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Navigating your SaaS contract: Buyer beware?

Even as CIOs face smaller IT budgets in a range of areas this year, one segment that still has traction is Software as a Service (SaaS). The subscription-based software delivery model provides an alternative to bulky, on-premise applications and is thriving in shops where CIOs need to deliver functionality quickly without a lot of up-front investment.

But buyer beware: The gold on the road to SaaS is often buried in the contract you negotiate, and some CIOs are left wishing they had done something differently soon after the ink has dried.

In a recent article, CIOs shared tips and advice for avoiding potential pitfalls in SaaS contracts, from contract duration to licensing fees and more. One CIO faced a requirement to buy a minimum number of licenses, which had to be maintained for the life of the contract. Adam Sokolic, vice president of product management at National Retirement Partners Inc. in San Juan Capistrano, Calif., lost 15 people in a layoff and was stuck paying for the licenses even though he didn’t need them anymore.


Such issues don’t seem to be crimping the popularity of some SaaS solutions, though. Research firm IDC has increased its SaaS growth projection for 2009 from 36% growth to 40.5% growth over 2008. recently announced record growth of almost $20 million in recurring revenue by the end of 2008, bringing fiscal year revenue growth to 389% of 2007. saw a 34% jump in quarterly revenue by the end of January, reaching a record quarterly revenue of $290 million. In fact, as these results show, CRM and IT Service Management software seem to be among the more popular application categories for SaaS.

So while lobbying for desirable SaaS contract terms may require a practiced and skilled negotiator, the market growth shows that SaaS continues to gather steam in today’s corporate IT. And that can benefit everyone.

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This issue of "buyer-beware" has been around for decades. Saas and Cloud Computing are new buzzwords for outsourcing, albeit using some of today's newer technologies and some variance in methodology. If the Saas world doesn't learn from the mistakes of the outsourcing world, it will not fail, but it will have a rougher time than it needs to. "Escape clauses", especially the "for convenience" variety were not seen in the early days of outsourcing, but eventually came onto the scene. The ability to ramp up (or down) is highly desirable, especially in the current economic situation. But the vendors usually have a tough time controlling their costs in a way that allows a high degree of variability. Kristen's opening premise is right on - buyer beware. Do some contract modeling using various economic and company conditions. I believe their is another element that needs to be on the table - liability. It is also one that has caused some rough spots for outsourcing. With things like HIPAA and more recent privacy laws (especially when you look globally), how are Saas and Cloud vendors going to address this issue. I think this will gain visibility as the new emphasis on Health Information Exchange gains momentum.