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Software With SaaS

July 29, 2008

Software agreements that use the “software as a service” or “SaaS” (pronounced “sass”) deployment model are becoming increasingly common. In 2005, SaaS software accounted for less than 5% of the software market. Gartner estimates that by 2011 nearly 25% of software will be delivered under the SaaS model.

SaaS is a type of software deployment where application software is not physically obtained by the customer, but rather the software is retained by its owner, which is also responsible for software hosting. Thus under the SaaS model, the capabilities of the software are provided in the form of a service delivered via the Internet. This business model is not new. It is largely a “rebranding” of the older and less than sexy “Application Service Provider” or “ASP” business model. Although the line between the SaaS and ASP models is blurry, many information technology (“IT”) professionals would broadly say the difference between the two is that SaaS software is “web-native” in that it was written from the ground up to be used over the Internet via a web browser, while the software offered via an ASP model was originally written to operate behind the customer’s firewall and only operates via the web because it has been jury-rigged to do so.

The SaaS model can be highly attractive to businesses. It eliminates the need for the customer to install, operate and maintain the software on the customer’s equipment using the customer’s staff. SaaS software is often provided on a subscription basis with fees due on a monthly basis. This reduces the customer’s upfront costs for the software license as well as for hardware and the ongoing cost for staff to support the application. This can serve to enable the customer’s IT department to focus on addressing the strategic needs of their business rather than on the nitty-gritty of deploying and maintaining complex software applications.

The software vendor also benefits. It can focus more of its efforts on the actual development and operation of its software as opposed to customer specific implementations. The SaaS model also typically reduces expenses arising from supporting customers on multiple versions of the software spread across multiple platforms. Because the software vendor never delivers the actual software to its customers, the risk that its intellectual capital may be misappropriated by its customer or a third party with access to the customer’s system is significantly reduced.

There are, not surprisingly, a variety of risks involved with software obtained under a SaaS model. These include (but are not limited to):

  • Issues relating to ownership and confidentiality of the data now maintained by the SaaS provider;
  • The customer will always expect to own its data (it should make sure that the issue is addressed in its agreement with the vendor) and may, in addition to its own business reasons, have legal requirements (e.g. HIPAA) concerning data confidentiality;
  • Addressing the “what ifs” such as:
  • “What if the SaaS provider goes out of business” (customers should consider a software source code escrow agreement that will enable them to operate the software if the customer is no longer able or willing to do so; the customer should also consider a contract provision requiring regular downloads of customer data to the customer to ensure that the customer’s data is not “held hostage” by the vendor); and,
  • “What if there is a disaster at the SaaS provider’s data center” (customers should make certain that the vendor’s back-up and disaster recovery procedures meet industry standards and the customer’s requirements)
  • Performance issues are critical and commonly addressed through “Service Level Agreements” or “SLAs.” SLAs address issues such as system uptime, software response time, and support performance (i.e., how fast are calls reporting problems answered and resolved).

Because of the benefits of the SaaS model for both vendors and customers, software agreements using the SaaS model are becoming increasingly common. Businesses considering obtaining software via a SaaS model should carefully consider the experience of the vendor in providing such services as well as the terms of any proposed agreement before making their decision.

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