SaaS Contract Pitfalls

Spend Matters welcomes another guest post from NPI, a spend management consultancy, focused on delivering savings in the areas of IT, telecom, transportation and energy.

Of all the trends that have impacted IT in the past decade, SaaS may be the most significant. The software as a service delivery model has delivered substantial savings and flexibility to enterprises large and small, and has even made IT purchasing a bit easier. But, that doesn't mean SaaS isn't without its own set of costing and contracting pitfalls. Smita Manjunath, an IT analyst with NPI, recently wrote a whitepaper on how companies can maximize their savings with SaaS and avoid contracting mistakes. Below are a few tips to consider:

  • Get Rid of Minimum Purchase Clauses: Buyers should not fall prey to requirements to buy a minimum number of licenses (or have a minimum number of users) over the term of the contract. This will prevent you from reducing the number of users in the event your business needs change. You may easily be locked into pricing that's not aligned with your needs.
  • Validate Vendor's Ability to Ramp Up: On the flip side, companies should require vendors to specify their ability to ramp up new users/usage quickly. This is especially important as businesses are emerging from a recessionary climate and striving to meet increased business demands. What happens if your company takes on a major client or acquires another company? How quickly can your SaaS-based business application adapt? Answers should be specified in the contract – not just in sales talk.
  • Establish Data Ownership, Return & Protection: Establish data ownership right off the bat. This includes who owns the data as well as the data migration procedures and costs. Data cleansing and migration procedures can add another cost and complexity layer to your SaaS purchase. Additionally, because your data will reside remotely and (most likely) within a multi-tenant architecture, your contract should clearly communicate the vendor's disaster recovery, business continuity and data confidentiality commitments.
  • Prevent Renewal Rate Increases: Be sure to address renewal rates in your contract by inserting language that limits or prevents renewal rate increases. Not doing this empowers your vendor to enact unreasonable rate increases once your contract term is up.
  • Specify Termination Costs and Transition Assistance: At some point, you may switch vendors. Specifying termination costs and data transfer guidelines upfront in the contract makes this process far less painful (not to mention less costly).

The savings potential for SaaS is high – but so are the risks of hidden costs. Read more tips and considerations for navigating your next SaaS purchase here.

-- Jeff Muscarella, EVP of Technology, NPI

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