CIOs share SaaS contract advice on pricing, customization and more

By Christina Torode, Senior News Writer | Mar 3, 2009

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Looking back on a Software as a Service (SaaS) contract or project, just about every CIO or high-level manager involved will tell you he wished he had done something differently.

For Adam Sokolic, vice president of product management at National Retirement Partners Inc. (NRP) in San Juan Capistrano, Calif., that gotcha happened after the ink was dry on his SaaS contract, when his staffing levels changed. "We laid off 15 people and [the SaaS vendor] won't let me drop [their licenses], so I have to pay for them for the next six months," said Sokolic, who is in charge of SaaS projects at NRP, a retirement plan broker/dealer with 130 offices and 400 registered financial advisors.

If you're gearing up for a SaaS project, here are a few tips on contract negotiations, data protection and project management direct from those who have SaaS installations in place:

Beware the potential pitfalls of license thresholds and longer contracts. Many SaaS providers require that you buy a minimum number of licenses and hold you to that number of licenses for the life of the contract, as Sokolic found out.

Fortunately, Sokolic had signed only a yearlong SaaS contract and won't have to pay for the extra baggage for the next three to five years. "I refuse to sign longer than a quarter-long contract with some SaaS vendors because I had a bad experience with one, but a one-year contract was reasonable with [Salesforce.com] because they've been around for so long," he said.

Protect yourself against steep renewal prices. Sokolic built a cap on price increases into his contract. After the first year, the price can increase no more than 5%, in year two no more than 7% and after that, the renewal prices can increase up to 10%.

Sokolic built in pricing tiers as well, with the $80 per user, per license fee going down as his company reached agreed-upon tiers of users for the SaaS CRM application. National Retirement Partners started out with one license and now has 215.

Build a sliding scale into your SaaS contract to keep cancellation fees in check. If you terminate a contract, you're on the hook for the months left in the deal, so build in a sliding scale. As an example, Brian Irvine, CIO of Unitus Community Credit Union in Portland, Ore., recommends an agreement in which the customer owes 100% of the remaining contract if it cancels within the first 12 months, 70% if it terminates in months 13-23 and 50% after month 30.

"If I cancel in month six, that should be pretty painful to me because I really damaged the vendor," said Irvine, who heads an IT team of 18 at Unitus, a community and state-chartered credit union with eight locations and $740 million in assets. "But if I cancel in year two in the 28th month, they've more than made back the investment they've made in me, so I shouldn't have to pay for the remaining eight months if we decide to cancel."