Top 10 SaaS traps

In theory, software as a service (SaaS) should be a cost-effective option for IT executives who don't want to deal with the hassle and expense of installing and supporting software for users. By tying into a Web-based software service that users can access with a browser, IT departments can avoid the costs of adding servers, powering servers or even setting aside space for them in a data center. And since the software is supported by a managed service provider, IT managers don't need dedicated staffers to deal with help-desk-related issues.

So SaaS is cheaper than installing your own software, right? Don't count on it. "If you go into a SaaS agreement believing it's going to be less expensive under all circumstances, you should reorient your thinking," says Rob DeSisto, an analyst at Gartner Inc. There are all kinds of extraneous expenses that SaaS customers need to be aware of, according to DeSisto. Those include setup costs, training fees, storage limits and the costs of integrating with other applications.

Here are the top 10 gotchas in SaaS agreements that corporate customers should watch out for:

1. "I agree" to what? SaaS providers typically send electronic contract notifications to customers with an "I agree" button for them to click, says Pat Cicala, president and CEO of Cicala & Associates, a consulting firm in Hoboken, N.J. "People usually get sick of reading these agreements online and end up clicking 'I agree,'" says Cicala.

IT organizations that are poorly governed or don't have a centralized Web licensing strategy run a significant risk of having business leaders agreeing to software terms they're not familiar with. "You've got business buyers making a lot of the contractual decisions, and they're not savvy in a lot of the contractual issues," says DeSisto. For instance, most business leaders don't know enough to ask if the vendor's data center is staffed by people with proper security certifications or if the vendor is ready to comply with the SAS 70 auditing standard.

2. Easy installment plans. For customers, one attractive characteristic of SaaS agreements is that they don't require a huge upfront financial commitment to start a service. But even though there are advantages to paying for the service on a monthly or quarterly basis, few customers realize that they can pare their yearly costs by 5 percent to 15 percent if they pay for an annual SaaS agreement all at once, says Michael Mankowski, senior vice president of Tier 1 Research in Minneapolis.

Customers should also obtain the rollout plan for the software in writing, says Mankowski. Find out what the vendor's rollout capacity is, he says. Will it add 100 of your users per week? Per month?

3. Missing SLAs. Service-level agreements, such as those guaranteeing vendor response time, are a critical component of SaaS contracts, says Mankowski. Some vendors provide SLAs with the contract, while others charge extra fees for SLAs or don't provide them at all, he says. "If it's a business-critical application and you need five 9s uptime, you need to make sure that's covered in the agreement with your SaaS provider," Mankowski says. Also, contracts should stipulate penalties such as credits or givebacks if service levels aren't met, says Jeff Kaplan, managing director at ThinkStrategies, a consulting firm in Wellesley, Mass.

4. Performance levels. Customers should clearly define software uptime and availability levels with SaaS providers in writing. Before entering into an agreement with a SaaS provider, customers should ask the vendor for a record of past performance levels, says Kaplan. It's also wise to ask about business plans and investments that the provider is planning to make over the next three to 12 months, including enhancements to service-delivery capabilities, says Kaplan.

Customers should also ask how they will be contacted if there's a service disruption, and they should find out how much time the vendor has to fix the problem under the contract, says Mankowski.

5. Defining uptime. SaaS customers need to carefully define guarantees around system uptime, says DeSisto. Most contracts call for 99.5 percent uptime or part of your money back for a month. "But what does that mean?" asks DeSisto. "Is that 99.5 percent of planned uptime? Does the vendor plan to be down eight hours a month? If so, which hours?"

6. Add-on costs. SaaS customers should scour the fine print for hidden expenses. Sometimes vendors charge to configure the software or implement the database or workflow processes, says DeSisto. In some cases, vendors charge an additional US$18 to US$25 per user per month to stage and test the software, he says. And if you want to add support for handhelds and other mobile devices, those costs can escalate to US$45 per user per month.

Vendors also may try to predetermine the amount of storage that's available for each end user in your organization and bill for overage charges. "So many people are buying SaaS based on price. They need to understand what the base product is and how much all the add-ons cost," says Rob Scott, managing partner at Scott & Scott, a Dallas-based law firm.

Customers should also ask whether training is "baked into" the cost of the service or if there are additional costs for training or support, says Mankowski.

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