What are software as a service (SaaS) agreements?

A SaaS agreement is simply the name used for the agreement between a SaaS provider and a SaaS customer which sets out the terms under which SaaS software may be accessed. Software as a service agreements provide for the secure delivery of software services to the user’s terminal on a pay-per-use basis over a network from processors hosted remotely by the SaaS provider. The main difference between SaaS and software as a licence is that users don’t have to host, install, and run the application from their business premises. Instead, the software is available via the internet using a standard browser.

We have a lot of experience in this area – clients of all sizes come to us for assistance with SaaS agreements. If you want to know more, check out our case study and video with a recent client – Extend Robotics – here.

Contractual issues

Software as a service contracts are service contracts rather than software licences. As SaaS providers usually have high numbers of contracts globally, they generally seek to offer their services on standard terms. These terms tend to be advantageous towards the provider and exclude or limit liability for data loss, corruption or service failure. However, there may be room for negotiation with smaller providers. There are a number of contractual terms which should always be included in a SaaS agreement. These include:

  • Charges and payment – in essence, there are four types of fees payable under software as a service agreements. A subscription fee will be payable in respect of the user subscriptions. This fee is payable in advance. There may also be fees payable in respect of any additional user subscriptions, fees payable in respect of any data stored by the customer in excess of the data storage limit, and support fees. You should consider whether these fees will be fixed or whether the supplier can increase the fees by giving notice to the customer.
  • Customer data – this clause should make sure that the customer owns and is responsible for the accuracy, quality, and so on of the customer data. The treatment of data security and back-ups is also extremely important in this type of SaaS arrangement. This supplier should be under an obligation to comply with its privacy policy and its back-up policy.
  • Supplier and customer obligations – this clause should include fairly standard supplier warranties, exclusions and obligations. The supplier should also state that they are not responsible for any delays, delivery failures, or other damage resulting from the transfer of data over communications networks and facilities, including the internet. The customer should give basic commitments about co-operation, access and information.

Licensing

Although in a software as a service model software is not being physically supplied to the customer, appropriate software licences still need to be granted. This is because the customers are using the software at a computer and, without a licence, this would be copyright infringement. These licences are usually very narrowly defined and limited to use of the online application for their own business needs. The supplier should warrant to gain and maintain all necessary licences, consent, and permissions necessary for the performance of the agreement.

Advantages of software as a service agreements

It is common for software as a service providers to host their service and store all of their customers’ data in the cloud. Data belonging to each customer is stored on shared computer platforms operated by the service provider in the cloud, but each customer’s data is capable of being kept separate from that belonging to others. This structure allows vendors to offer customers major cost savings as a result of economies of scale achieved by managing multiple customer solutions in a single operation.

As well as being able to offer cost savings, software as services vendors can benefit from only having to support one version of their software and delivering their service on a single platform. In addition, software as services providers can make changes to the software fairly simply, as the software is not located at the customer’s premises. The vendor can implement enhancements at its data centre and make those changes available to its entire customer base. Customers can then accept or reject them as required.

A further benefit of software as a service is that customers do not have to invest heavily in hardware, software and professional skills to obtain a wide range of functional capabilities. Software as a service is designed to be user-friendly and minimise specific training requirements.

Disadvantages of software as a service agreements

Although some software as a service vendors offer customer-specific customisation services, the majority of services provided are a “one-to-many” model. This means that software as a service is generally regarded as most useful for standardised software applications such as email, word processing and accounting.

Some may also be wary that there is a lack of control over data and content with software as a service arrangements. There may also be compliance issues and there may be a risk of hidden extras for additional users, storage and so on.

Another, often overlooked, element of SaaS is the risk of lock-in. Much of the cost benefit would be negated if, for example, a customer has to back up all of its data on its own servers to ensure that it will have access to it if it seeks to terminate the SaaS arrangements.

For any questions you may have concerning software as a service agreements or tech contracts generally please contact Neil Williamson.