Software as a Service (SaaS) – Contractual Structure and Issues

[Italian Language Version -Versione in lingua italiana]

Software as a service (or SaaS) is a business model whereby the functionalities of a software (the “Core Software”) are made available on a subscription basis, and the software is centrally hosted on a public Cloud service.

The end user does not receive a copy of the Core Software and can access the functionalities of the Core Software through a light end user software (“End User Software”).

The functionalities of the Core Software are therefore accessed by the end user by downloading the End User Software (which is not a copy of the Core Software used to provide the service).  The End User Software may be a Web application that runs within any Web browser, a Mobile App that can be installed on any mobile device, or an installed software package that executes specific tasks and moves data back and forth towards the Cloud.

This delivery model is increasingly used for enterprise applications as well as messaging and gaming. Some examples of business applications deployed using the SaaS model are ERP (Enterprise Resource Planning) and CRM ( Customer Relationship Management) platforms, but also the growing number of IoT (Internet of Things) applications; all these use Big Data and Artificial Intelligence technologies to provide highly scalable and extremely advanced information management, accurate predictive analytics, and the highest levels of data security.

The business model for Software as a Service requires careful drafting of the contracts in place between the software owner or provider, its end users and its distributors.  Contracts for this type of business model are often drafted and negotiated without a thorough understanding of the technical and business structure of the model and are therefore often useless or counterproductive.

In particular, the contracts drafted to structure the relationships related to a SaaS model need to include the understanding that no license is granted to the end user (and to the distributors to end users if this business model is used) on the Core Software. The functionalities of the Core Software are made available to the end user as services, while access to the End User Software typically should be governed by its own EULA (end user license agreement).

The fee structure should reflect a service fee model rather than a software license model.This also has tax implications (which we advise to discuss with a tax consultant) as service fees are typically treated differently than software license royalties in most jurisdictions.

Some of the issues that need to be taken into account when drafting agreements for SaaS models are:

  • The intellectual property of the Core Software needs to be carefully protected. No license should be given on the Core Software.  Appropriate EULA for the End User Software needs to be put in place.
  • The data of the end users are stored on the provider’s servers. Data security and data protection need to be carefully addressed. SaaS providers that implement widely-accepted security standards like ISO/IEC 27001 may have a strong commercial advantage on competitors, and contracts should enforce and leverage these differentiators.
  • Customizations for specific clients is often not possible or not financially viable, unless highly remunerated, as it would entail developing and hosting a specific software version for a specific client.
  • Hosting of the Core Software often takes place at a third party hosting provider’s site. The hosting provider’s constraints and service levels need to be weaved in the software provider’s contracts with distributors and end users.
  • Where the business model requires a distributor and local vendors, appropriate agreements need to be put in place that mirror the protection for the software vendor.
  • SaaS agreements are typically long term agreements. Where a distribution structure is in place, the distribution contracts need to address what happens to the SaaS agreements with end users once the distribution agreement is terminated.

Building a large-scale SaaS platform that provides subscription-based services to many thousands of customers worldwide may be, in the long term, a very profitable, predictable and cash-positive business, and a careful and accurate drafting of the contracts with customers and partners should be considered a fundamental pillar of the entire service architecture.

Authors

 

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Stefania Lucchetti

Stefania Lucchetti – Founder of Lucchetti-Law Crossborder)

 

 

 

 

and

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Nicola De Blasi

 

Nicola De Blasi – CEO and founder of MPS Monitor

 

 

This note is for information only and is it is not to be considered legal advice. For further information Contact Us

Articles may be shared and/or reproduced only in their entirety and with full credit/citation.  

 

 

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