initial contract and review them annually

A surprising number of SaaS vendors don't have formally stated SLAs in their boilerplate contracts. Before signing on any dotted line with a SaaS vendor, you should determine what service levels you expect from the vendor. Some examples might be: 24/7 service, 99.5 percent uptime performance, mean time-to-response for questions or reported problems within two hours. You can add these via an addendum to the contract.

Negotiate for the right to select your account rep

A key make-or-break point for a successful relationship with a SaaS vendor is having a single point of contact from the vendor whom your staff trusts and can work with. Vendors often start out with one of their best reps to get you implemented, and then cycle you to a lesser rep once they feel you are established with them. You can maintain control over this situation by negotiating in your contract the right to approve or reject a rep when change occurs.

Participate in SaaS product development

When you engage a SaaS vendor, you are outsourcing part of your business and your IT. This doesn't mean that you aren't going to want enhancements to the software that will benefit your business. One way you can ensure that you have a voice in the SaaS vendor's product development is by actively participating in the vendor's user conferences and special user committees where the vendor is soliciting ideas for future product improvements.

Develop an upfront understanding with your SaaS vendor about custom software

Many SaaS vendors stipulate that if you pay for custom work, they will have the option of making this work available to other clients. In some cases, the open forum of software benefits everyone, but if you are concerned about keeping your software proprietary, you can negotiate with your vendor that any custom development that you define and pay for will be yours. Alternatively you can negotiate that you will fund the upfront development and allow the vendor to incorporate your code in the vendor's code base -- but only after your initial investment is recouped, and if you continue to earn licensing fees.

Obtain the vendor's IT, security, and financial audits

When engaging a SaaS vendor, you're depending on the vendor to meet your corporate governance and security standards, and you're expecting the vendor to be financially and operationally stable. To meet these objectives, and to satisfy your own auditors' and examiners' questions, you should ask your SaaS vendor to see their security, IT, and financial audits on a regular basis. If the vendor can't provide them, you might want to look for another option.

Include an 'opt out' in your contract in case of change in management control

It's happened before: a company moves from vendor A to vendor B because it is dissatisfied with vendor A -- only to find out that vendor B gets acquired by vendor A. Because you never know if your SaaS vendor is going to be acquired, or what service will be like from the new company, you should pencil in an 'out' clause in your contract that gives you the flexibility to leave the vendor if there is a change of management that isn't going to work for you.

Negotiate SLA levels for a de-conversion

The other part about leaving a SaaS vendor is that you have to de-convert from the vendor in order to move your service to another vendor. No vendor likes losing business, so this is an area where a SaaS vendor is likely to underperform. You are in the strongest position to manage this situation if you have a firm set of SLAs written into your contract with the vendor that states the metrics for timeliness, responsiveness and so on, that are required from the vendor if there is a need to de-convert.

Have an upfront understanding with your SaaS vendor about hiring away employees

Many SaaS vendors acquire staff expertise by cherry-picking top talent from their clients' organizations that they get to know in the course of a working relationship. The situation works in reverse, too -- with companies hiring away key staff from SaaS vendors. At the beginning of your business relationship, have a discussion with your vendor about hiring each other's employees. The general practice is that employees should not be restricted from pursuing new career opportunities, so to accommodate this, SaaS vendors and their clients usually work out arrangements where the hiring party pays a fee to the company who is losing the employee.

Include disaster recovery testing in your contract

SaaS vendors will often tell you that they test disaster recovery (DR) and business continuation regularly but they won't reveal the results, nor will they necessarily volunteer to test DR with you on your own service with them. This doesn't change the fact that you still owe your management, your board and your stakeholders the peace of mind that all of your systems -- including the ones that you have consigned to your SaaS vendor -- will failover and continue your business without interruption. For this reason, you should contract for and conduct an annual DR of the service you have engaged your SaaS vendor for if the service is mission-critical.

The majority of SaaS vendors strive for excellent service to their clients because they understand that both systems and quality of expertise are what distinguishes them as SaaS vendors. They are also likely to understand your concerns when the two of you sit down to negotiate your first contract, and as the business relationship continues. The keys are getting all of the issues out on the table and keeping communications channels open. This builds a solid foundation for an ongoing business relationship, which is where SaaS works best.

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