Best practices on how to document and manage SaaS contract & agreement details, what to look out for and how to negotiate them with your SaaS vendor.
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With the growing adoption of cloud-first environments, companies also accumulate a growing amount of SaaS contracts and SaaS agreements. If these important documents aren’t properly reviewed or stored, it can have a negative impact on an enterprise.
For example, it can increase security risks and slow down contract discoverability inefficiency when details need to be pulled up for negotiating renewal terms. Plus, not having an overview when it comes to your SaaS solutions also leads to shadow IT and stands in the way of SaaS optimization efforts.
A SaaS agreement stands for “software as a service agreement”. It is issued by the SaaS vendor and lays out the terms and conditions of the respective software delivery model provided to the client. In this cloud delivery model, users access the software via the web, and data is centrally stored in the cloud using off-premise servers managed by the vendor.
Whether you are signing a new SaaS contract or renewing an existing one – documenting the items in the checklist below is important and will ease up the work for any stakeholder, especially when software as a service agreements need to be reviewed. The 9 details covered in our SaaS agreement checklist will also help you maximize the value of your SaaS solutions.
Every SaaS contract should have a start date that indicates when the agreement takes full effect and starts being binding for both parties. This commencement date is also the point in time when you, the client, and all end-users, will be granted access to the provided service. Knowing the exact kick-off date of your SaaS agreement is key as all term durations refer back to this date.
Knowing the end date of your SaaS contract is just as important as knowing its start date. It might also be referred to as the termination or renewal date of your subscription. Anticipating renewal dates helps application owners proactively negotiate renewal terms and make sure that the enterprise doesn’t accidentally renew a contract for a product that is not needed or used anymore.
This section can be a major pain point. The majority of SaaS providers require notification if the subscriber doesn’t intend to automatically renew a subscription. Typically, this notification period can be as short as 15 days or as long as 90 days. Since it depends on the product, you are advised to employ a system of record for your SaaS agreements, so you never miss the chance to terminate or re-negotiate them.
The total contract value combines all financial commitments for each SaaS subscription across your business units. This way, you have a good grasp on the total amount spent for the SaaS solution and it’s easy to spot inconsistencies when comparing the actual billing data to what is stated in the SaaS contract. Knowing the total contract value also allows you to compare SaaS spend over time, detect pricing model changes and reduce costs by opting out of upgrades.
Another important detail to look out for in your SaaS agreement is the total quantity of licenses and license types. Ideally, you get only as many licenses as you need. These licenses are then allocated throughout the organization. In case employees don’t end up using the software or team members exit the company, there might be excess licenses. Make sure to regularly compare active user accounts with the number of licenses stated in the SaaS contract.
This part of your SaaS agreement outlines the billing frequency for your SaaS subscription. In combination with the total spend, this is helpful information for determining the ROI of a particular SaaS product. Most SaaS solutions are billed monthly, semi-annually, or annually. Before deciding on a frequency, talk to your billing, bookkeeping, or financial department.
Identifying pricing and billing units is an essential practice for tracking and containing costs. First, you need to determine the SaaS application consumption metric, meaning any unit of value that determines the price and has a predetermined limit or capacity. A consumption metric can be the total quantity of emails sent when using a marketing platform for digital company newsletters.
Companies that use cloud delivery models heavily rely on data. That’s why you need to understand how sensitive data is managed when stored with a third-party SaaS provider. The SaaS contract should outline which data protection regulations are being followed and it’s your responsibility to determine whether they meet the standards for your company and industry.
Last but not least, it’s important to know your consumption metrics and threshold for your SaaS usage. This will prevent overages and unexpected fees. A SaaS contract should clearly define the financial consequences for exceeding these thresholds. Depending on the SaaS tool, these items might include things like professional services, features, the total value of line items, platform details, and more.
SaaS contracts tend to be lengthy and overwhelming which is why important details often get overlooked. As a potential SaaS customer, one of your main concerns should be the fact that you are giving an off-site SaaS vendor control of your data. Remember that a data breach could be extremely costly and put your organization’s whole reputation on the line. It is often only after such an incident, that users will check on their SaaS contract and SLAs.
That is why you should pay attention to the fine print concerning data access before it is too late – after all, it is the most overlooked aspect of SaaS contracts.
Information about data access
Traditional systems ensure that companies have sole access to their data stored on-premise. However, SaaS vendors by definition store your data in the cloud. While it should always be clearly stated that you own the data you create, the SaaS contract should also address the following questions:
Your SaaS agreement should clearly outline how long your team can access data following the termination of the contract. Typically, it's best to have access for at least 3-6 months to ensure that you'll have time to retrieve it.
In addition, make sure the contract details how you can access this data as well as the format of the data. You can either receive a data export or you can export it yourself through the SaaS API. Whatever you prefer, make sure the format is easy to use and aligns with your company's practices.
When negotiating your SaaS contracts, it's important to address each of these points. That way, you can avoid the risk of losing valuable data that is not only sensitive but also critical to business operations.
Chances are your business will keep adopting various SaaS solutions over time, which is why establishing best practices for negotiating, maintaining, and managing contracts for SaaS applications will save you from future headaches. However, these best practices can vary from organization to organization. It is up to you to establish the best way to document important contract details and empower SaaS management.
Ideally, once the most important contract details are stored in a SaaS management platform or a different record-keeping system, they offer you a holistic view of the cloud-based software that your company owns. You should also know the difference between “enterprise contracts” and “click-through license agreements”. The latter typically favors the vendor, while enterprise contracts let you add additional items for contract compliance and security protections.
Below are our best practices that let you manage SaaS contracts with much more ease.
Not only is it important to follow best practices when it comes to new SaaS agreements. You should also look at your existing SaaS applications and review their respective agreements to bring hidden details to the surface. Once you create much-needed visibility, you can properly manage SaaS contracts with the goal to maximize value for your business.
After the discovery process, document each application’s contract details in a system of record that is easy to access and streamlines the review process. Some companies still use spreadsheets or contract management systems that aren’t designed for SaaS. We recommend a system that lets you search by vendor or application and allows you to compare multiple contracts without having to reread the entire SaaS agreement.
When evaluating SaaS agreements, make sure to look for the items we previously mentioned in the checklist as well as the additional ones we added to the list below:
Companies gain the most value from their SaaS applications if they automate SaaS contract and renewal management with a SaaS management solution like LeanIX's SaaS Management Platform (SMP). The platform not only offers tools for dealing with SaaS contracts; it also helps you spot redundant SaaS contracts, duplicate licenses and identify and eliminate shadow IT.
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Many SaaS vendors obsess over monthly or annual recurring revenue growth to establish a critical mass of customers. You should keep this in mind when negotiating SaaS contracts, renewals, or True-ups, e.g. Microsoft EA True-up, as you can get discounts for an extended period of time.
SaaS agreements provide new challenges to IT and procurement, therefore, they require a different approach than a typical contract. SaaS renewal strategy created for IT and procurement explains storing decentralized contract details and assigning app ownership, which combined with renewal best practices aim to turn business leaders from reactive to proactive renewal approach.
Some SaaS providers are also open to “grandfathering” an existing customer in order to reduce churn. By understanding the intrinsic value levers and supporting negotiation conversations with actual usage data for each vendor, leaders can land attractive pricing and terms. Just build a case and ask.
SaaS prices are determined by policies that guide discounting and margin management. These are designed to either encourage or discourage certain behaviors and trends, depending on the vendor’s goals. PwC divides the common pricing components into the categories below:
Beneath the surface of each component has a supporting set of values, goals, or priorities that an insightful business leader should be able to capitalize on when negotiating a SaaS contract.
Consider the following scenarios where your awareness of a vendor’s pricing rationale and business goals could result in more favorable contract terms.
Understand SaaS vendor license types
More often than not, companies deploy enterprise-grade apps with unnecessary features. This is most common with tools like Salesforce or Office 365. You can build a baseline of user needs and then right-size license types based on the features and functionality needed.
Consider term discounts
Vendors need consistent cash flow and want to avoid customer churn. You can use this information when negotiating your SaaS agreement and get attractive discounts. Once you’ve identified your mission-critical apps, you can consolidate multiple SaaS contracts and propose a longer-term service extension.
Ask for loyalty discounts
Similar to term discounts, vendors care about the long-term value (LTV) of SaaS contracts. Funding, valuation, and Wall Street interest are all connected to contract value for SaaS companies. With this info in your back pocket, you can determine your longest-tenured relationships and ask those vendors for loyalty discounts.
Fear of churn
The SaaS model typically requires heavy investment in customer acquisition while the cost of keeping an existing customer is relatively low. If a SaaS vendor has a low lock-in with your company and there are good alternatives, use your bargaining power to get loyalty discounts or promotional pricing.
Consolidate for vendor discounts
With SaaS management platforms, you can quickly find redundant SaaS apps. In this step, you can consolidate app functions to a single vendor to increase your license need and leverage for negotiation. Just ask your preferred vendor for volume discounts and compare between competitors.
If you work for a well-known company with great brand recognition, leveraging your logo power can get you a good discount. Many SaaS vendors have special accelerators in place to motivate sales teams to close high-profile industry names as they seek to build their category leadership in the market.
When negotiating SaaS agreements, remember that security and risk components are not set in stone. They can be adjusted to meet your needs – at least to some extent. To ensure that the security clauses in SaaS contracts protect your type of organization in the best way possible, take a look at the tips below.
Create a master list: Before starting a SaaS contract negotiation, create a master list of all risks that are relevant to your organization. In general, the bigger your planned service procurement, the more leverage you’ll have with the vendor.
Communicate the non-negotiable: Call in on your security team early on when negotiating SaaS contracts. That way, you ensure that non-negotiable security risks around data protection are covered before a SaaS solution is purchased.
Get additional protections: You can ask your vendor for additional protections. This could include language protecting you in case of a vendor acquisition or a vendor’s cybersecurity provisions.
Insist on early breach notification: When negotiating SaaS contracts, it’s advisable to include clauses that ensure prompt breach notification. This might be the most difficult point to negotiate as vendors don’t like to be pinned down to a specific timeline.
Managing SaaS contracts and agreements is a complex task that not only requires negotiation skills, but the visibility of your SaaS application landscape and a clear understanding of your leverage, your company’s needs, and how these needs can be protected.
SaaS management platforms are the most efficient way to streamline and manage your SaaS contracts, optimize your cloud spend, and stay in control of your data.
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How to negotiate SaaS contracts?