The Challenge
When you need to globalise or evolve your business, old software systems often need replacing. Cloud is an increasingly viable option, but is it really that straightforward?

In a recent project, a Turnstone client faced the reality of negotiating with a SaaS supplier. Below we detail five of the tactics employed by the supplier which required careful but robust negotiation to ensure a fair deal.

1.Cloud technology, but not Cloud charging
Our expectation of cloud is a pay as you go model, based on usage of the system. However the supplier’s interpretation of the charging model looked much more like a traditional licensing model.

Their initial position was for user numbers to be defined upfront for the year, with a very inflexible  mechanism to reduce user numbers. Certainly not the typical ‘billing on demand’ model that cloud based software is usually advertised with.

2. Data protection
This was a straightforward initial position from the supplier – data protection was completely omitted from the contract. This was despite the fact that the supplier were providing the application, the database and the hosting.

Data protection is an important liability on the part of SaaS suppliers, who are obliged to process data based on customer’s instructions and take appropriate technical and organisational measures to protect the data.

All these duties should be included in the SaaS agreement, either in the data protection clauses or in a separate data processing agreement. In this case protection was explicitly negotiated in by the Turnstone.

3. Ensuring performance for you
Andrew Curtois of Turnstone says, “Suppliers may state ‘our service is great, with 99.x% availability, so why do you need service credits?’.

Usually vendors resist service credit requirements, but a buyer needs these stated in the contract, not just for the usual performance monitoring but also to cover any unpredicted changes in the vendor company”.

“Mechanisms include increased penalties for repeating faults, e.g., 25% for the first time, twice 50%, three times 75%. This exists to promote keeping service levels high”. “Ultimately, if a vendor claims great availability, why shouldn’t it be in the contract?”

4. Payment terms
The only area where a cloud implementation differs from a ‘traditional’ software deployment is in the license and maintenance costs.

The charges for setting up, configuring and integrating the software remain. In this case the initial offering from the supplier was very open ended, with a rough estimate of man days, on a time and materials basis. So effectively requesting a blank chequebook.

Turnstone recommended to the client that this represented a serious risk. We thus proceeded to  negotiate milestone-based and performance-based payments, with agreed fixed costs.

5. Key contractual points
Overall the deal initially favoured the supplier. In particular the client had little liability cover, a contract governed under US jurisdiction and they were exposed to any cost overruns.

Working with the client, Turnstone negotiated delay deductions, a better liability cap and importantly placed the contract under UK law.

With many SaaS providers being US based, the benefit of UK jurisdiction is that the cost of any legal action in foreign courts can be prohibitively expensive and as such presents a significant risk.

Final Commentary
A SaaS agreement needs to address business risks that are specific to a cloud environment. These include gaining explicit contractual wording in black and white to cover you for:

- performance and uptime guarantees and/or SLA’s
- data privacy and security
- data backups and disaster recovery
- data portability, especially in case of nonrenewal of the SaaS agreement

Client Comment
“The numbers speak for themselves. Turnstone negotiated on costs and parts of the contract, achieving savings and terms that we wouldn’t have achieved without expert assistance.

The value added was many times in excess of consultancy fees”, says the Head of Business Change at the client company.

Results
Turnstone’s team of experts supported the procurement process to achieve a much improved commercial position, which included:

1. 30% saving on licences
2. 25% savings on the cost of implementation
3. Fixed price for the life of the contract
4. An enhanced contract, which covered the client for:

- Service credits
- Full IPR indemnity
- Delay deductions included
- Greater liability cap
- Data Protection Act
- Milestone based payments
- UK jurisdiction (US vendor)