SAAS CONTRACT RISK OVERVIEW
SaaS vendors’ growth strategy is dependent on preserving annual spend levels and deterring attrition of licenses. As a method to support their growth strategy, SaaS vendors use terms and conditions to eliminate the feasibility of switching solutions or reducing annual fees. In this SaaS report, we dive into the top SaaS contract ‘gotchas’ used to lock in customers and continually drive cost increases. The contract language that is addressed in this report includes:
1. SaaS Renewal Increases and Caps
SaaS renewal language is very aggressive, often locking customers into an ever-increasing annual fee and limited flexibility to feasibly decrease SaaS license counts. In this section, we detail what the average SaaS renewal cap ranges are, what SaaS contract language and specific terms pose risks at renewal, and ways to achieve protective language from unforeseen SaaS price increases.
2. SaaS License Limitations on Downturn
According to recently appointed accounting standards, SaaS vendors cannot recognize revenue until the solution’s “service” has been utilized by the customer. As a result, SaaS vendors cannot count revenue multiple years in advance. In order to maintain predictable forecasts to Wall Street, SaaS vendors will qualify the unearned revenue as “deferred.” To ensure that the deferred revenue converts to the same amount of actual revenue achieved, SaaS vendors will not allow customers to decommission or reduce costs mid-term. This section details the cost impact and the limitations of flexibility this can have on your business, alongside other ways to improve SaaS license flexibility in your contracts.
3. SaaS Product Changes
SaaS vendors commonly split or rebrand main service offerings to create new product sets. Many of these “new” products offer the same level, or sometimes less, of functionality than their predecessor. For the customer to continue to access the same level of service, additional fees typically apply. Without specific language in your contract to lock in functionality, you could be at risk of additional SaaS costs whenever the vendor issues a new product change. This section provides detailed advice on how to avoid these cost increases and prevent SaaS vendors from finding loopholes in your pricing through product changes.
4. Free SaaS Product
Free SaaS licensing or SaaS “proof of concepts” feature a very small amount of licensing given at no additional charge for the business to use. If the business ends up using that free licensing, SaaS vendors are confident that the business will want to expand usage to more users than initially provided in the agreement. If you do not negotiate competitive rates for additional licenses of the free product, any expansions will incur high costs. This section provides insight on ways to avoid high expansion costs if you do agree to free SaaS licensing, pilots, or proof of concepts.
5. SaaS Price Holds & True-Ups
SaaS price holds and true-up rates in your agreement will shape the cost of licensing for all future purchases. Without competitive rates for additional SaaS product, you are setting your business up for large costs down the line. We provide advice to ensure that you understand what an appropriate SaaS price hold and true-up rate should be for your products and the best practices for protecting yourself in future SaaS license expansions.
6. SaaS Platform Bundling and Suites
SaaS vendors can be strict with their product bundles, rarely breaking them apart or providing line-item transparency. So, achieving the ideal transparency needed to mitigate pricing related risks can be difficult. This section details the risks inherent with bundling, how it can affect your future SaaS buying, and helpful tips and advice in gaining transparency or achieving a better cost point for your bundled SaaS solutions.
7. SaaS Audit Exposure & Restricted-Use Licenses
SaaS contracts typically detail strict compliance rules related to their “restricted-use” or “lite” licenses. These “restricted” licenses are priced at a fraction of the cost of a full-use license, but aren’t actually limited in any way. The price and usage restrictions are agreed upon only in the SaaS contract, requiring the customer to enforce the restrictions manually. When many of these licenses are scaled in an organization, it becomes increasingly difficult to maintain compliance amongst users, opening the door to expensive true-up premiums on all restricted-use licenses. This section details where these SaaS audit terms are hidden as well as the competitive contract language to include to protect yourself if SaaS compliance is ever compromised.
8. SaaS Service Levels and Uptime
Since customers rely on their SaaS solutions to be up and running to complete their business processes, any unplanned downtime can result in a loss of sales. It is important to have service levels, like uptime, in place to ensure that you are receiving the level of service you paid for. This is especially important if you adopt any niche or startup SaaS solutions, as this language will minimize the risk of poor performance from a potentially unreliable solution partner. This section details the language you need to have in place to protect yourself from a service level perspective and what uptime percentages are competitive for a SaaS solution.
9. Mergers & Acquisitions in SaaS Contracts
Having consent to assign your competitive pricing and terms to an acquired entity is not always a given. With larger SaaS vendors like Oracle, Salesforce, Adobe, and Microsoft, it is likely that the acquired entity also has a contract in place with that supplier. Based on the M&A contract language, you can inherit potentially poor pricing and terms from your affiliates, with little ability to rightsize them to your price levels. We provide guidance on the best practices around mergers and acquisitions in a SaaS contract and what language needs to be included to mitigate future M&A risk.
10. Divestitures in a SaaS Contract
Divestitures provide a great deal of leverage to the vendor. On one side, the SaaS vendor can overcharge the main entity by requiring them to inherit the full contract. Since decommissioning licenses is difficult with SaaS vendors, this poses huge cost risks for the main entity. On the other side, the vendor can dictate terms and pricing for the divested entities, grabbing as much money as possible from them. Customers need to exercise caution around divestitures and ensure that they have the necessary contractual protections in place to mitigate this SaaS risk.
Contract terms and conditions are an integral part of SaaS supplier strategy. SaaS vendors will not concede to competitive terms without a strong negotiating position, because its success is tied to maintaining their standard contract language. To execute a successful SaaS deal, negotiators need to be wary of all contract risks and ways to protect their organization from future cost increases. For additional assistance on your SaaS purchase, review some of the other ClearEdge resources listed below to help plan your strategy and mitigate risk.