Top 10 “Gotchas” in SaaS Agreements and How to Mitigate Them

If you are an IT deal maker, it’s likely that you will encounter a SaaS engagement in the near future, either being pushed by your organization’s business units or by highly incentivized SaaS sales reps. Your ability to identify and mitigate risk will determine the success of your SaaS deal. Though specific landmines vary from supplier to supplier, the main “gotchas” are common among all SaaS providers and are summarized here.

1. Renewal Caps.

Standard increases for SaaS vendors are high (7-10%), and there are a number of ways these vendors find loopholes to increase your price above this threshold. For example, some vendors require 100% of initial volumes to be renewed or your renewal caps are void. So, if you decommission a quarter of your volumes in effort to cut costs, SaaS vendors who use this language can increase your costs proportionally to keep you at the same annual cost level. Suppliers including Microsoft, Salesforce, ServiceNow, and Adobe find similar loopholes in language to inflict larger than average increases at renewal.

What you can do: Implement a 3-5% renewal cap that limits increases for all products. In addition, remove any language that limits the ability to downturn licensing at renewal so you can preserve license decommission flexibility. Start negotiations early (6+ months to execution date), obtain viable deal alternatives, and have net new license growth to create leverage to dictate renewal rights.

2. License Downturn.

If you over-purchase on SaaS licensing, you cannot downturn any unused products until renewal. Even at renewal, the feasibility of decommissioning product without a penalty fee is low. Since most customers agree to multiyear term lengths and SaaS costs are based on an annual recurring pricing model, it’s easy for shelf-ware costs to accumulate quickly.

What you can do: There are other terms you can negotiate into a contract to improve your flexibility and reduce the risk of shelf-ware, such as a clause that allows you to swap licenses during the term. This lets the customer swap out unused licenses for new products that may be needed, as long as the same annual cost level is preserved. Also, the customer could also negotiate a “ramp” in license volumes over the course of the agreement to further reduce costs and commit to more specific (and realistic) timetables for deployment.

3. Product Changes.

SaaS vendors that enact consistent changes to functionality and solution offerings typically have the legal ability to reprice and alter their customers’ contracts and products. Specifically, ServiceNow uses product changes and “end of life” to force re-negotiation on licenses, often for the same functionality. ClearEdge has seen cases where SaaS vendors used product changes and re-brands to increase price by up to 30% above the original amount.