SaaS Agreement Checklist: Top 5 Terms to Watch Out For


A SaaS IT contract is a legally binding agreement signed between a SaaS vendor and an organization opting for the service. 

Generally, the SaaS vendor takes care of the maintenance and the upgrade of the software. End-users need not worry about downtime, slowing systems, glitches, or scaling the infrastructure. 

Though there are many details in a SaaS agreement, the gist is this: the vendor promises to provide a certain quality of service (SaaS) to the customer in return for a payment. 

The SaaS agreement is the best way to ensure the delivery of agreed services. Nobody can be held accountable while the customer suffers from service disruption in its absence.

This can lead to a cascading effect where the customer's (service taker) own services that depend on the particular software get disrupted. It can lead to their reputation and financial losses, and the company itself may be slapped with multiple lawsuits.

But a SaaS agreement leaves no room for ambiguity and thus is beneficial to both: the SaaS provider and the customer. It clarifies the responsibilities of the service provider and customer and thus prevents the time and money waste that may be spent on legal fees fighting battles in court.

This blog will explore the crucial terms you need to watch out for in a SaaS agreement.

Let’s begin.

Key Terms to Watch Out for in a SaaS Agreement

The key terms in a SaaS agreement revolve around data management, billing and services details.

Let’s understand each of these terms in detail.

1. Billing Details

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Pricing is the most crucial aspect of a SaaS agreement. First, you need to negotiate the cost of the subscription. 

Some SaaS vendors may offer monthly subscription plans, others offer yearly plans, while some others may offer a mix of both. Choose the one that works best for you. Monthly plans don't tie you to the vendor for long periods. This is good for those for whom it's difficult to forecast the requirements. 

On the other hand, yearly or other term plans tie you to the vendor. They usually cost less per seat/license but require you to shell out the total money upfront. This may be a good option if you are sure of the demand for the services in your company for the term.

Then, identify and tackle hidden charges in the agreement. Extra charges can creep up at any time during the agreement period. Hence, you may want to clarify the hidden charges during the negotiation phase to avoid cost overruns.

Additionally, watch out for the renewal clause in your SaaS agreement. You may see an auto-renewal term at the end of the agreement period with or without a price incremental. Generally, you are required to inform 30 days in advance if you don't want the licenses to auto-renew, though we have also seen 15, 60, and 90 days terms. 

Let’s understand the pricing plan with an example of HubSpot, a provider of marketing, sales, and customer support software. According to its billing terms, it has fixed pricing unless certain usage thresholds are crossed. 

The variable fees depend on feature up-gradation, email sending limit, availing additional contacts, and more. According to the terms, they reserved the right to increase the prices, and the new pricing will be applicable charges after the next renewal.

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2. Data Privacy & Confidentiality

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You must check the data sharing terms in the agreement. In addition to the organization and the SaaS vendor, sometimes subcontractors require sensitive data. All the third parties with which the vendor will share the data must take total care to protect the data and should be bound by the agreement norms with the vendor. 

Every business has a set of confidential data. The information ranges from their customers' data, financial details, products' source code, and design documents. So, it is your responsibility to check how the vendor uses the data, and opt-out of any service that may get you in security and compliance trouble.

If there is no mention of data sharing in the agreement, you must ask your SaaS vendor if they share their customers' data with third parties? If they answer yes, then for what purpose?

One way to understand the data privacy level at a glance is by seeing which standards they are compliant with. If the vendors comply with international data protection standards like GDPR, SOC 2, PCI DSS, HIPAA, etc, you know they take privacy seriously. And there are basic systems and processes in place to protect your data.

Here is the privacy clause for DocuSign. 

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DocuSign’s privacy policy gives a clear idea of the nature of the customer’s information collection, its usage pattern, the sharing norms, and the information retention format. Interestingly, there is also a section for children’s privacy. There is a separate section on additional disclosures in the case of residents of countries like Israel, Brazil, Canada, or France. 

3. Opt-Out Clause

What if you don’t like the service of your SaaS vendor after a few months of usage? Do you have an option to terminate the SaaS IT contract agreement? Or, will you be charged for prematurely ending the agreement? It depends on the specificity of the opt-out clause that you include early on during the negotiation cycle.

Some events that can trigger an opt-out includes:

  • You have reached the end of the subscription term.

  • If the vendor violates the service quality promised in the agreement.

  • If there is a breach of data privacy.

Post opt-out issues, and how to deal with them?

  • Though vendors may charge you for premature opt-out, negotiation is possible to bring down charges.

  • Post an opt-out, you may want to transition to a new vendor. Some vendors help you with the transition process. You may or may not be charged transition fees.

Let's go through the Slack policy to better understand the opt-out clause or termination of agreement clause. Slack has an elaborate termination clause covering both terminations for cause and without cause. In terminations without cause, customers can also terminate the free subscriptions immediately. The refund formalities are mentioned too.

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4. Intellectual Property Rights (IPR) and Data Ownership

Most SaaS IT agreements have an exclusive IPR clause about trademarks, copyrights, patents, etc. While the vendor has the sole ownership of the software and the source code, the customer owns all the data: images, documents or codes developed using the vendor’s platform.

The SaaS agreement must have provisions to make sure you own all the intellectual property that is developed using the vendor's application.

Let’s take a look at a Freshdesk Intellectual Property Rights clause. Freshdesk’s IPR rules clearly state that the intellectual property of their SDKs and APIs belong solely to them while customers own the created apps and content. 

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5. Service Level Agreements

Service Level Agreements ensure that you get assured quality services from your SaaS vendor. Research shows that downtimes led to the loss of customers for 37% of small businesses. Of these, 26% of companies reported a whopping loss in the range of $10,000 - $20,000 per hour due to IT system failures. 

Hence, getting a comprehensive SLA clause in your IT contract agreement is necessary. 

Usually, service level agreements cover different aspects like:

  • The services that a SaaS vendor agrees to provide?

  • A mention of average response time based on the gravity of the issue.

  • A definite mechanism to measure the quality of the service.

  • The quantum of penalties must be levied if the SaaS vendor fails to meet the service quality expectations.

  • Are there any instances during which the fine may not be applicable?

You can reap several benefits by including a service level agreement (SLA) clause. First, you bring in more accountability from the vendor. Second, with legal protection in place, you can ensure no service lapses from the vendor’s side. 

Let’s take a few examples to understand service level agreements in detail.

Let's see Microsoft Azure’s Service Level Agreement (SLA) for Cloud Services. Microsoft Azure provides a detailed service level agreement for providing various services like Azure Bot Service, Azure Cognitive Services, Azure Applied AI Services, Azure Machine Learning, and more. 

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Now, let's take a look at the Service Level Agreement of the Google Cloud Platform. Google also provides a comprehensive SLA touching upon various Google cloud platform services like Cloud Identity Service Level Agreement, Cloud DLP, BigQuery, App Engine, IoT Core, etc.

Check a sample agreement below.

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SaaS Agreement: You Get What You Can Negotiate

Usually, the agreements are one-sided to the benefit of vendors—and the reason for this is most customers don't understand the nuances of the deal. Still, with proper knowledge and data, IT and procurement teams can get the best terms for their organization.

Signing the SaaS agreement is the first step in forming a long-term relationship with SaaS vendors. It should ensure a fair deal between both parties.  

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