By Martin Kotze
So, you have been asked to draft a mission-critical Software-as-a-Service (SaaS) contract. How complex can it be? It is basically software being licenced.
As it turns out, there are important differences between a software licence and a SaaS contract.
A SaaS contract falls under a category of contracts called a cloud services agreement.
To understand the difference between a software licence and a cloud service subscription, you need to understand the access method.
With a software licence, 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-premises’ software).
Think about Microsoft 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 Salesforce customer relationship management (CRM) software. There is nothing to install. You open your browser, you log in with your credentials, and there you go.
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 information technology (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.
Due to the delivery models being different, with a software licence, 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.
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.
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.
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.
A SaaS solution often uses different commercial models compared to on-premises 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.
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-premises 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.
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 technology contracts.
Martin Kotze, a seasoned corporate and commercial lawyer with a keen interest in technology.
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