How to Negotiate SaaS Contracts

For many business owners, negotiating SaaS contracts can be intimidating. If you haven’t had much experience with these specific contracts, it can be difficult to understand why SaaS agreements are used or what to consider. Failing to negotiate a SaaS contract successfully properly could lock your business into an unfavorable arrangement or expose it to an unreasonable degree of risk.

Negotiating SaaS contracts is similar to any kind of contract negotiation. Once you know what to focus on, SaaS contracts become much easier to discuss. Read on to learn when SaaS contracts are used, when they’re non-negotiable, and how to navigate the negotiation process.

Also known as a software-as-a-service agreement, SaaS contracts specify the terms and conditions of using a developer’s cloud-based software products. Leading technology companies like Intuit, Oracle, and Microsoft, for example, expect users to agree to a SaaS contract ahead of accessing customer relationship management, human resource management, and payroll software products hosted online.

SaaS contracts can vary significantly depending on both the company and the service. One common feature these contracts have, though, is a subscription model. Some companies offer monthly or yearly subscriptions, while other SaaS contracts allow customers to pay as they go.

SaaS agreements are used by companies whenever they want to:

• License software (instead of selling it)
• Offer online access through the cloud (instead of a CD or download)

Because SaaS providers license access to software that resides on their servers, these arrangements must include terms of use and indemnity clauses to mitigate the risks of lawsuits or lost revenue. 

SaaS contracts are generally based on the kind of user wanting to access the software. A developer might, for example, offer individual and small business contracts for a particular cloud-based software while providing large institutions with broader, customized options. While individuals and small businesses may generally receive boilerplate contracts, negotiating SaaS contracts with institutional customers is common practice. 

Some SaaS contracts don’t require negotiation. These contracts usually contain standardized language and are presented in a way that doesn’t allow for negotiation. This is commonly done by having the user accept a clickwrap agreement to access the software. 

An example of a non-negotiable SaaS contract is a terms and conditions agreement, which notes all of the rules a user must follow to access a company’s cloud-based product or service. Some clauses and terms found in a non-negotiable Saas contract include termination of usage, limitation of liability, and governing law. 

A trial license agreement is another type of SaaS contract that doesn’t require negotiation. Developers may grant users the opportunity to try out their product or service for a limited time, and the user can either accept the trial offer — with all the inherent terms and conditions — or decline it. Here’s an example of a trial agreement for Oracle Cloud Services. 

Software license agreements or end-user license agreements (EULAs) are also considered to be non-negotiable SaaS contracts. EULAs grant users the right to use an application and explain any restrictions related to using the software.

While non-negotiable SaaS contracts are prevalent these days, oftentimes, negotiating SaaS contracts is necessary. As noted earlier, major institutions — like a state university or a large corporation — typically can negotiate the terms of their SaaS contracts, customizing the use of the developer’s product or service. These negotiated contracts can be beneficial for all parties involved. 

Revising the specifics of a SaaS contract typically leads to a narrowly tailored, personalized agreement that meets the client’s specific needs. If the client is a university seeking to give students and staff members access to an online platform where they can access emails, grades, and other important documents, for example, the negotiation process will include an assessment of the number of client users the developer should anticipate. It may also include questioning the amount of bandwidth the university will need and whether access to a customized support team will be required.

The following SaaS terms showcase the key areas of negotiation and client personalization.

• Technical specifications: Defining technical specifications helps to establish appropriate expectations between the parties and usually provides the parameters by which SaaS performance will be measured.
• Warranties and service levels: Provisions should address how the parties will handle service unavailability and will be dependent upon how critical the service is to the client’s operations.
• Data ownership: The definition of data and its ownership should be clearly defined, given that it might be hosted remotely or transferred over the internet. 
• Data protection: This is especially important for SaaS companies that work with sensitive client data. Storage, transmission, access restrictions, and other security requirements or responsibilities should be addressed.
• Data conversion and transition: Depending on whether the client will be importing data, the contract should specify whether or not data can be imported directly and who is responsible for the cost of any data conversion. 
• Limitation of liability (indemnity): This could cover a range of issues and usually includes a contractual damage cap.

Your business may not need to negotiate significant adjustments for the above-listed issues. Nevertheless, your legal team should consider custom terms for these key areas when negotiating SaaS contracts.

Some SaaS companies have policies against negotiating contractual agreements, even for large customers. If a provider is willing to bargain, there are many good reasons for negotiating SaaS contracts. 

One of the most important reasons to negotiate is to protect your company from downside risks. Many standard SaaS contracts contain policies and terms that hold the customer responsible for most risks. Your business can reduce or potentially eliminate risks by negotiating a shift of responsibilities to the service provider. 

If your company is well-known, leveraging its popularity to get better terms is another reason to negotiate. SaaS providers can gain a lot of value and prestige by having popular brands as customers. Because of this, they’ll be more willing to adapt SaaS contracts to fit your needs.

Certain situations require negotiation, depending on your company and the type of SaaS agreement being offered. An insurance company might, for example, be interested in purchasing a product that automates compliance. The service provider and customer would probably have to negotiate a custom agreement to complete the transaction. 

In addition to the issues mentioned earlier, there are several key elements of a SaaS contract that are negotiated. Your team will need to be aware of them and their relevant issues to negotiate successfully.

• Price: The agreement should clearly explain the service charges and how they are calculated, such as limits on the number of users, the location of users, and if the price includes configuration assistance. Fixed or increased prices, price increase formulas, and inflation adjustments are additional issues to consider. 
• Term: Most SaaS contracts offer cost discounts for longer contractual terms, so your business will have to balance any cost-savings benefits against your need for flexibility. While it’s generally advised to avoid long-term arrangements, this becomes less of an issue if the contract allows for early termination.
• Termination clause: It’s important to determine if and when you can terminate your SaaS contract. Knowing the practical steps you need to take to end the agreement is equally important. The risk of lock-in — or not being able to access your data following contract termination — and how to mitigate it shouldn’t be overlooked.
• Service credits: Standard SaaS contracts will often offer service credits as the customer’s sole remedy in the event of substandard service. Negotiating to have the option to terminate and sue for damages in the event of serious service failures should be strongly considered.
• Intellectual property: Many developers provide customers with an indemnity if a third party claims that the customer’s use of the software infringed on intellectual property rights. This indemnity needs to be broad enough to protect the customer in every jurisdiction where the SaaS software will be used.

While this is not a comprehensive list, your business should take into consideration all of these potential SaaS contractual provisions and negotiate them if possible. Doing so will ensure you walk away with an agreement that’s satisfactory for both your company and the service provider.

Effectively negotiating SaaS contracts can help your business save money and get the level of service needed to maximize productivity. This requires that your legal team understand what to look out for in the negotiation process. A well-negotiated SaaS contract not only mitigates risk for both parties but can also be the start of a lasting partnership between the service provider and client.

Collaborating with Ironclad can help you achieve all of your contract management objectives. Ironclad can assist your company with negotiating SaaS contracts, keeping you ahead of the competition while allowing you to focus on innovation. Try digital contracting today to discover how it can improve your business.