This article is published with permission from the editor of De Rebus. This article was first published in De Rebus in 2023 (Oct) DR 15. The original article was also published on the De Rebus website at www.derebus.org.za on 1 October 2023.

Master SaaS Contracts – Part 1

So, you’ve been asked to draft a mission-critical Software-as-a-Service (SaaS) contract. How complex can it be? It’s basically software being licensed.

As it turns out, there are important differences between a Software License and a SaaS contract.

A SaaS contract falls under a category of contracts called cloud services agreements.

Software license vs. cloud services subscription

To understand the difference between a software license and a cloud service subscription, you need to understand the access method.

With a Software License, you receive a copy of the software and install the software on your computer. Once installed, you can access and use the software offline (often called “on-prem” software).

Think about MS Word that you must install on your computer or McAfee antivirus software.

With a cloud service subscription, you generally require an internet connection, and you access the software through a web browser. There is nothing to install, and you do not need a copy of the software.

Think about Xero accounting software or Sales Force customer relationship management (CRM) software. There is nothing to install. You open your browser, you log in with your credentials, and there you go.

Important considerations

Hosting

With a SaaS solution, the software is hosted off-premises (often called “cloud hosted”), and the Service Provider takes responsibility for commissioning the servers and ensuring that everything runs smoothly. 

Therefore, when you go with cloud services, you rely on someone else’s IT infrastructure, which is an important consideration, especially if the software is mission-critical.

Conversely, using someone else’s IT infrastructure has several benefits, including scalability, less maintenance and flexible pricing.

Copyrights and access rights

Due to the delivery models being different, with a Software License, you need to address various copyright-related aspects. For example, how many copies can the customer make of the software? Are there any restrictions as far as the scope of the license is concerned? For example, may the software only be used for internal purposes?

On the other hand, with a SaaS solution, you need to address various aspects related to access rights and use of the SaaS solution.

Confidentiality

When using cloud services, users may be required to upload confidential documentation to a cloud server. A cloud server you have little control over. For this reason, you must address various aspects dealing with confidentiality and data breaches in the cloud subscription agreement.

Data privacy

Cloud services can be provided from anywhere in the world, which is convenient, but this, in turn, may result in compliance headaches, especially when it comes to cloud service providers’ processing of personal information in other countries.

Business continuity

Another scenario that requires consideration is what happens if the Cloud Service Provider goes out of business. 

If you use “on-premise” software, you will still be able to use the software.

With a SaaS system, You will not be able to continue using the software because the servers hosting the software will most likely be suspended.

Commercial models

A SaaS solution often uses different commercial models compared to on-prem software licensing. The pricing of a SaaS solution is generally more flexible. For example, SaaS providers can also charge “usage fees” as “usage” of the software is easier to monitor as everything happens on the servers controlled by the SaaS provider.

Service Provider Benefits

The above considerations are mainly concerned with the Customer’s perspective.

From a Service Provider’s perspective, providing a cloud service may hold several benefits.

One of the benefits is including suspension rights in the agreement. Generally, the subscription fees are payable in advance, and if the customer fails to pay, the service provider can suspend the service and restrict access to the system.

The Cloud Service Provider is also in control of all released updates. With on-prem software, an issue that may arise is that customers fail to update the software to the latest version. This, in turn, places an additional support burden on the software provider to support outdated software.

Stay tuned

Considering the above, several additional considerations must be considered when drafting your SaaS contract. Over the next few months, we will unpack all these aspects and help you master tech contracts.