Contract negotiation typically focuses heavily on pricing, but getting a deal on pricing isn’t the only objective when negotiating SaaS. Equally important is the need to practice contract risk management with advantageous terms and well-constructed legal protections. The best-negotiated contract not only creates opportunity but avoids potential losses. Implementing good risk mitigation policies can reduce the chance your company will be one of the more than 50% that suffer a data breach or other risk incidents.
In this blog, we’re providing insight on avoiding and mitigating risk when buying SaaS software. You’ll learn the types of legal risk to be aware of, and how to better protect your organization against common contract pitfalls.
What is a SaaS contract?
SaaS contracts outline the price and terms of purchasing software and enumerate any rights and responsibilities each party has during the term of the contract. They also feature service-level agreements (SLA) that dictate agreements about uptime, minimum performance, and data handling. Active risk management in your contracts is part of contract lifecycle management (CLM). This practice takes a continuous improvement approach to managing supplier contracts, by evaluating contract performance, avoiding and mitigating breach of contract during the contract term, and performing periodic contract reviews to ensure contract compliance and security.
3 types of risks that may appear in a SaaS contract
When negotiating a contract with a new supplier, there are several common issues you’ll want to watch for. Weak contract protections can cost you time, profitability, and data security. When a supplier doesn’t meet its contractual obligations, your contract is the only protection from negative outcomes. Watch for these 3 types of risk that could appear within your contract:
- Termination penalties – organizations often miss the cancellation window for contracts or software that is no longer needed. If negotiation during the contract inception didn’t address auto-renewal, companies find themselves paying termination penalties.
- Weak SLA language – inadequate SLA protections in your contract may leave ambiguity about the rights and responsibilities of your supplier – reducing your ability to seek a remedy.
- Contract noncompliance – negotiating for strong compliance language in your contracts is vital to mitigating risk. Clearly defined parameters for compliance and penalties for noncompliance should be a feature of any software supplier contract.
Notice and manage risk in your software vendor’s contract
Contract risk can be costly, but there are ways to detect and reduce instances of risk-related spending:
- Invoice discrepancies – problems with the invoice as compared to the contract terms is a strong indicator of a potential risk situation. Any discrepancies in your invoice reconciliation should be immediately researched and discussed with your supplier.
- Audit for contract variances – charges or substitutions to the products or services outlined in your SaaS software contract warrant investigation and remediation. Building a strong compliance and supplier evaluation practice can help spot non-compliance issues early and prevent financial losses incurred for remediation.
- Address ambiguous language – at the negotiation stage, address any areas of confusion or ambiguity in the contract language. Look for areas where you need more clarity on the intended delivery of services and the consequences and responsibilities when issues arise.
5 best practices for mitigating and negotiating software contract risks
Implementing the following risk management strategies in your contract management can help you avoid third-party risk and establish better relationships with your suppliers:
- Lead with non-negotiables – having a strong, documented set of contract requirements can help you negotiate good agreements and practice risk mitigation preemptively. Collaborate with your legal teams, security heads, finance department, and departmental stakeholders to establish cross-functional prerequisites for working with suppliers.
- Insist on a thorough evaluation process – when shopping around for new SaaS software tools, commit to a thorough multi-bid process with a standardized due diligence process and risk assessment. Evaluate at least three vendors for any new contracts.
- Build a strategic supplier list – build a list of trusted suppliers that meet all of your software needs. Consolidate your supplier pool into a well-managed, streamlined list to ensure that every new purchase of software meets the minimum standards set out by your departments.
- Establish strong budgetary controls – having guidelines in place for spending, and tracking those expenditures closely will help you quickly identify deviations from approved spending and correct discrepancies with software or contract issues.
- Centralize your contract management – automating with a contract management solution can help avoid issues such as auto contract renewals and missed termination deadlines. It provides total visibility for your contracts and allows for automated tracking, reporting, and evaluation to ensure high performance over time.
Let SCS Guide You
When negotiating for SaaS software, it’s important to take an informed approach. We help buyers build better-performing software contracts by outlining many of the protections and practices necessary for a strong, successful contract. With SCS, you get access to comprehensive data, knowledgeable negotiation experts, and contract template advice that can save you money, and mitigate potential risks. Contact us today!