Understanding A Software As A Service (SaaS)

What is a Software as a Service?

Software as a Service, commonly known as a “SaaS”, are becoming increasingly popular amongst organisations. A SaaS is typically the same software application that multiple customers gain access to through the internet or a private network. The software application will be physically deployed on servers owned or controlled by a supplier. There is a range of SaaS options available to organisations, examples include:

• Customer relationship management software
• Expense management software
• Payroll management software
• Productivity tools software

A SaaS can come in a “one-to-many” model whereby there is a standard software product that allows many customers to access the same version. Under this model, the software is not tailored for specific customer requirements. Alternatively, a SaaS can be bespoke whereby a supplier offers customer-specific customisations to the SaaS.

Why use a SaaS agreement?

Where a SaaS is used an agreement governing the customer and supplier relationship should be put in place.

A SaaS agreement can be a useful tool for a supplier to monetarise their software, by having customers pay fees, such as set up, subscription and/or maintenance fees, for providing the SaaS. The pricing model adopted by a supplier typically follows one of two models: periodic charging or per usage-based charging.

• Periodic charging – whereby the supplier charges a set subscription fee based on the number of users and an overall or per-user storage limit. Such a fee could be paid monthly, quarterly or yearly. The supplier may also offer add-ons or upgrades to the package that are separately chargeable.
• Per usage-based charging – a supplier charges subject to the amount of usage of the service by the customer. From a SaaS supplier perspective, this model may not be desirable since the charges that they receive may fluctuate from one charging period to the next on a basis that it is beyond its control and subject to the customer’s decision to use the SaaS.

When it comes to reviewing a SaaS agreement, various key areas of the SaaS terms are often heavily negotiated. Some of these areas are set out below.

• Indemnity – agreeing to an indemnity in any scenario should be deeply considered by any organisation. An indemnity is a contractual right to payment on a pound for pound basis, i.e. every pound lost can be claimed back, meaning the party claiming payment under the indemnity can demand payment without needing to go to Court.
• Limitation of liability – the purpose of a limitation of liability clause is to cap the liability should a breach event occur. It is important to understand what is covered under the cap and what is not, along with how much could be potentially claimed should a breach event occur.
• Ownership and data protection – with data protection becoming increasingly important to the functioning of organisations, the SaaS should clearly set out who owns and is responsible for the data that is inputted into the SaaS. Particular care and consideration should be taken if special category data is processed via the SaaS.
• Service levels – service levels provide standards that are expected as part of the SaaS. The parties should ensure that the service levels are achievable and sufficiently detailed and understandable as to what is expected as part of the SaaS.
• Specification of service – a SaaS should deal with the service being offered and its technical specification. Defining appropriate technical specifications is crucial for establishing expectations between the parties and avoiding disputes down the road. The technical specifications should adequately and specifically describe the expected functionalities of the SaaS.
• Term and termination – a supplier may use incentives, such as discounts, to encourage customers to sign up for longer terms in order to secure long-term revenue. From a customer perspective, caution should be taken when agreeing to a long-term arrangement that may cease to meet their business needs in the future. Termination provisions should be reviewed to understand what trigger events or mechanism need to be followed in order to end the agreement.
• Warranties – A warranty is a contractual promise, which, if broken, allows the affected party a recourse to sue the other for damages. The parties should pay particular attention to any warranties related to the service being supplied.