What is a SaaS Agreement?

In this comprehensive guide, you'll learn why SaaS agreements are important, how to use them to avoid risk, and tips for managing them at scale.

Adam Feber
May 10, 2023
8 min read

A SaaS agreement is a formal contract between a customer and a Software-as-a-Service provider that sets forth the terms and conditions of using the provider’s software. SaaS agreements are tailored specifically for the SaaS delivery model, where the provider typically hosts the software on their own servers or cloud and the customer accesses it via a web browser.

If your eyes are starting to glaze over, we get it. Most of us would agree that “reading the fine print” in every contract isn’t something we always have the time or enthusiasm to do. 

But knowing what’s in every SaaS agreement is vital for protecting both you and your vendors from negative outcomes, such as unclear payment obligations, lack of service level agreements, poor data and legal protections, ambiguous ownership of intellectual property rights, or lack of dispute resolution. 

In this article, we’ll explore why SaaS agreements are important, when you need one, the most important clauses, and how to manage your SaaS agreements at scale. 

SaaS agreements vs. licensing agreements

The delivery model of the software you buy will impact the type of agreements you enter into with your software vendors. While SaaS and licensing agreements seem similar, there are crucial differences you should know:

  1. Delivery model: SaaS agreements cover the delivery of software over the Internet. Licensing agreements generally refer to the delivery of software as a downloadable package or an on-premise implementation.
  2. Ownership: In a SaaS agreement, the provider owns the software and grants customers limited rights to access and use the software based on the terms of the contract. A licensing agreement will generally grant ownership of the software to the customer, who can then modify and transfer ownership in accordance with the licensing terms. The customer is also usually responsible for maintenance and security in an on-premise model. 
  3. Payment structure: SaaS agreements are often structured as subscriptions, where the customer pays a recurring fee at an agreed-upon interval, such as monthly, quarterly, or yearly. The cost of the subscription can depend on many factors, such as seats/users, add-ons, integrations, etc. Licensing agreements are usually structured as a one-time upfront payment for the license, with additional costs for implementation and optional maintenance. 

Why SaaS Agreements are important: avoiding risks

SaaS agreements are the handshake deal that helps everyone get what they need. They provide clarity around terms and conditions that ensure both parties meet their ends of the agreement and provide a structure for a strong partnership. Here are some of the key reasons why SaaS agreements are critical.

Protecting personal and customer data

SaaS agreements define the data protection policies the vendor will adhere to and lay out all of the ways they’ll secure company, customer, and employee data. As security comes more into focus for enterprises, understanding if potential vendors meet critical compliance standards is one of the most important things to figure out before signing a contract.

Data ownership

The concept of data ownership refers to who has the legal right to access, manipulate, and use the data generated by a customer’s use of a SaaS product. In the SaaS world, the provider owns the software and infrastructure, while the customer provides/generates data within the software. Who actually owns that data must be put forth in an agreement.

If you’re inputting customer or business data into a SaaS solution, it’s critical your agreement with the provider firms up details like

  • Who owns the data
  • Who can access the data
  • How the data will be used by the provider
  • How the data will be protected and backed up
  • Who is liable for data loss

Having a formal agreement around data ownership ensures you can meet compliance standards and maintain customer trust. 

Service Level Agreements

SLAs define the level of service a customer can expect from a SaaS provider, as well as the penalties the provider will incur if it fails to meet the SLA. 

You rely on the tools you use to run your business, so getting SLAs for service availability, performance metrics, customer support (response times, availability of tech support services), maintenance and upgrades, and remedies for failure to maintain the SLA is vital. Without a mechanism to hold your providers accountable, you may have key processes interrupted by poor service. 

When you need a SaaS agreement

Any time your employees sign up for a SaaS product, you’ve entered into an agreement—even if you haven’t actually negotiated or signed a contract. It’s not a matter of when—that ship’s already sailed. It’s a matter of which agreements you know about and which ones you don’t.

Many SaaS products offer individual or small team tiers that can be purchased with a credit card. Consider tools like Calendly, Trello, or Airtable. Anyone can sign up and use those platforms for years and never even talk to a sales rep. 

But even then, those self-serve models come with terms and conditions that a user has to agree to before they can access the service. It doesn’t matter if they read through them in-depth or not (and let’s be serious—most people just check the box that says they read the T&C and move on as quickly as possible).

All of those platforms have Team and Enterprise tiers that do require contracts and formal agreements, but the fact is that any time you adopt a tool or an individual employee signs up for something, there’s an agreement. 

The problem is that when you have rogue users creating software sprawl with multiple individual accounts, you have little/no visibility into what those agreements actually say. You don’t know how your or your customers’ data is being stored or handled. You don’t know who has the login credentials. You don’t know what you’re paying for and how often. 

Research shows that the average company overpays for software by as much as 30%. 

Types of SaaS agreements

Most SaaS agreements you enter will fall into one of two categories: per user or consumption/usage-based. 

Per user agreements outline how many users—or “seats”—you can have in the solution before you reach the contractual limit. If you reach or exceed the limit, your agreement may require you to pay to add additional users. 

Consumption or usage-based agreements lay out how much you can use the software during a given period. For example, you might be able to run a certain number of reports, export a certain amount of data, or track a certain number of events per month. 

Many SaaS agreements offer components of both models. It’s important to understand how consumption and number of users impact your agreement before signing.

The most important clauses in a SaaS contract

Arguably the most important task in contract negotiation is going through the agreement clause-by-clause to ensure your company gets the value it expects while putting safeguards in place for security and breaches of contract. 

While every SaaS contract will be different, there are some common clauses to watch out for. Here are some of the most important ones:

  • Data ownership: Is it clear who actually owns the data you upload into the software?
  • Liability: What liabilities does the SaaS provider accept, and what do they deny? Is there a cap for damages? This may also be listed as indemnification and arbitration. Essentially, to what extent will both parties be responsible for breach of contract?
  • Seats/users permitted: Does the agreement include the number of users agreed upon in negotiations?
  • Payment schedule: Is the pricing and schedule of payments outlined correctly?
  • Term and renewal: Does the agreement lay out the subscription period, the means you have to cancel or alter the subscription, penalties for early cancellation, or auto-renewal language?
  • Support: Are there guarantees for the level of support you’re entitled to? Look for specifics like response time and access to a dedicated rep if one is included in the contract.
  • Data security: How often is data backed up? What kinds of protection are offered? What will happen to your data in the event of a breach or if the vendor shuts down?
  • SLAs: Is there a minimum performance standard for service availability/uptime? 
  • Consumption metrics: For usage-based SaaS products, you may have a limit to how much data you can use or actions you can take before you hit a limit. What is that limit? What happens if you go over during the billing period?

Dealing with these aspects of contract negotiation can be incredibly difficult and time-consuming. Don’t have the resources to dive into the weeds of every contract negotiation? Learn about Tropic’s Assisted Purchasing capabilities. 

Managing SaaS agreements at scale

While large enterprises have procurement and legal teams to act as “SaaS Ops,” smaller companies—those fewer than 1,000 employees—often have some mix of finance, IT, and operations trying to wrangle SaaS agreements on top of their core responsibilities. 

Cue the sound of dozens of SaaS agreements falling through the cracks.

That’s why many midmarket and enterprise companies are turning to third-party SaaS procurement solutions. As a leading provider in this space, Tropic helps companies manage SaaS agreements at scale on their behalf. Here’s how:

Preventing runaway SaaS spending

The average company overpays for SaaS by as much as 30% due to mismanagement and lacking processes. 

We solve this problem in the near term by facilitating contract negotiations, backed by thousands of data points to ensure fair pricing. Over the long-term, by deploying compliant purchasing experiences on our workflow technology, we’ll ensure you’ll always get a favorable contract through renewals or even expansions. 

Tropic also makes it easy to identify redundancies across your tech stack, making it easy to consolidate contracts, reduce IT burden, and prevent rogue users.

Saving time

You want your departmental leads and IT teams focusing on high-value activities that move your business forward, not trying to make sense of complicated SaaS agreements. 

The average end user spends 4-5 hours per contract. Across 100+ contracts that’s 400+ hours per year for a single user. By automating the purchasing experience, Tropic reduces this by 87.5% to 30 minutes per contract for your team.

Ensuring compliance

One of the most nerve wracking experiences an IT or security team can have is finding out that someone signed up for a SaaS solution that puts company, customer, or employee data at risk due to substandard security workflows and processes. 

If you’re struggling to implement your desired purchasing controls—such as INFOSEC, financial review, proper documentation, etc.— Tropic can get you to 100% compliance by deploying a user-friendly procurement experience.

Get a free estimate of how much you can save on software, or check out our Customer Stories to see how our customers are turning procurement into a strategic advantage.

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Adam Feber
Adam Feber is the Head of Marketing at Tropic.

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