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CIOs share SaaS contract advice on pricing, customization and more

Christina Torode, Editorial Director

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 US company National Retirement Partners , 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.

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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 , 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."

Protect your data through a third party. Bill Hoban, CIO of Extra Space Storage, a self-storage space company with 685 locations, is very comfortable with his data residing in a SaaS provider's data center, but he still errs on the side of caution. His IT team downloads and stores 90% of the data from its point-of-sale (POS) system in its data warehouse every day. The POS system feeds data to its hosted SaaS CRM application.

Preserve any customization you have paid for in your SaaS application. Irvine at Unitus signed a deal with an escrow company to keep the code that customized the credit union's Service-now SaaS service desk application. "If the [SaaS provider] shuts down, I don't want to deal with creditors to get my code," he said. "Sure I'll have to start over, but if my code's in escrow at least I can get it and install it on my own hardware and be back in business relatively quickly."

Sokolic recommends keeping spec documents on every configuration made and all custom code work involved, to rebuild the SaaS application with another provider if needed. His IT staff performs weekly backups of all data in NRP's SaaS CRM application and stores it locally. Hoban said he plans to figure out a way to protect the customization work that Extra Space Storage has done within its SaaS CRM application once the system is officially launched this March and his staff finally has time to address the issue.

Scale functionality gradually. To date, National Retirement Partners has integrated nearly a dozen back-end systems with its SaaS CRM application. The company plans to continue down this path, adding new services and functionality in a systematic way.

"The more I work with [Salesforce.com's CRM application], the more I see what it can do," he said. "But you don't know what you don't know, so when you get going you really need to start with the basics of the program and then slowly build on top of it in bite-size pieces."

Go with a SaaS application that is highly configurable versus customizable. That way, internal IT can add services at its own pace and not have to rely on a third party to develop custom code. "[SaaS service desk vendor Service-now] is very open with its architecture, which makes it easy to fully integrate anything that you want," Irvine said. "That's how we're able to achieve more configurations and less customizations than we would with other players in the [SaaS service desk] space."

Keep an eye out for new releases. SaaS vendors release updates more frequently than on-premise software vendors do, and you need to make sure updates don't break your customized instance. Some SaaS vendors will test your application and notify you if an update may cause your application to fail; some will not. The vendor should put you in control of turning an update on or off, or blocking it altogether. The first step is tracking the release schedule so you know when to take action.