Procurement Professionals Should Follow Best Practices when Contracting for SaaS

By Robert Wright posted 06-01-2023 12:38 PM


In today's digital landscape, Software-as-a-Service (SaaS) has become a popular choice for businesses seeking to streamline their operations.  Negotiating SaaS contracts is similar to navigating a minefield; if done carefully and with the right tools, you can reach the other side unscathed, but one misstep could have catastrophic consequences.

It is essential for procurement professionals to equip themselves with the right information to make sure they avoid any landmines and get the best outcome for their organization.  In this article, we explore the key risks in SaaS contracts and offer actionable best practices to help procurement professionals negotiate and establish robust agreements.

1. Clearly Define Service Level Agreements (SLAs):

Service Level Agreements (SLA) are a critical component of SaaS contracts. These SLAs define what the SaaS solution should deliver in terms of performance and availability. Collaboration between procurement professionals and stakeholders is essential to ensuring SLAs align with the organization's requirements, especially when it comes to uptime guarantees, response times, and data security. SaaS companies usually promise 99% uptime, and many promise 99.9% uptime. By clearly defining service levels and performance goals, the risks of service interruptions can be minimized.

2. Data Privacy and Security:

Data protection is one of the most important aspects of any SaaS contract. A procurement professional should pay close attention to the contract's data privacy and security provisions.  Data ownership, encryption, breach notification protocols, and compliance with applicable data protection regulations are all important considerations. For example, the contract should clearly state which party is responsible for obtaining data protection certifications, such as ISO/IEC 27001 or GDPR compliance.  By collaborating with legal and IT teams, organization data can be safeguarded and breaches or non-compliance risks can be mitigated.

3. Intellectual Property Rights:

SaaS contracts often involve proprietary software or custom solutions. Intellectual property rights are a key component of SaaS contracts because they ensure that the software provider retains ownership over the software and that the customer doesn't have the right to modify or resell the software. The customer typically only has the right to use the software in the manner and for the duration specified in the agreement. Contracts should address intellectual property rights, such as ownership, licensing, and restrictions on usage. This will protect the organization's interests and prevent any disputes regarding ownership or unauthorized use of intellectual property in the future.

4. Termination and Exit Strategy:

An exit strategy and termination provisions should be included in each contract. This is like having an emergency plan in place in case of a fire; you may never need it, but it's essential to be prepared in case of an unforeseen event.  A procurement professional should negotiate termination terms that allow them to terminate a contract in the event of non-performance, contract breach, or changes in business requirements. In addition, a clear exit strategy should outline the process for retrieving data, providing transition assistance, and returning or destroying confidential information. When addressing these aspects upfront, procurement professionals can ensure an organization's interest and ensure a smooth transition.

5. Vendor Accountability and Support:

SaaS vendors should be held accountable for their obligations under contracts. A number of remedies are available, including compensation for service disruptions, support and maintenance services, and compensation for breaches of SLAs. To make sure the vendor provides a reliable and responsive service, robust contractual language should be negotiated.

6. Flexibility for Scalability and Changes:

SaaS contracts should be flexible enough to accommodate business growth and changing needs. It is important for procurement professionals to negotiate terms that allow for scalability, such as adjusting licenses or expanding services without incurring excessive costs. Some of the most important factors to consider when negotiating a SaaS contract include the technical specifications, the stakeholders involved, the pricing and discounts, and the ability to terminate the contract.  An organization can adapt to evolving business needs by anticipating and negotiating favorable terms.

Identifying and mitigating risks while securing favorable agreements is essential when it comes to SaaS contracting. Procurement professionals can navigate the complexities of SaaS contracts with confidence by focusing on clear service level agreements, data privacy and security, IP rights, termination and exit strategies, vendor accountability, and flexibility. With these best practices in mind, procurement professionals can optimize value, protect their organizations, and develop successful SaaS partnerships.