Cloud contracts: Watch those gotchas

Cloud contracts: Watch those gotchas

Summary: Companies need to plan for data return, service level agreements and exit strategies before signing a SaaS contract.


When it comes to negotiating a software as a service contract, it pays to think about an exit upfront. Why? By 2013, 20 percent of SaaS customers will move to an on-premises software deployment. And by 2014, half of SaaS customers will be hit with higher costs than they expected.

Those takeaways were a few of the gotchas highlighted in a contract clinic at the Gartner Symposium in Orlando.

Also see: SAP, Oracle negotiations: It's complicated

The interesting thing about SaaS is that its maturing and increasingly becoming more complicated. Among the pre-contract tips:

  • Calculate your costs for an exit strategy in case SaaS doesn't work out. Business process outsourcing and on-premises software are options.
  • Document data retention, security and regulatory requirements.
  • Make sure you won't be stuck with shelfware as a service and features you don't use.

As far as the negotiation goes, the key topics to note are price protection so a company won't be squeezed at renewal and can benefit from decreases in the future. Service level agreements with meaningful penalties also matter and the ability to terminate a contract for outages and regular failure points. Companies also need to be able to adjust usage minimums in a downturn.


On pricing, Gartner noted that common language in SaaS contracts notes that user subscriptions can't be decreased during the subscription term.

As for failures, SaaS providers include supplier delays and Internet disruptions as Force Majeure events. Customers need to read that legalese carefully and make sure failures from SaaS providers aren't easily forgiven.

Data protection is also critical---especially if you need to get your information back for another deployment. Gartner recommends that data security and privacy requirements are detailed and there's an annual certification of standards.

Meanwhile, data return clauses are also important. Companies need to specify the format and delivery modes for a SaaS vendor returns data. In addition, enterprises need to specify that no data can be deleted without approval.

The exit is also important. Termination for convenience clauses in SaaS contracts also require a lump sum fee to exit.

Topics: Cloud, CXO, Enterprise Software

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  • Rollover Contracts with Old SLA's

    Real World Example: Another potential gotcha is when you've been using 'on-site' software in your shop and the vendor tries to get you onto their hosted 'cloud' solution without updating your SLA's in detail for the new service. If the contract and SLA's you're living under were negotiated to cover the on-site service, it's entirely possible that those SLA's don't apply at all to the cloud service (it's a different technology), and that leaves you vulnerable. If you're migrating from on-site to cloud based versions of a vendor's software, be sure that your contract and SLA's get renegotiated well BEFORE the migration date and that they provide meaningful language for the new operating environment. Guarantees of 99.5% up time on a service you're no longer using and NO guaranteed performance on the service you ARE using is not a good place to be.
  • Just like I've been saying...

    SaaS is going to cost users/companies a lot more money (while giving back downtime, hacked data, government confiscation of data, increased bandwidth costs, etc.)

    Remember lightning strikes from clouds.

    Have a nice day,

  • A Comprehensive SaaS Contract Template

    Roughly 50% of all SaaS contracts aren't on a subscriber's contract template. To put yourself in the best possible position to use your SaaS or cloud computing contract template, you have to get the contract template in front of prospective bidders as a part of a competitive bid. But that implies you have a SaaS contract template to begin with. For a comprehensive SaaS contract and to learn how to negotiate critical cloud terms and conditions, check out the Contract Negotiation Handbook: Software as a Service.