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SaaS Grows Up

Editor's Note: Learn more about effective SOA Governance in ebizQ's upcoming SOA Governance Virtual Conference.

Have you considered SaaS from a standpoint of legal and business practicalities? By using a SaaS solution, you effectively outsource part of your IT and in some cases, business processes, which were previously managed internally. This raises a number of points that require consideration and also changes many aspects of the buying cycle compared to the purchase of installed on premise software. In this article we will take a look at several of these aspects including:

  • Service Level Agreements
  • Escrow
  • Business Continuity
  • Relationship with IT
  • Privacy

Service Level Agreements

It seems natural to define the terms of service, and with that to also define expectations of service availability. In some cases, customers seek to codify these expectations into service level agreements with penalties in place for non-conformance.

It is difficult however, to agree to the terms of a penalty clause that constitute proportional compensation for loss of service absorbed as a business risk by the vendor.

It is misleading to compare the practice of penalty clauses in large outsourcing contracts, since their vastly larger scope and size enables realistic penalties to be absorbed. Also, there is typically a bonus structure which offsets the penalty structure upon over-performance. SaaS contracts may be only $20-50 per user per month, and this simply does not provide sufficient margin to hedge against a reasonable penalty clause.

The best approach is to review the vendors’ track record of availability. Also, the customer should always have a back-up plan to migrate to an alternate vendor or solution, should the service provided not be acceptable.


It is common for enterprise software purchases to include an agreement to place source code in escrow, released only in the event of the vendor discontinuing operations. The purpose is to prevent a customer being orphaned if a vendor meets its demise.

Even in the enterprise software space, while common, these Escrow accounts have a number of problems. From the vendor’s perspective, they are in effect writing an insurance policy for that by definition the vendor will not see enforced. The more serious problem is that, until the vendor is insolvent, and the source code is released, a customer has no way of knowing if every important portion of the code has been included and is up to date.


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