SaaS Contract

What is a SaaS Contract?

A SaaS contract is a legal agreement that governs the provision of software services from a vendor to a customer over the Internet. It covers how end-users can access and use the software, as well as payment and subscription billing schedules, terms of use, and service level agreements (SLAs).

In the subscription economy, SaaS is the preferred software delivery model among businesses because it’s more flexible, reliable, and scalable than traditional software. Since software applications are hosted remotely on the provider’s servers, customers have the ability to use the latest software updates without having to invest in expensive hardware or infrastructure.

This means that SaaS contracts are more flexible than traditional software licensing agreements. With tiered, user-based, and usage-based pricing, SaaS customers pay prices that directly reflect the value they receive. They can scale up or down as their usage needs change, and vendors can customize agreements to account for upgrades, fluctuations in usage, and other factors.

Synonyms

• Software-as-a-Service contract
• SaaS agreement
• SaaS subscription agreement
• SaaS vendor contract

The Purpose of SaaS Contracts

Having a contractual agreement with your SaaS customers gives you legal protection and helps prevent miscommunication or misunderstandings. Without one, you’re opening yourself up to risks like lost revenue, data breaches, lawsuits, and a damaged reputation.

A well-written SaaS contract does the following:

• Defines the roles and responsibilities of both parties, including service availability guarantees, security protocols, and data protection measures
• Sets minimum performance standards
• Outlines the terms of using the software, including any restrictions on usage or modifications of the software
• Spells out how you’ll resolve disputes or terminate the agreement
• Protects your intellectual property by including clauses that prevent unauthorized use and distribution of your software
• Clarifies the pricing, payment schedule, and billing terms for the subscription service
• State what happens in the event of a breach of contract

SaaS contracts have become even more crucial as data privacy regulations like GDPR and CCPA have come into effect. These laws require businesses to protect consumer data and provide transparency about how it’s being used, making a clear agreement between vendors and users a critical part of the customer relationship.

Elements of a SaaS Contract

SaaS contracts differ from traditional software licenses primarily because the software is not downloaded or installed on local machines. Instead, SaaS customers access their applications remotely. As such, aspects like uptime, data security, and continuous updates make up a significant part of the service agreement.

Let’s dive into the specific elements of a SaaS contract more in-depth.

Key Definitions

The key definitions section provides clarity on the terms used throughout the document. Terms like “Customer,” “Vendor,” “User,” “Software,” and “Subscription Term” are defined here to ensure everyone is on the same page about the roles and responsibilities. It also serves as a reference point in case one party tries to dispute the meaning of a contractual term.

Service Description

The service description clearly states what the customer can expect from the software service. It outlines:

• Product tier
• Features
• Functionality
• Customization options
• Integration capabilities
• Microservices and add-ons

Scope of License

Below the service description, you’ll also want to include a “Scope of License” clause. This is what outlines:

• The authorized means of accessing the software
• How many authorized users are allowed
• The defined extent of permitted usage access
• The number of devices the software can be accessed on
• Authorized facilities where users can access the software

Software vendors might offer their product to custoemrs exclusively, but most use multi-tenant architecture to enable different customers (and users within a company) to access the same software instance.

Because of this, you need to be very specific about how your customers can access the software and what they’re allowed to do with it. For instance, some vendors may limit the use of their software to certain sectors, markets, or industries.

Limitation of Liability

This clause limits the vendor’s liability to customers in case of any errors, malfunctions, or downtime. It typically outlines how to calculate damages and what remedies the customer is entitled to if something goes wrong.

Payment Terms

Software companies use the subscription model, meaning users pay for the service in installments over a defined period, typically monthly or yearly. SaaS pricing involves multiple different pricing structures, some or all of which you might use as part of your pricing strategy.

• Tiered pricing (different levels of product features, with more comprehensive and advanced features at higher price points)
• Flat-rate pricing (one-time fee for unlimited usage or a specific period of time)
• Usage-based pricing (users pay per unit of usage — e.g., storage, data processing, API calls)
• Per-user pricing (pricing based on the number of users who access the software)
• Per-active-user pricing (users are automatically removed from the subscription after X days of inactivity)
• Feature-based pricing (pricing based on the features and functionality the customer needs)

As a software provider, you should be transparent about your pricing structure and clearly outline the payment terms in the contract. In addition to your pricing model and structure, this includes information on the billing cycle, subscription period, and any applicable taxes and fees (e.g., setup costs, late payment fees).

Support Services

Create a section in your SaaS contract to spell out the accessible support services (e.g., phone, email, live chat) your customers can access. Cover the following points:

• Operating hours
• Response time (how long it takes to respond to a support request)
• Escalation procedure (if the initial support representative can’t resolve the issue, how does the customer escalate it?)
• Availability of dedicated or emergency support (typically at an additional cost)
• Support for customization, migration, and integration services
• Technical and non-technical support availability (i.e., for both end-users and administrators)

Service Level Agreement (SLA)

An SLA outlines the level of service customers can expect from the vendor. This could mean:

• Uptime guarantees (the SaaS industry’s benchmark is 99.9% guaranteed uptime)
• Data privacy and security protocols
• Performance metrics (e.g., page load times, error rates)
• Data backup and disaster recovery procedures
• Procedures for monitoring and reporting

Service level agreements can be standalone documents. Or, they can be included as a section within the main SaaS vendor agreement. The contract terms in the SLA are meant to be the minimum performance standards.

Data Security and Privacy

The data security and privacy provisions set out what the vendor is contractually obligated to do with customer data. These clauses are critical in light of the data privacy regulations mentioned earlier. They typically outline:

• What type of data is collected
• How that data is used
• How customer data is protected from unauthorized access (e.g., encryption, firewalls)
• Procedures for reporting any security breaches
• Data retention and deletion policies

The contract should also address whether the vendor shares or sells customer data to third parties and, if so, under what circumstances.

Data Ownership

When SaaS service providers give customers access to their platform, the platform holds information depending on the type of software it is. For instance, a CRM system will collect customer information, while an e-commerce platform will hold product and customer purchase data.

When someone uploads files and information to the system, this clause clarifies who the owner is. If the customer is the owner, it’s their responsibility to ensure that they have the necessary rights to upload that information.

For a practical application, consider the approach used by companies like Axosoft. Axosoft’s SaaS agreement states that the customer owns all data they input into the system, while the SaaS provider can use this data only for purposes directly related to the operation of the SaaS system under strict privacy and security measures.

Intellectual Property Rights

Intellectual property rights (IPR) outline the ownership and usage rights for any software, content, or materials exchanged between the vendor and user throughout the SaaS agreement’s duration. This is especially important for enterprise SaaS products, which include customizations, integrations, code, and features tailored to the customer’s needs.s

This SaaS contract clause should also cover issues like liability for infringing on another party’s intellectual property rights and any restrictions or limitations on using the software.

Common restrictions include those for reverse engineering, decompiling, modifying, and sublicensing the SaaS product.

Renewal and Termination

When your agreement reaches its end, it’ll either be due for contract renewal or termination. SaaS contracts normally last between 1 and 5 years, with a monthly or yearly subscription plan.

Unlike a regular software license, a SaaS contract generally uses evergreen renewal — that is, the contract renews automatically unless either party opts out. If this is the case for your software, you’ll have to express (in days) the notification period for terminating the agreement before the end of the current term.

Challenges in SaaS Contract Management

Managing SaaS contracts presents a series of challenges that can complicate operations. Particularly as they scale, changes to your business structure, ICP, pricing, and product offering require new clauses, terms, and changes to your contracting process.

The most common challenges companies face with SaaS contracts are:

• Contract version control. With updates to your product and pricing, keeping track of different versions of your contract can be challenging. Having a central repository for all active and expired contracts can make it easier to manage.
• High contract volumes. As companies expand, the fast-growing number of user contracts they need to process can lead to inefficiencies and oversights. This volume can overwhelm manual management processes, leading to potential compliance issues and financial risks.
• Delayed negotiations. When negotiating with potential customers, the back-and-forth can take several weeks. The more people involved on both sides (e.g., legal, sales), the longer it takes to finalize the terms.
• Tracking contract performance. Understanding how your contracts are performing is crucial for making informed decisions about future deals. However, tracking usage and renewals manually can be tedious and prone to error.
• Data privacy and security compliance. Frequent updates in compliance requirements and legal standards necessitate agile contract management processes to integrate these changes.
• Miscommunication between departments. Misalignment between sales, legal, and finance creates confusion and delays when executing contracts.

Implementing AI-powered contract software can greatly enhance the efficiency of contract management processes. AI can streamline data entry, risk management, and even the contract review process. This dramatically reduces the time spent on manual tasks and eliminates most opportunities for human error.

Best Practices for SaaS Contract Management

To navigate the challenges modern SaaS contract management entails, there are a few best practices you need to follow:

• Use contract management software to automatically track renewal dates and notify relevant parties when it’s time to renew or terminate a contract.
• Invest in a SaaS subscription management tool to automatically notify customers of upcoming billing cycles and renewals to reduce churn and dispute volume.
• Integrate your contract software with CRM, CPQ, and ERP systems to ensure data accuracy, reduce manual work, and streamline operations.
• Maintain a central  repository for all current and expired contracts.
• Establish a clear process for updating and versioning your contract templates when you make changes to your product or pricing.
• Use electronic signatures to speed up contract execution.
• Train your employees on contract management best practices, including data privacy, security compliance, and the use of AI tools.
• Foster collaboration and alignment between sales, legal, finance, and other relevant departments to prevent miscommunication and delays.

Technology Requirements for SaaS Contract Management

Contract management software streamlines compliance checks, automates most of the clerical work associated with SaaS contracting, and provides a more efficient way to handle renewals and amendments.

There are four things you need to evaluate when looking for a contract management system for your business:

• Cloud-based storage
• Search functionality
• Automated reminders
• Integration capabilities

Cloud-Based Storage

Cloud storage makes for easy access to SaaS contracts and seamless collaboration between your deal desk and other team members. Cloud platforms enable secure storage and sharing of contracts, allowing team members, regardless of their location, to access up-to-date contract versions.

This level of accessibility is especially important in remote or hybrid work environments, where real-time remote access to contract documents is crucial for maintaining workflow continuity.

Search Functionality

Advanced search capabilities help your contract team quickly navigate through large volumes of contracts.

Within your contract repository, it should work something like this:

1. You input keywords or phrases.
2. The system pulls up all the contracts matching those keywords and phrases.
3. You get a list of results ranked by relevance.
4. From there, you can access specific contracts for review or editing.

Users should be able to search for contracts based on various criteria — contract type, involved parties, dates, and specific terms or clauses. The ability to pull up contracts for different accounts through keyword search drastically reduces the time spent locating specific documents or details within those documents, thereby enhancing productivity.

Automated Reminders

To manage the contract lifecycle effectively, SaaS contract management systems should include automated reminders. These can alert stakeholders about critical dates such as renewal deadlines, payment dates, or milestone completions.

Automated reminders prevent oversights that could lead to breaches of contract or missed opportunities for renegotiation and renewal, which are essential for maintaining good business relationships, increasing customer lifetime value, and ensuring operational compliance.

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