Negotiating SaaS Agreements: Everything You Need to Know
Negotiating SaaS agreements is important so you wind up with a well-drafted contract. SaaS services allow customers to access the application from any location.4 min read
Negotiating SaaS agreements is important so you wind up with a well-drafted contract. SaaS services allow customers to access the application or software from any location, while data is stored with a provider. These agreements have become trusted digital platforms for many businesses in an attempt to provide one unified platform to their customers and employees.
Effective SaaS contracts cover a variety of topics, such as:
- Who can access and who owns the data?
- How data is protected in the event of a breach or recovered after a system failure.
- Service agreements.
- Response times after system failure.
Essential SaaS Provisions
Legal counsel for SaaS negotiations needs to recognize the important clauses that should be added to every SaaS agreement. They should also understand the typical challenges they will encounter while drafting and negotiating agreements, so they can provide helpful advice to their clients.
One of these is service level guarantees for availability and performance. These should detail what the minimum acceptable levels are in regard to:
- Response times
- Customer satisfaction
- Other factors
Because there is a risk for data breaches of cloud storage, combined with a customer's need for round-the-clock access to the software, it's important for businesses to ensure they understand the customer's needs when entering into a SaaS agreement. To clarify, your agreement should include specific data security provisions:
- Warranties regarding data security, alteration, and loss.
- Vendor compliance with client data security practices.
- Disaster recovery and a business continuity plan of action.
- Approval for the client to conduct regular audits and security evaluations.
- Data restoration requirements.
- An obligation for the vendor to perform regular backups.
- A properly worded force majeure clause.
- Clarification regarding data ownership and its return.
Key Points for Negotiations in SaaS Agreements
There are some key points that anyone involved in a SaaS agreement should be paying attention to, especially when it comes to pricing and service levels:
- Price application as a utility service, which is sold on a subscription model with annual or monthly payments for system usage.
- If the vendor's pricing plan doesn't work with the customer's business model, discuss custom pricing options.
- Address potential extra costs early on in the negotiation process, as extra fees can add up quickly.
- Try to avoid customizations to keep additional costs down.
- It's recommended to start with the base offering, assessing its core functionality. Then determine whether you need custom features and how critical those are to your success.
- When negotiating for a discount from a SaaS vendor, expect to offer something else in return, like an extended contract term.
- If the agreement calls for long-term subscriptions (typically three to five years), ensure there is an out clause.
- System reliability is one of the most important things to discuss.
- Include an SLA, or service level agreement, which commits to a certain amount of time the system is up and running.
- Discuss renewals and how they are handled. You may hear the term “evergreen renewal,” which is an automatic renewal of your term. If you don't want this, ensure it is removed.
- Any SaaS vendor who won't remove the automatic renewal option should be carefully monitored, as that is a red flag.
- Will the SaaS vendor offer scalable pricing? You may want to expand down the line, but what if you need to downgrade?
Negotiating Support Elements of a SaaS Agreement
Ensure you know what's covered in a support package and what hours of the day is support available. How will it be delivered — web, phone, email, or chat? You also want to know what the response time guarantee is. Some of the best organizations guarantee a response time of under 30 minutes for emergencies, and all other matters are handled within two hours.
In addition, does the SaaS vendor have a dedicated support team? It may cost a little extra, but if it's an important contract element, it may be worth the added expense.
Other Key Negotiation Points
Keep some other key terms in mind when negotiating your SaaS agreements:
- Demarcation: A point where the provider's contractual obligations end and the customer's responsibilities start.
- Insurance: What insurance limits should parties carry.
- Indemnification: The requirement of one party to pay for any necessary defense costs and damage awards in the event of a third-party claim.
- Limitation of Liability: This is an important section to address because you can cap the vendor's liability to a certain amount.
- Warranties: Should be a list of warranties that include compliance with legal regulations, authority to enter the agreement, etc.
Other important topics to discuss revolve around:
- Intellectual property
- Software implementation
- Termination/transition service
If you need help with negotiating SaaS agreements, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.