Differences between Standard and SaaS Software Contracts

As the second decade of the 21st century gets traction, the legal departments within many enterprise companies are coming into contact with their very first “cloud” or Software-as-a-Service (SaaS) contracts, whether for web content management (WCM or WCMS) technologies or for other cloud computing applications and services.

There are significant differences between billing and ownership models when dealing with traditional software solutions versus those delivered as a service. Just for a start, one implication for your contracts is that the concepts of code escrow, liability, and indemnity bonds in their traditional applications simply don’t apply to Software-as-a-Service.

Here’s a quick guide to key differences between standard software contracts and those from vendors offering cloud applications or Software-as-a-Service.

Payment Terms

Many companies signing up for SaaS software such as WCMS solutions expect to be able to subscribe on a month-to-month basis. The business model to support this billing option is rare, if not nonexistent, as SaaS technology providers absorb substantial start-up costs. This is one of the main reasons that nearly all SaaS vendors require an annual subscription commitment.

May enterprise customers understandably want to lock in a single rate, but service providers often reserve the right to make incremental cost adjustments to cover rising costs, such as the development costs associated with further development of the tool set, for example. It’s also true that, in many cases, the SaaS vendor will experience a net loss the first quarter of your subscription period in the form of account set-up and customer acquisition costs.

Work for Hire

Most likely your organization has come to expect to own the proceeds of any professional services for which you contract, such as a custom implementation of a CMS or WCM system. Because Software as a Service isn’t constructed as a pure set of independently functioning code, it’s simply not possible to work in terms of work for hire or your organization’s ownership of the end result of professional services, so this will be a difference in your SaaS software contracts.

Warranty Issues

It’s common for corporate customers to expect software—whether packaged or SaaS or otherwise—to perform all of their intended uses. However, it is in the nature of web content management software that the provider can’t know in advance all of your intended uses, so it’s likely that some time will need to be spent negotiating which representations and warranties (promises) will be delivered by the service provider.

Customer Warranties

A SaaS provider is likely to need more representations and warranties from its customers than other software companies would, because the work is done together through an active relationship involving the shared use of a tool. For one example, the SaaS vendor will need assurances that your “customer data” will not violate the rights of others and that your use of the software will not violate any applicable laws.

Limits of Liability

This is generally a surprise to enterprise attorneys, but it’s an inescapable reality that—even more than with traditional software sales and licensing models–a SaaS vendor would be unable to provide the service it offers if exposed to potentially unlimited legal liability. It can seem difficult to accept what are fairly standard limits of liability for SaaS vendors—such as the exclusion of “consequential” types of damages, such as customer data loss—but these are both standard practice and necessary for the viability of business models for SaaS software development companies. A SaaS vendor can provide the tool, but it can’t guarantee the preservation of data; that is the customer’s responsibility (backup, etc.).

Bear in mind that SaaS web content management systems and technologies are separate from your organization’s data, and the vendor’s services are not meant to safeguard your data. Your organization and its information technology (IT) staff are still fully in control of and ultimately responsible for your data and the security of your customers’ and consumers’ private information.

For example, stock “scam” companies make use of content management systems just like any other online business. If subject to unlimited legal liability on the data produced by the customer, the risk to the provider of WCMS technology would be unacceptable. It’s in the nature of the SaaS business that there are tradeoffs between the lower risk to your organization of try-before-you-buy licensing and the fact that your organization alone is liable for data security, redundancy, and regulatory compliance issues.

It’s standard practice to cap the liability of a WCM vendor company at the price of one year of subscription service. In fact, it’s essential that this is done in order to protect the vendor who intends to partner with you in every appropriate way and to ensure that the technology your organization adopts can continue to evolve and be supported.

Uptime/Service Level Agreement (SLA) Issues

Ten years ago, software was thought to be mostly bug-free and was most definitely available to your organization 100% of the time. So the concepts of a service level agreement (SLA) and uptime may be entirely new to you and your legal team. Even when a SaaS vendor offers greater than 99% uptime, it could seem on the surface as if you’re being asked to sign up for something that may not be available when you need it.

With a perpetual software license, you’re licensing one version of a software product for which your IT group becomes responsible. You may already be relying on your IT group to meet internal SLAs for mission-critical business applications. With SaaS web content management or other applications, your provider will upgrade their SLAs at no additional costs. Some will also provide refunds or discounts for any failures to meet levels in the agreements, something your IT staff is unlikely to ever provide.

One advantage of SaaS software is that, if it’s architected properly, your organization can expect to receive automatic and more frequent updates than are possible with traditional software, and these updates will be included in your subscription cost. This will eliminate what can often be days-long downtime periods for upgrades.

For More Information

This article has briefly touched on some of the main differences in business model, philosophy, and standard contractual practices between standard software and that offered via SaaS. For more information, see:

• Forrester: Key Areas to Consider in SaaS Contract Negotiation
• Gartner: Safe SaaS: Contractual Protections for a Lasting Vendor Relationship

Questions? Comments? Have some experience negotiating a SaaS SLA? Start or join a conversation below for the edification of your colleagues and peers.