Making Sense of SaaS: Critical Questions to Ask Before Signing Cloud Software Contracts

Making Sense of SaaS: Critical Questions to Ask Before Signing Cloud Software Contracts

The term “Software-as-a-Service” (SaaS) has turned into a marketing catch-phrase. Many software vendors are using it to boost the appeal of their applications because SaaS implies lower total cost of ownership (TCO) and other benefits like much faster deployment. But, before you take the plunge, it pays to arm yourself with the facts so you can separate true SaaS from the hype and make sense of vendor claims.

By gaining a better understanding of the details of SaaS pricing and contract terms, you’ll be able to approach decision-making around your IT roadmap from a position of knowledge and strength.

When evaluating SaaS products from any vendor you really need to understand their technology architecture and contract terms to make sure you are getting the most favorable pricing and the best value for your money. Here are the questions you should be asking:

Question 1: Is the product pure SaaS, with a multitenant architecture?

True SaaS vendors use a single code base, hosting all customers (or “tenants”) on a common infrastructure. The idea is to have a common software architecture for all customers, which reduces the cost and complexity of managing each software instance – only the data is different, not the application. These economies of scale are passed down to you, making deployment transparent, faster and highly economical, particularly if you are starting from scratch.

Caveat: A drawback of a common, multitenant architecture is that it may rule out customization (as discussed below in more detail).

On the other hand, if true SaaS and the economics that come with it are what you want, make sure it is what you are really getting. Many vendors parrot the rhetoric of SaaS cloud efficiencies but are in fact running different installations of their software for each hosted instance. If they are not delivering the pricing and flexibility you expect from the cloud, that might be why.

Question 2: Who is hosting the application?

Is the vendor collecting subscription fees for access to the software hosting the SaaS application itself? Maybe so, but not necessarily.

If your SaaS vendor is hosting the software, upgrades are handled by the vendor and can typically be accomplished as needed – efficiently and quickly. If instead the software vendor is relying on another firm to provide the back end infrastructure and operational expertise, there will be more opportunities for them to fumble a bad handoff from one to the other.

Caveat: Some larger vendors outsource application hosting, relying on other cloud and data center firms to handle the operational details. For example, SAP outsources most of its ERP S/4HANA cloud hosting to other data center operators or refers customers to cloud operations such as Amazon Web Services.

In our experience, offering a SaaS-style contract for an existing software product – but doing it by hosting the software on someone else’s cloud infrastructure – doesn’t confer the DevOps expertise that allows the best SaaS businesses to operate so efficiently.

SAP does offer several true SaaS product lines like SuccessFactors and Concur as the result of acquisitions. In the process, it acquired substantial cloud engineering talent. However, reengineering ERP applications with decades of pre-cloud development history remains a steep challenge that won’t be conquered overnight.

Question 3: Does your business require software customization?

As mentioned above, a multitenant architecture precludes customization, or at least rules out the source code modifications enterprises had the option of making in the past. Sticking with a common code base means that the vendor only needs to upgrade one master instance of the application, and that upgrade automatically ripples out to all customers at the same time. The big benefit for you, the buyer, is lower support costs.

The question is whether you can work within the limits of a no-customization platform.

Caveat: For the most part, SaaS applications are fairly simple and require no customization – bill of materials management, CRM, HRMS, travel and expense management, online meeting tools and email. But complex ERP systems are another story. Research shows that the majority of ERP systems have had minor to major customization. How these customizations will be migrated to a SaaS system remains a big unanswered question for customers considering SaaS ERP.

With SaaS cloud software, customers are limited to configuration options provided by the vendor’s programmers. If these developers did not anticipate the tweaks you would like to make, or the vendor does not wish to allow them, making those changes will not be an option.

This is a significant tradeoff. While customizations add to the cost of application maintenance, many enterprises have invested in years of customizations they wish to preserve. Going forward, they may prefer to retain the option of customizing when necessary – and not just within the limits of predefined configuration options – in which case, SaaS is not for them.

Question 4: Are you getting the flexible contract you expect?

A highly touted benefit of SaaS deployments is flexibility, reflected in month-to-month contracts. Often this means you have the freedom to get out of your commitment anytime and/or are only charged for usage.

Caveat: SaaS vendors are in business to make a profit. While they may be willing to wait 12 to 24 months for the revenues to really start flowing, in our experience they are also confident about the value they offer and perceive customer retention as a given, as organizations tend to develop dependency on their services. In addition, SaaS contracts are steeped in complexities, making it harder for customers to leave. In our experience, when it comes to ERP vendors that didn’t start out as SaaS providers – like Oracle, SAP or Microsoft – they typically lock customers in for a period of time, with no easy-cancellation clause.

Question 5: Is the pricing clear and transparent?

Genuine SaaS vendors typically publish pricing, in part to make it easy for customers to sign up for services without the need for a sales rep. All it takes is a credit card to get started. Negotiations are virtually eliminated.

Caveat: Unlike SaaS vendors that got their start in the cloud, software vendors whose products have been deployed internally and are now offering SaaS versions rarely publish their pricing. Why? First, the vendor has more control over pricing, with the salesperson as the gatekeeper. Second, customers are unable to do comparison shopping if they don’t have pricing information. The typical response from these vendors to pricing inquiries is that they have to learn more about your requirements before they can provide a quote.

If you are offered an attractive price, make sure you know what to expect in terms of future price increases — and, if possible, put a cap on them. Don’t let the vendor think you will pay any price, once you have entrusted your data to them.

Question 6: Can you try before you buy?

True SaaS vendors are eager to have you sign up for their services, so they provide easy access to demo systems. This self-guided approach gives you plenty of time to review the application and determine whether it’s a good fit.

Caveat: Traditional ERP and database vendors, on the other hand, often tightly control the demo process. Usually, you need to set up an appointment with a sales rep to see a brief, carefully crafted demo that rarely gives the whole picture. ERP vendors have been slow to provide access to a demo environment, although that is starting to change.

Rimini Street Helps You Avoid Potential SaaS Pricing Pitfalls

Now that you have some guidelines to help you navigate the SaaS landscape and separate true SaaS from the hype, you’ll strategize your IT roadmap with greater confidence and clarity. Take control of your IT roadmap by downloading our resource guide now, “Making Sense of SaaS Pricing and Contract Terms.”

Rimini Street can also provide additional help. Rimini Street Business Roadmap Services can make your migration easier by helping your define a business roadmap that is not dependent on any single SaaS or ERP vendor. Or, we can help you get more out of your existing ERP and database implementations with premium support services at half the cost, security services, strategic roadmap guidance and much more.