The beginner's guide to SaaS license agreements

Once upon a time, most companies used traditional software solutions hosted on-premise that required on-prem servers, data centers, and dedicated IT resources.

Then, SaaS applications hit the software scene for practically every core function of a business. Now, there are more than 30,000 SaaS companies in the world.

The catalyst? Organizations seeking continuous improvement.

Companies were doing tons of manual processes that they could do much more efficiently, securely, and from any location and device. For every possible question of efficiency, there is almost always a SaaS product with the answer.

The SaaS industry has changed the landscape of software products available. But more than that, it has profoundly altered how companies buy and manage software.

One such change is in software licensing and agreements.

SaaS license management can be confusing, and if your procurement team is organizing a large stack, it can be overwhelming, too.

This post breaks down what a SaaS license is and the things SaaS customers need to understand when reviewing license agreements.

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What is a SaaS license?

Unlike on-premise software, SaaS isn’t a copy of software placed on a server for use. Instead, it exists in the cloud.

So, while we may call it a license, today's SaaS license looks more like a subscription. It slightly resembles the end-user license agreement (EULA) for on-premise or traditional software.

In many cases today, SaaS licenses are part of SaaS agreements or vice versa.

Types of SaaS licensing agreements

There are two standard types of SaaS licenses: per-user and usage-based.

Per-user licensing

This subscription software license model may also be called per-seat or seat licensing. In this type of licensing model, your company pays an upfront cost for licensing for each user. These are often offered as tiered pricing from only a few end users to full-enterprise access.

Usage-based licensing

This SaaS license model may also be called consumption-based licensing. For example, this model may base usage-based pricing on the number of transactions, reports, or data used within a defined period.

These are just some of the options. As companies continue to optimize their SaaS license management, SaaS suppliers have begun offering many variations of the standard license types mentioned above. Some examples of those variations are:

• Tiered pricing
• Pricing per active user
• Pricing per feature
• Open-source pricing
• Monthly subscription

Perpetual license vs. SaaS license

What's the difference between a perpetual license and a SaaS license?

Perpetual means never-ending. Your company may have a perpetual license for specific software, like Microsoft products. Microsoft has a perpetual license business model and offers the option to pay a lump sum for indefinite use of the software, like Microsoft Office.

You pay a perpetual license fee for Microsoft Office upfront. Then, you install the software on a device and now own that software.

However, with a SaaS subscription, you never own the software; you just pay for its use.

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What does a SaaS license agreement include?

In many cases, with SaaS applications hosted in the cloud, you will see a limited-use software license agreement.

This agreement typically consists of all license terms and the service-level agreement (SLA).

Make sure all necessary stakeholders have the chance to review the license agreement before both parties sign it. Stakeholders might include finance, legal, IT, and the software application's end users.

Here are some standard clauses you can expect to see.

Definitions

This section will include definitions of key terms used throughout the license agreement.

Grant of license

This clause identifies the type of license granted to the customer. It may specify things like exclusive or non-exclusive, transferrable or non-transferrable, and what third parties, if any, to which the license (subscription) extends.

Licensor services

Licensor services are a SaaS license clause that identifies what data security the SaaS vendor, or licensor, agrees to provide the customer. It also includes what they decide to do to protect customer data.

This section is where your IT department and SaaS security checklist come into play.

If you have already conducted a supplier security and risk questionnaire, there should be no surprises here.

You may also see this section called protection of licensee's data.

License use restrictions

This clause in a SaaS license identifies how the customer can use the software. For instance, it may state the licensee cannot use the software for any reason beyond defined business purposes.

Another name for license use restrictions is licensee obligations.

Fees

This section will not likely outline specific costs but will determine how you will pay them and any penalties for late payments.

There is a subscription fee and an implementation fee with many SaaS applications. Usually, you will need to pay the subscription fee upfront, and then implementation fees may be billed as incurred.

Term and termination

Just as it sounds, term and termination define the term of the agreement and how you and the supplier should handle the contract’s ending.

For example, the contract term may be "one year with auto-renewals" if you don't notify the supplier of termination within a certain period before the renewal.

The supplier defines a termination notice as a specified number of days before the end of use. For example, the "licensee must provide sixty (60) days of written notice of cancelation."

No one signs a SaaS agreement to cancel. However, sometimes it must happen due to supplier performance, budget cuts, or lack of use.

Therefore, keeping up with termination clauses is critical to SaaS license management.

Contract management software, like Vendr's SaaS buying platform, can reduce or eliminate the need to juggle renewal dates and termination clauses.

Indemnification, liability, and arbitration

These sections are legal and refer to the extent to which the licensor and licensee will be responsible if the contract is not honored.

Service-level agreement (SLA)

You'll find the service-level agreement when you've gotten through the license or subscription agreement.

This SaaS service agreement is where you'll get into standard software agreement clauses like uptime, downtime, scheduled maintenance, upgrades, specific pricing, support terms, and more.

How a well-managed SaaS license stack can deliver success

The overall success of your company will rely on more than your SaaS stack. Still, SaaS license management that runs like a well-oiled machine is critical to a successful business today.

If your business is like many, your stack includes more SaaS license agreements than you can count, traditional software, and various types of licensing agreements, pricing, and terms. And let’s face it, managing that can be a tremendous challenge. Unfortunately, it might also mean your company is spending too much money.

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Understanding SaaS license agreements is the first step to taking the reins on your stack. With Vendr, you’re not just managing license agreements—you’re managing the entire SaaS buying lifecycle.

At the front end, you’ll gain access to the most extensive set of SaaS purchasing data around. This access will allow you to use price benchmarking data to drive software license deals and ensure you get the best price possible.

Vendr customers gain real-time insights into vendor performance so procurement pros can spot areas of contract non-compliance and address them before they become an issue.

Then, your procurement team proactively tracks upcoming renewals (preventing contracts from lapsing) and manages the renewal approval process with automated workflows.

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