Exit strategy necessary in SaaS licensing negotiations

Businesses need to factor in exit plans when it comes to licensing software-as-a-service, such as short-term contracts or option to scale down the number of licenses to respond to volatile market conditions.
Written by Kevin Kwang, Contributor

Software-as-a-service (SaaS) connotes on-demand, pay-per-use subscription schemes. However, many times, this assumption can be misleading because vendors may lock customers down to long-term, multi-license agreements, leaving them with not much room to scale down operations when needed or end the service if necessary. 

SaaS licensing best practice

Own the data
Companies should ensure the licensing terms spell out data usage and access terms. These include jurisdiction, usage rights, and policies regarding securing the company's data upon terminating the service.

The data sovereignty issue is still ambigious with various countries crafting their own guidelines and policies. Companies will need to work out the specifics with their SaaS service providers to ensure compliance and ownership.

Get timely support
Service support needs to be tied down during licensing talks.

For instance, Asia-Pacific organizations sourcing from a smaller SaaS provider must determine the hours of operation and support, as some of the vendors only offer assistance during standard hours, usually based on U.S. time zones.

Start small
It is always better to start with a few SaaS services first before expanding usage based on the service quality of the vendor. 

Michael Barnes, vice president and research director at Forrester Research, said SaaS is spreading rapidly among organizations across Asia-Pacific. A Gartner report last March noted SaaS revenue in the region was expected to hit US$934.1 million in 2012 as adoption grew. Financial applications such as accounting are the most popular among companies in Asia, particularly China and India, followed by expense management and employment performance management, the research firm said.

With the popularity of SaaS on the rise, Barnes urged enterprise customers to focus on factors beyond standard performance and availability issues.

He highlighted pricing and subscription terms as one such area, as organizations need to project for growth but, at the same time, factor in the need to streamline and scale down should there be a need to.

"Beware contracts that are essentially a one-way street that allows for [companies to] scale up, but are difficult to scale down and even triggering hefty price increases in order to do so," the analyst said.

Flexibility to scale in both directions is critical

Sabharinath Bala, research manager of enterprise applications at IDC Asia-Pacific, noted that while the standard SaaS pricing is "public, straightforward and transparent", companies which choose to subscribe based on a customized pricing package should include a suitable exit clause. They may overlook this when negotiating down the price for longer-term contracts, leading to future complications should they choose to terminate the service, Bala said.

"Given the volatile business environment in the last few years, it is quite unavoidable that your SaaS solution may need to scale up or down depending on your business growth or decline," he said.

"Any vendor will be happy to scale up, but will not reciprocate with the same level of happiness when it comes to scaling down, especially after offering lower prices and discounts for longer terms and large user licenses."

Regional Web hosting company, ICONZ-Webvisions, concurred. CTO Peter Hendry said when looking at SaaS licensing, there is a "general misconception" the model is strictly an on-demand, usage-based one, but this is not the case a lot of the time.

In fact, Hendry said a typical SaaS license is often not very different from on-premise licensing, where it is based on a time or contract commitment and licensing costs are tied to the number of users.

"This should lead to questions around the advantages of utilizing a particular product as SaaS versus in-house, as well as questions around service levels and support," he added.

ICONZ-Webvisions is currently implementing Microsoft Dynamics CRM (customer relationship management) across the region, along with the software vendor's Office 365 productivity suite, Hendry revealed. It is also evaluating the use of Kayako as a helpdesk tool, first in Singapore, before deploying across other parts of the business, he added.

AIA Singapore CTO Leong Weng Ling also advised IT departments to be aware of licensing terms which involve incremental or additional charges based on volume usage.

He said the best way to safeguard the organization's interest is to be clear on what the charges are, what basis the incremental charges will be based on, and whether such additional costs are within the "economic appetite" of the company.

The insurance firm is not a big SaaS user, but it does rely on human resource software from Oracle's PeopleSoft and NorthgateArinso's EuHReka as well as Google Apps for its e-mail service, Leong noted.


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