So SaaS is cheaper than installing your own software, right? Don't count on it. "If you go into a SaaS agreement believing it's going to be less expensive under all circumstances, you should reorient your thinking," says Rob DeSisto, an analyst at Gartner Inc. There are all kinds of extraneous expenses that SaaS customers need to be aware of, according to DeSisto. Those include setup costs, training fees, storage limits and the costs of integrating with other applications.
Here are the top 10 gotchas in SaaS agreements that corporate customers should watch out for:
1. "I agree" to what? SaaS providers typically send electronic contract notifications to customers with an "I agree" button for them to click, says Pat Cicala, president and CEO of Cicala & Associates LLC, a consulting firm in Hoboken, N.J. "People usually get sick of reading these agreements online and end up clicking 'I agree,'" says Cicala.
IT organizations that are poorly governed or don't have a centralized Web licensing strategy run a significant risk of having business leaders agreeing to software terms they're not familiar with. "You've got business buyers making a lot of the contractual decisions, and they're not savvy in a lot of the contractual issues," says DeSisto. For instance, most business leaders don't know enough to ask if the vendor's data center is staffed by people with proper security certifications or if the vendor is ready to comply with the SAS 70 auditing standard.
2. Easy installment plans. For customers, one attractive characteristic of SaaS agreements is that they don't require a huge upfront financial commitment to start a service. But even though there are advantages to paying for the service on a monthly or quarterly basis, few customers realize that they can pare their yearly costs by 5 percent to 15 percent if they pay for an annual SaaS agreement all at once, says Michael Mankowski, senior vice president of Tier 1 Research in Minneapolis.
Customers should also obtain the rollout plan for the software in writing, says Mankowski. Find out what the vendor's rollout capacity is, he says. Will it add 100 of your users per week? Per month?
3. Missing SLAs. Service-level agreements, such as those guaranteeing vendor response time, are a critical component of SaaS contracts, says Mankowski. Some vendors provide SLAs with the contract, while others charge extra fees for SLAs or don't provide them at all, he says. "If it's a business-critical application and you need five 9s uptime, you need to make sure that's covered in the agreement with your SaaS provider," Mankowski says. Also, contracts should stipulate penalties such as credits or givebacks if service levels aren't met, says Jeff Kaplan, managing director at ThinkStrategies Inc., a consulting firm in Wellesley, Mass.
4. Performance levels. Customers should clearly define software uptime and availability levels with SaaS providers in writing. Before entering into an agreement with a SaaS provider, customers should ask the vendor for a record of past performance levels, says Kaplan. It's also wise to ask about business plans and investments that the provider is planning to make over the next three to 12 months, including enhancements to service-delivery capabilities, says Kaplan.
Customers should also ask how they will be contacted if there's a service disruption, and they should find out how much time the vendor has to fix the problem under the contract, says Mankowski.
5. Defining uptime. SaaS customers need to carefully define guarantees around system uptime, says DeSisto. Most contracts call for 99.5 percent uptime or part of your money back for a month. "But what does that mean?" asks DeSisto. "Is that 99.5 percent of planned uptime? Does the vendor plan to be down eight hours a month? If so, which hours?"
6. Add-on costs. SaaS customers should scour the fine print for hidden expenses. Sometimes vendors charge to configure the software or implement the database or workflow processes, says DeSisto. In some cases, vendors charge an additional US$18 to $25 per user per month to stage and test the software, he says. And if you want to add support for handhelds and other mobile devices, those costs can escalate to $45 per user per month.
Vendors also may try to predetermine the amount of storage that's available for each end user in your organization and bill for overage charges. "So many people are buying SaaS based on price. They need to understand what the base product is and how much all the add-ons cost," says Rob Scott, managing partner at Scott & Scott LLP, a Dallas-based law firm.
Customers should also ask whether training is "baked into" the cost of the service or if there are additional costs for training or support, says Mankowski.
7. Integration intangibles. If SaaS software has to be integrated with other customer systems, buyers need to determine who's responsible for handling the systems integration and at what cost, Scott says. An "ecosystem" of third-party firms can typically handle this work for less than what SaaS providers charge, says Kaplan.
8. Data rights. Before entering into SaaS agreements, customers should determine where their proprietary data will reside and what rights they have to access that data, says Cicala. "If the deal goes south, you need to know where your data is and what kind of shape it's in," says Mankowski. Customers should also ask for guarantees in writing as to how the data will be protected from both a privacy and disaster recovery standpoint, says Kaplan. Moreover, customers should determine whether they're entitled to back up the data on their own systems should they choose to, Mankowski says.
9. Non-negotiable? One of the biggest misconceptions about SaaS agreements is that they're simple "click-wrap" contracts that aren't open to negotiation, says Cicala. Customers figure they're already saving money, so they don't press the issue. "But the licensing costs are going to catch up to you," says Cicala. The vendor essentially bundles maintenance and support costs into the contract, so it makes sense to try to negotiate the deal down.
And just as with other types of software licenses, big customers can obtain volume discounts. "If you're talking 50 seats, there might not be a lot of discounting," Mankowski says. "If you're talking 5,000 seats, then the vendor might be inclined to talk a discount."
10. Exit charges. Let's say an organization has signed a one-year contract for CRM services for 1,000 seats but wants out of the deal after nine months. In some cases, providers will hit customers with exit charges before giving them their proprietary data back, says DeSisto. He points to one vendor that has enforced a 10 percent penalty against the total value of a contract if a customer wants to cancel the deal after six months.
Or let's say a customer has a service agreement for 200 users and wants to scale back to 100 users after six months. In some cases, the vendor will try to continue charging for 200 users or force the customer to pay a penalty for scaling down to 100 users, says DeSisto. Either way, he says, it flies in the face of the so-called on-demand software model.
Sidebar
An agreement that works
When Agristar Global Networks Ltd. in Chicago launched a satellite-based service in 2003 to connect commercial farmers and ranchers with trade partners, it wanted to provide customers with a portal where they could check on news, weather and market prices.
But when it requested proposals from vendors, Agristar Vice President and Chief Financial Officer Joseph Kruszynski discovered that many outsourcers wanted $50,000 just to implement and launch the portal service, never mind the monthly user and service fees that would be added on top of that.
After shopping around, Agristar entered into a software-as-a-service agreement with InfoStreet Inc. in Tarzana, Calif. The application service provider (ASP) provides a customizable portal called StreetSmart and charges Agristar about $4,000 a month for the service, which includes training and support costs.
Under the contract, which started in May 2003, Agristar paid InfoStreet a "nominal" fee to set up the portal and integrate the system with Agristar's e-mail system, says Kruszynski. Agristar also had to shell out a small amount of money to integrate the system with the Hughes Network Satellite services it uses. "It wasn't much of a cost," says Kelly Paradis, director of Web development at Agristar, which now has several thousand customers using the portal.
Although Agristar is happy with the agreement, it has the option to back out of the contract with 90 days' notice at a cost of less than $5,000, says Kruszynski.
InfoStreet has made one modification to the original agreement. When Agristar first signed the deal, InfoStreet guaranteed 99.95 percent uptime for the portal. Beginning in April, the ASP upped that guarantee to 99.99 percent, says InfoStreet CEO Siamak Farah.
"Part of the reason that our termination costs are so low is that we stand by our product," Farah says.