Key takeaways:

  • Software as a service (SaaS) is a subscription for limited rights to software often located in the cloud.
  • There are two standard types of SaaS licenses (per-user and usage-based), but many variations of both.
  • A SaaS license agreement may include a limited-use license agreement (LULA) and a service-level agreement (SLA), or you may have two separate agreements.
  • Optimizing your SaaS license management can deliver significant value to your company.

Once upon a time, most of us used traditional software solutions hosted on-premise that required on-prem servers, data centers, and dedicated IT resources. But then, we blinked, and suddenly, SaaS applications hit the software scene for practically every core function of a business. Later, cloud services changed things even more. By 2020, there were more than 15,529 SaaS companies in the world.

The catalyst? Organizations like yours are seeking continuous improvement. What processes are we currently doing manually that we could do much more efficiently, securely, and from any location and device? Somewhere out there, 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 changed the way we buy and manage software. One such change is in software licensing and agreements.

SaaS license management can be confusing, and if you're managing a large stack, it can be overwhelming, too. This post breaks down what a SaaS license is and the things SaaS customers need to be aware of when reviewing license agreements. 

What is a SaaS license?

Unlike on-premise software, SaaS (software as a service) isn’t a copy of the software placed on a server for use. Instead, with SaaS, the SaaS supplier has put the solution in the cloud. It exists there whether you use it or not. It is generally a pay-as-you-go subscription. 

So, while we may call it a license, today's SaaS license looks more like a subscription and only slightly like the end-user license agreement (EULA) we're familiar with for on-premise or other traditional software. In many cases today, SaaS licenses are part of SaaS agreements or vice versa. 

Types of SaaS licenses

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

  • Per-user licensing: This type of subscription 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 model may also be called consumption-based licensing. For example, your usage-based licensing may be based on the number of transactions, reports, or data used within a defined period. 

But, these aren't the only 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

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 certain 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. 

In the Microsoft Office example, you pay a perpetual license fee upfront, 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 the use of it.

What is included in a SaaS license agreement?

 

SaaS license: two people discussing documents

In many cases with SaaS applications hosted in the cloud, you will see a limited-use software license agreement (LULA). A LULA typically includes all license terms as well as the service-level agreement (SLA). 

Before we jump into the details, I'll offer a reminder: Make sure all necessary stakeholders have the chance to review the license agreement before both parties sign it. This might include finance depending on your company but must consist of Legal, IT, and the stakeholders that will run the software application. 

Here are some standard clauses you can expect to see.

Definitions

This section will include definitions of key terms used throughout the license agreement, so there is no room — or at least reduced room — for subjective misinterpretation. 

Grant of license 

Also called title to intellectual property, 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

You may also see this called protection of licensee's data. Licensor services is a SaaS license clause that identifies what the SaaS supplier (licensor) agrees to provide the customer (like data security) and what they agree to do to protect customer data. This is where your IT department and SaaS security checklist comes into play. If you already conducted a supplier security and risk questionnaire, there should be no surprises here. 

License use restrictions

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

Fees

This section will not likely outline specific fees but will define how you will pay them and any penalties for late payments. There is a subscription fee and an implementation fee with many SaaS applications if the SaaS supplier assists with implementation. Usually, you will need to pay the subscription fee upfront, and then implementation fees may be billed as incurred. This depends on your agreement with the supplier and should be defined here.

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

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

A word of caution on this one: No one signs a SaaS agreement with intentions of canceling. But the reality is, sometimes it needs to happen, whether due to supplier performance, budget cuts, or simply lack of use. Keeping up with termination clauses is a critical part of SaaS license management. 

I spent a lot more time in technology procurement than I'd like to admit trying to get my company out of a SaaS agreement after not providing adequate cancelation notice. Most often, it was because I wasn't aware the end-user department wanted to cancel. That didn’t necessarily mean the department was negligent in informing me. Sometimes they weren’t aware of the renewal terms themselves, or staffing changes happened and the person who knew the terms was no longer there. 

As a procurement agent, this left me scrambling after-the-fact to research termination clauses and renewal terms and, ultimately, making excuses to suppliers in hopes they’d be willing to reverse the renewal. Sometimes it worked, and sometimes it didn’t. 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

I'll be honest, as a SaaS buyer, when I'd get to the indemnification, liability, and arbitration sections of a new software agreement, my eyes would blur over, and I'd make a "for legal to review" note. These sections are heavily legal and refer to the extent to which the licensor and licensee will be responsible if things go south. So while I tried to ensure I had a general understanding of these sections, I always made sure to have our legal team's review. 

Service-level agreement (SLA)

When you've gotten through the license or subscription agreement, you'll find the service-level agreement. This is where you'll get into standard software agreement clauses like uptime, downtime, scheduled maintenance, upgrades, specific pricing, support terms, and more. Not every supplier handles the license and agreement in the same way. 

How a well-managed SaaS license stack can deliver success

3 people discussing documents

Sure, the overall success of your company will rely on more than your SaaS stack. Still, the fact is, SaaS license management that runs like a well-oiled machine is a critical component of 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 licensing models, pricing, and terms. And let’s face it, that can be a tremendous challenge to manage. Unfortunately, it might also mean your company is spending money it doesn’t need to spend.

The first step to taking the reins on your stack is understanding SaaS license agreements. Then, implement some tried-and-true industry best practices to optimize and take your SaaS contract management to the next level.

An out-of-control SaaS stack got you down? Vendr to the rescue! Contact us today to find out how we can help.

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