By Liz Herbert

Liz-Herbert

Software-as-a-service (SaaS) continues its rapid growth — becoming an increasingly strategic part of firms’ application portfolios. Firms are using SaaS across a wide range of applications from CRM to ERP to IT, for deployments of all sizes, and across multiple geographies. As firms make heavier use of SaaS solutions, CIOs must ensure proper due diligence in the selection process. Although some SaaS still comes in through under the radar screen, business led deployments, centralized groups in IT, sourcing, and vendor management should take ownership of the research, purchasing, negotiations, and ongoing vendor relationships for these solutions.

Forrester suggests CIOs ensure the following considerations in SaaS sourcing:

  1. Data ownership. Buyers expect that they have ownership of their data — but in some cases they have been surprised by fees associated with getting their data back at the end of their relationship with the provider. SaaS contracts should be clear about any fees associated with getting data back at the end of a relationship as well as details such as data format. Beyond data, sourcing teams should work with business users to make sure that they are clear on what they can and cannot take with them at the end of the relationship. With the growing number of platform-as-a-service capabilities offered by SaaS vendors, firms may be able to get data back but should be aware that bolt-on applications that they have built in proprietary code are likely to be lost.
  1. Rights to data usage analysis. One of the greatest advantages of the SaaS deployment model is the ability to see data (anonymously) across multiple customers. SaaS vendors are able to use this information to drive R&D road maps as well as to build valuable benchmarking reports in areas ranging from details about application usage to application-specific information such as sales pipeline metrics or customer service queue times. SaaS subscribers should understand what data their provider is allowed to capture as well as what benefit they will receive from it (e.g., copy of a benchmark report, monetary compensation, access to new functionality).
  1. Support expectations. A key benefit of SaaS is that firms can offload application help desk and support to their SaaS vendor. Beyond bug fix and traditional support calls, SaaS vendors are often able to provide additional services such as password resets and health checks. Sourcing executives should make sure they are detailed about factors such as hours of support, type of support (phone, email, chat), and which employees have access to that support.
  1. Exit clause. Firms often choose to sign multiyear SaaS contracts in return for significant discounts off list price. Additionally, multiyear contracts ensure lock-in for negotiated prices. Many of these longer deals range from two to five years, meaning that firms risk losing the flexibility to get out of their contract. However, many firms have successfully negotiated exit clauses with their SaaS vendors, sometimes for specified causes such as an integration failing to work. Others have negotiated the ability to terminate the contract without cause. Sourcing teams should make sure they are clear about what is required to exit the contract including how much notice they must give the SaaS vendor as well as any associated fees — which may vary based on length of time elapsed in the contract (or may not be required at all in some cases).
  1. Cost increases at end of contract. Firms often spend time negotiating their initial contract and considering the total cost of ownership based on that initially agreed-on price. However, sourcing executives should also work with business and IT executives who are signing these contracts to specify what happens at the end of the contract. Some firms have successfully been able to negotiate caps on rate increases in subsequent years (although some firms are met with the response that they need to sign a longer-term contract if they want any future price protection).
  1. Expectations for the physical infrastructure/hosting provider. As SaaS continues its fast-paced growth, some providers will start with one hosting partner and switch to another one as their needs change. At a minimum, firms should demand advance notification and an explanation when the vendor is switching the underlying hosting provider. Firms that did significant due diligence in the selection process — such as physically visiting the hosting facility — might want to consider additional language that would give them time to investigate the new partner and/or opt out of their contract if not satisfied with the switch.
  1. Backup and recovery guarantees. Sourcing executives should help SaaS buyers understand how their SaaS vendors are approaching backup and data recovery as well as to write language into the contract that commits the vendor to restore data in case of disaster. Key components to consider include the amount of time the application could be down and the window of potential data loss. Firms should be compensated if the vendor cannot meet its commitments.
  1. Uptime and performance expectations. Many SaaS applications do not have a service-level agreement (SLA) that outlines expectations for application uptime. And those that do often have a fairly weak uptime guarantee such as 99.5% uptime outside of planned maintenance windows. Sourcing executives should not only push for uptime guarantees and details in SLAs, but increasingly have the opportunity to detail performance expectations as well. Although the SaaS provider can't control the Internet, it may be willing to guarantee a response time for data leaving its own site.

SaaS vendors are evolving their contracts as well as physical infrastructure, security, and tools to keep up with the increasing buyer-side demand for enterprise-class solutions that can stand up to rigorous standards. Forrester has been seeing significant focus around clients bringing SaaS into formalized sourcing and vendor management groups who can oversee the all elements of the SaaS lifecycle — from selection to contract negotiation to ensuring ongoing value from the SaaS provider. As this trend continues, Forrester continues to help clients understand best practices for SaaS price negotiation levers, SaaS contract negotiations, and SaaS vendor management. This continues to be a significant topic of focus and will also be a key part of sessions and discussions at Forrester’s IT Forum.