Learning the basics of a SaaS contract will position your company to score a better deal as you’ll be able to meaningfully negotiate the nitty-gritty.
The software as a service (SaaS) subscription business model continues to grow in popularity, but many companies still struggle to understand what they’re signing onto when they subscribe. A SaaS contract, specifically a cloud service agreement, is not the same as a licensing agreement and doesn’t adhere to a standardized format across organizations, making this type of document particularly difficult to decipher.
Nevertheless, learning the basics of a SaaS contract will position your company to score a better deal as you’ll be able to meaningfully negotiate the nitty-gritty. This blog will help you develop a general understanding of SaaS contracts by answering some commonly asked questions and clarifying key clauses.
Interested in a specific aspect of SaaS contracts? Click on the topic below to skip ahead.
SaaS is a software distribution model where users access cloud-hosted applications through the internet in exchange for a recurring fee. Typically, the software provider offers different features and degrees of functionality through a few pricing tiers. To support this subscription model, vendors need specific contracts.
A SaaS contract is an agreement between the application developers and users that defines how the application is to be accessed and used. Many providers have a ‘terms of service’ or ‘terms and conditions’ page that fulfils the role of a simplified SaaS contract.
Under a perpetual licensing agreement, a company will deliver and physically install software and relevant hardware. Customers are granted rights to copy and use the software, which also serves to protect the vendor’s copyrights, patents, and intellectual property rights.
A SaaS contract permits users to access the software through the cloud and customers can only use the software in line with the terms of their subscription. In brief, a perpetual license agreement leads to a singular payment and full ownership of the software whereas a SaaS contract permits use of the software as long as the customer pays for the service.
SaaS contracts document the exact software access clients receive for the term of their subscription. They are essential for cloud application providers to minimize the risk of lawsuits and penalties. Terms, limits, and liability waivers establish the relationship between the vendor and users so that both parties know exactly what is expected. SaaS contracts can protect vendors’ interests by limiting liability in a data breach or prohibiting specific user activities, like sharing the software with other people or using it to commit illegal actions. It’s not uncommon for providers to have unique SaaS contracts tailored to each of their individual, small business, and enterprise-grade tiers.
SaaS contracts need to strike a balance between the provider’s responsibilities and the users’ expectations to properly establish legal accountability by both parties. Without proper foresight, the process of creating, managing, negotiating, and maintaining an organization’s contracts can be a headache-inducing legal quagmire. However, a firm understanding of the layout and key clauses in a typical SaaS contract will help prepare your team to tackle the challenge.
A typical SaaS contract includes the following sections:
1. Introduction
2. Definitions
3. SaaS services
4. Customer responsibilities
5. Payment
6. Term and termination
7. Warranties
8. Limitations of liability
9. Indemnification
10. Confidentiality
11. Other general provisions
12. Exhibits
A SaaS contract may look easy to manage in theory, but it can become a painful process in practice, especially if you do it manually. Each contract may contain distinct terms and specific clauses dependent on relevant information like your company’s industry or the products and services you offer. Nevertheless, you can set your organization up for success by learning about the following key clauses found in virtually every cloud service agreement.
Jump to a specific clause by clicking below:
One of the most important aspects to understand about SaaS contracts is that any licensing is for the services—not the software. As such, most SaaS contracts don’t include end-user licence agreements (EULA). To make this clear to all parties, you’ll often see “scope of permitted use” or “scope of licensed access and use” clauses in place of a “scope of licence” clause.
The scope of permitted use defines and limits the rights transferred to the subscribers. SaaS contract permitted use provisions usually include most or all the following:
SaaS contracts often also include a “prohibited uses” clause in the SaaS services section or a separate acceptable use policy, outlining actions that would cause the user to forfeit their access. Behaviours typically included in this clause include using the software to conduct illegal activities, spam or harass other customers, and install viruses. It is the responsibility of the subscriber to ensure that the scope is sufficient to support the intended current and future use of the SaaS service.
A “limitation of liability” clause outlines under what circumstances the SaaS provider is liable to pay damages to the customer(s) and the maximum amount of damages owed. Most SaaS contracts include limitation provisions to protect the vendor from the impact of events beyond the developers’ control. Power outages and bandwidth overloads are common occurrences that can make it impossible for an application to function correctly. The specifics of these clauses often differ between SaaS vendors to capture risks associated with their unique solutions, but SaaS contract limitation provisions usually include most or all the following:
Cloud-based applications host an enormous amount of provider- and user-generated data, so SaaS contracts must have clauses to establish who owns the data uploaded to the platform and each party’s data security responsibilities.
SaaS vendors that handle personally identifiable information (PII) or protected health information (PHI), particularly those operating within the healthcare or finance industries, must ensure that their data ownership and security clauses are watertight. While data ownership clauses state who owns data uploaded to the service, data security provisions usually include most or all the following:
Additionally, SaaS vendors must create a Privacy Policy compliant with privacy laws in the regions where their software is used. For example, SaaS vendors operating in the EU must write a policy that complies with GDPR. Privacy Policies typically cover:
Customer service and support clauses state how the SaaS vendor will offer support for their services and any additional guarantees related to expected service. Customer service and support provisions usually include most or all the following:
These clauses document the exact subscription plan, model, and pricing the customer has chosen. This is another section that is frequently negotiated during B2B deals. Vendors can work with customers to optimize their SaaS plan, lowering customer acquisition costs (CAC) and increasing customer lifetime value (LTV) through higher prices and better retention rates. Subscription plan, model, and pricing provisions usually include most or all the following:
Term, termination, and renewal are three clauses that establish the term of the agreement and the processes to terminate or renew the account. Many SaaS vendors have evergreen renewals in place that require the subscriber to terminate their contract before a specified date, or else the agreement will automatically renew. These clauses are generally presented as:
A Service Level Agreement (SLA) can be a stand-alone document or a section of a comprehensive SaaS contract, either way it’s a critical component of any cloud service agreement. An SLA designates minimum performance standards, usually with a focus on service availability. A comprehensive SLA may raise customer expectations, but it can also be a selling point. Quick response times and high availability are valuable metrics for potential subscribers. SaaS SLAs usually include most or all the following:
Accurately managing and maintaining SaaS contracts is nearly impossible without automating at least some parts of the process. Modern companies need readily available insights into KPIs and subscription plan details. A comprehensive subscription management solution, like Subscription Billing Suite, can not only handle recurring billing, invoicing, and recognition, but also supports flexible pricing structures, real-time reporting, and regulatory compliance. It’s available as an embedded extension in Microsoft Dynamics 365 Finance and Operations, Business Central, and Dynamics GP.
