20 steps to an iron-clad SaaS contract

During my discussions with Guardian Life Insurance Co. for this week’s feature story, Best practices for scaling up SaaS, I asked the executive team what their secrets were to successfully implementing 20 large-scale SaaS contracts.

I heard back not only from CIO Frank Wander but from the rest of the negotiating team as well: Doug Greene, vice president of corporate systems, security, risk and compliance; Scott Husslein, counsel; Frederic Khalil, vice president and head of Source to Pay; and Linda Cooper-Angles, assistant vice president and corporate information security and governance officer.

I also solicited advice from Cindy McKenzie, senior vice president of enterprise application services at Fox Entertainment Group, and Russell Weiss, a partner at Morrison & Foerster, a law firm that specializes in negotiating service agreements.

What follows is a summarization of their tips and best practices.

1. Establish ground rules and a single point of contact prior to any vendor discussions or contract negotiations.

2. Prepare, Prepare, Prepare. Eighty percent of negotiation time should be preparation and strategy development; 20% should be on the RFP and face-to-face negotiations.

3. Understand your negotiating position up front. Know what you can realistically achieve and whether you can get to an acceptable solution before you invest a significant amount of time. Even if you’re not a big player you may still have negotiating leverage. Are you the first in an industry to get on board? Will you agree to publicity? Is there significant add-on opportunity for the vendor? Is there a strong competing vendor you can play against? Is it the end of the quarter or year for them?

4. Contract negotiation starts with the first meeting, and should be a team approach. Involve legal from the start and document all verbal agreements for inclusion in the contract later. A partnership between the business, strategic sourcing, finance, legal/contracts, security/risk specialists and IT is a must for a successful outcome.

5. Keep track of any verbal or written agreements made throughout the negotiation sessions and integrate those into the contract.

6. Understand who on your team is in a position to make changes to business requirements or authorized to accept specific operational or financial risks prior to negotiating. Organizations that are not clear on this may end up going in circles.

7. Be candid and up front about what you can accept, what you can’t and why not. Know going in which terms and conditions are show stoppers and what you can live with. Work on tradeoffs towards a win-win.

8. Focus on what the liability issues are, what the limitations are and whether those are acceptable given the potential cost exposure, especially when it comes to breach of confidentiality.

9. Nail down pricing. Contracts often ratchet upwards: You can add new users but there’s no downward adjustment if the number of users drops during the contract period, which may extend out as far as five years. IT executives say that vendors have been less willing to be flexible on this point.

10. Strengthen your negotiating position: Make it clear that you’re soliciting competitive bids. Then pull together the most favorable pricing, terms and conditions from each proposal and ask each vendor to match it.

11. Consider working through a reseller to help negotiate better terms and conditions.

12. Avoid “clickwrap” agreements. (See the “Would you sign this contract?” shaded text box in the SaaS feature story). Develop your own master service agreement that includes primary legal points such as warranties, limitation of liability, ownership, service descriptions and pricing and the fee schedule.

13. Be sure any contact includes a right to terminate for nonperformance issues, such as a consistent inability to meet service level agreements. Getting service credits isn't a good remedy if the quality of the service doesn't meet your needs. 

14. Check that security certifications and best practices apply to the SaaS vendor’s staff, as well as the vendor’s hosting provider or other third parties used by that provider. Ask for breach of confidentiality guarantees, data protection and data security policies.

15. Ask for the right to audit for data leakage or loss.

16. Ask for governance guarantees on usage. Who has access to the data and what can and can’t they do with the service?

17. Begin with the end in mind. Know how you will exit the agreement, how quickly the vendor must provide the data, and have a transition plan. If you plan to bring it back in house, how will you do that? Without a plan switching costs may be so high that a company may be stuck or face high operational and budgetary challenges to make the transition.

18. Vendor selection ends only when the contract is signed, not when you have narrowed down the number of vendors to a single option. Until then you are still negotiating.

19. Use objective decision making criteria. Using a scorecard based on both qualitative and quantitative criteria prior to any vendor negotiation will enable you to be objective.

20. Think win-win. Contract negotiation is about more than defining contract terms and conditions. It should be about structuring a win-win relationship between customer and vendor.

Copyright © 2012 IDG Communications, Inc.

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