Contract Negotiation - What changes are driven by SaaS?

Thinking about signing on the dotted line for a SaaS solution? Guest columnist Tom Ryan tosses out a few points to ponder.
Written by Brian Sommer, Contributor

For about a decade, I've worked along side Tom Ryan on various projects. He's a former Gartner Group analyst and West Pointer. He also knows more re: RFID, WMS and transportation technology than I'll ever get.

Tom penned the following post and I agreed to turn over the space to him. I've also added a couple of bits of my own at the bottom. Enjoy

The SaaS Contract

Once you select a SaaS solution, you still need to negotiate your contract.  Not much has changed with respect to contract negotiation, but those things which have changed are important.

First, intellectual property ownership: With SaaS, you don't own the code; you don't have a license to use like you do with on-premise solutions.  Instead you have a subscription to use the software.  Changes are typically data driven so there is little if any new code developed for your project.  If there is, it is typically rolled into the base SaaS offering and is made available to you and others.  This is supposed to be one of the big selling points for SaaS, so IP ownership shouldn't really be an issue.

Second, services:  With SaaS, implementations should be easier, shorter, and more straight forward.  Most of the effort will be directed towards configuration and data migration from the old world to the new.  The contractual key here is to insure that since this data is stored in the cloud that you retain ownership to it.  It was yours before and should remains yours forever.  You also want to insure that no subset of your data, even if it is "genericized" or "sterilized", can be shared with any other entity.

There will probably be no professional services agreement separate from the subscription agreement.  You want to make sure that it is clear what services, if any, will be provided by the vendor.  It is not uncommon for these services to be priced separately as a one-time expense.  You may also see them rolled into the subscription fee.

Third, upgrades and code maintenance:  With SaaS, this should be included.  There should be no annual maintenance fee or price escalations.  All of this is supposed to be a part of the subscription fee.  Contractually, you want to make sure that upgrades of or improvements to the base code are included and that the contract spells out how such upgrades/improvements are tested and verified as well as how they are rolled out to the user base.

Finally, changes in ownership of the software vendor:  With on-premise software, having your vendor acquired or having them go through Chapter 7 or 11 is disturbing but not immediately disruptive.  After all, you have their software running on your own hardware.  You will keep running, perhaps indefinitely, on what you already have installed.  There is time to decide what to do and to plan for it.

This may not be the case with a SaaS vendor.  Remember, your data is running on their hardware in their data center (or the third party data center they have contracted with).  If there is a change in ownership through a merger or acquisition, there will be time to understand the impact and negotiate with the new owner.  If there is a bankruptcy filing, someone may walk into that data center and pull the plug with your firm dead in the water.  You must negotiate this with your vendor ahead of time - you must have a plan.  The likelihood of it happening may be low, but it can be catastrophic to your business operations.

Don't look to escrow to solve this problem.  Escrow can't be executed immediately and even if it were, you would still need to stand up your own servers and redo your implementation.  That could take days if not weeks.  Don't look to receiving frequent copies/backups of your data as a solution.  Although this is certainly helpful and more effective than trusting in escrow arrangements, you will still need the vendor's software, new computing hardware, and time to re-implement your operation.  This will be faster than the escrow situation but it still takes time and during that time your operation is down.

You can look to something like a prepaid off site third party data center that can seamlessly take over running the vendor's software and your implementation.  This is somewhat akin to an off-site disaster recovery operation.  It has the advantages of being a fail-over type of occurrence which can mitigate your downtime and operational disruption exposure.  This is probably the biggest risk associated with SaaS software.  You can negotiate on this point and mitigate your risk exposure but that mitigation will only happen if you plan for it up front.

Contracts can be a scary read.  It is best to remember that contracts describe how to handle various scenarios.  They don't try to assign a probability of occurrence to those scenarios.  It is important to consider those situations most likely to disrupt your business or adversely affect your relationship with the vendor and then address them in the contract.  Plan ahead and mitigate your risk should any one of the nasty scenarios occur.

Brian adds:

1) IP ownership can be an issue if you or your implementation partner (e.g., systems integrator) uses the application software's platform-as-a-service (PaaS) to build material product extensions and/or new functional applications. Royalties can be had from these. One of my questions is "Can you limit who can access these apps (e.g., a competitor)?

2) When Tom speaks of upgrades, these definitely should be part of the service when you contract for a multi-tenant solution. If it's one of those 'hosted' on-premises products, it very well could be an added cost. Caveat Emptor.

3) I could write a book on escrow issues. The risk Tom points out is definitely one that must be managed and managed well.

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