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Software as a Service – Another Form of Outsourcing

Software as a Service – Another Form of Outsourcing

Software as a Service (SaaS) is a services delivery model being sponsored by many software vendors. While not generally referred to as "outsourcing," SaaS has many of the same features, and requires many of the same contractual precautions of an IT outsourcing.

In a true SaaS model, the software vendor and the service provider are one-in-the same. Charges are generally based upon a scalable metric – transactions, employees, seat counts or dollar volume – not upon instances, machines or licensed users. Capital investments and infrastructure are owned and/or controlled by the software vendor. While there is an underlying license to the software in the SaaS model, that license is not at the front-and-center of the relationship.

SaaS offers many benefits to potential customers, but also presents major costs and risks. Perhaps the most significant benefit of the SaaS model is the opportunity it creates to align software and infrastructure costs with actual usage, company size, number of employees, or process dollar value. Secondly, it can replace significant capital expenditures (and their associated recognition issues) with an expense model that is often more budget-friendly – and facilitates a clearer, easier to defend charge back process. Third, it offers customers the ability to keep their software "up-to-date" without costly and disruptive upgrade processes. Finally, SaaS allows for economies of scale to develop through multi-tenant installations.

However, SaaS is not without its drawbacks. Depending on the foresight employed in the negotiation process, costs may not reflect additional economies in the event of growth or appropriate reductions in the event of shrinkage. In addition, with a single vendor controlling both the software and its infrastructure, customers may be subject to unreasonable costs for upgrades, enhancements or professional services.

Standardization is a key feature of SaaS delivery – and may be a benefit or liability, depending on the customer's perspective. SaaS encourages baseline standardization, with customizations generally coming from business rule implementations, not from underlying changes to the software. However, business users do not always welcome standardization and, certainly, some business processes do not lend themselves to standardization.

SaaS also introduces substantial institutional risk into the equation. Signing on with a SaaS vendor means that control is being ceded to a third party – control over the means of production, the subject of production and the underlying data. Without adequate protections – protections that are, in some cases, even stronger than those in an outsourcing agreement – the customer could be left without software, without infrastructure, and most critically, without access to their data. Performance management is also a major concern. Vendors, like customers, are always looking for ways to reduce costs, and when those reductions adversely affect the services, the customer must have recourse.

SaaS relationships, therefore, must contain protections not unlike those contained in IT outsourcing agreements. Transition-in plans must be clearly established – and, more importantly, transition-out plans must be well constructed and protective. Customers should also seek protection in the event that the vendor faces insolvency, financial difficulty or a corporate transaction. Service levels are also important, as they may be the only way to encourage vendors to maintain a high level of performance throughout the term of the agreement.

Data protection is another important consideration. With the software vendor holding the data, and potentially sharing systems and devices with other customers, it is critical to develop clear security, backup and archiving protocols. A customer's data should be easy to segregate and easy to supply to the customer, and should be provided in a form readable by the customer. In certain cases, a "data escrow" agreement may be considered.

Software is also an integral part of the relationship. It is important to employ key provisions normally found in a software agreement, including a clear delineation of IP ownership and rights, appropriate data protection provisions, and appropriate license and escrow provisions related to both source and object code.

In this short post, it is impossible to survey all potential benefits and liabilities offered by the SaaS model. However, when contemplating a SaaS relationship, the deal team should carefully consider employing the best practices of both outsourcing and licensing agreements, developing an agreement that includes the best of both constructs and is structured in a manner that reflects the long-term, high-touch nature of the relationship.

This entry was written by Gary M. Zeiss, Esq. and posted on April 19, 2007 at 4:41 am and filed under Outsourcing, IT Outsourcing. Bookmark the permalink. Follow any comments here with the RSS feed for this post. Post a comment or leave a trackback: Trackback URL.

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