Forrester: Be careful negotiating SaaS contracts

As SaaS (software as a service) applications continue to gain momentum, customers should take certain precautions when negotiating contracts, a Forrester Research analyst said on Thursday.

Forrester found that 16 percent of large enterprises in North America and Europe were using or piloting SaaS in 2007, and nearly half were interested, analyst Liz Herbert said during a webcast event for Forrester clients.

But that usage number may be low because SaaS deals are sometimes made under the corporate radar screen, she said. Forrester has SaaS statistics for 2008 due out soon, she added.

Meanwhile, SaaS contracts have been getting longer, Herbert said.

"In the past, I was seeing a lot of contracts that were trial-based, month-to-month. Companies didn't want to commit," Herbert said. But more recently she has seen deals as long as five years.

Vendors are using deep discounts, even beyond 50 percent, to help seal such pacts, she said. But steeper price cuts generally go to key customers and are on more expensive products, she added.

Companies that do sign long-term SaaS deals should consider what will happen after the term expires. For example, it is wise to include language in the original pact that limits price increases for subsequent contracts, she said.

Also make sure to get an exit clause, the terms of which might be surprisingly flexible, she added. "I've even seen exit clauses go in [that require] no cause and no fee."

Other contract considerations include a clear sense of expectations around service levels as well as support, such as the number of customizations the vendor will cover.

SaaS vendors should also be compelled to alert customers in advance when they are changing hosting providers, and customers may also demand that they be given time to check out the new provider, Herbert wrote in a recent report that covered similar topics as Thursday's event.

Above all else, make sure your company's sourcing group and legal team are involved in SaaS negotiations, she said.

That's because SaaS contracts today are more like marriages than experimental flings.

In the past, many SaaS applications were "pretty basic, and companies had much easier time switching, which was a huge problem for SaaS vendors," she said.

But the increased complexity and extensibility of contemporary SaaS products makes a move more complicated, Herbert said.

These days, a customer who wants to switch SaaS providers will likely end up with just their data, she added. To that end, however, SaaS contracts should disclose any fees associated with getting their data back, Herbert noted in the recent report.

A Forrester report on SaaS by analyst Ray Wang released Wednesday touched upon the worst-case scenario of a SaaS vendor going bankrupt.

"Choose a financially viable SaaS vendor or seek a software escrow-like mechanism," Wang wrote. "Most contracts do not include the software escrow protection mechanisms found in on-premise contracts."