Heavily driven by the pay-as-you-go and subscription models, the SaaS industry thrives on long-term relationships (high retention rates) and constant customer onboarding (high pipeline velocity). Yet, managing contracts at scale remains challenging for many organizations, even in a significantly digitized business ecosystem.
This is due to the prevailing manual processes, poor cross-functional alignment, delicate industry regulations, and controversial renewals and terminations that have plagued businesses for a long time.
Without proper SaaS contract management strategies, your organization will struggle to scale its customer base and also incur more running costs while getting exposed to potential industry and jurisdictional violations.
In this guide, we’ll delve into the fundamentals of SaaS contract management, exploring common challenges and offering proven strategies you can leverage to get optimal results.
What are SaaS contracts?
A SaaS contract is a legally binding document describing the terms, conditions, rights, and obligations between a vendor and a customer throughout the lifecycle of their business engagement.
A SaaS contract outlines how the software will be delivered and used, including the amount to be paid, duration allowed at the stipulated price, who can use the service, how they can use it, and so on.
Key terms to be included in SaaS contracts
A SaaS contract typically contains several terms, depending on the nature of the software and the vendor’s policies. It may include:
- Subscription terms: Is it a monthly or annual subscription? What are the associated prices, acceptable payment methods, discounts, and penalties for early termination?
- Service Level Agreement (SLA): What are the performance guarantees provided by the vendor? This typically includes uptime commitments, support response time, and schedules for system maintenance and upgrades.
- Scope of service: Who can access the software? What functionalities are available to the end user? And what limitations and exclusions should the end user expect for their pricing tier?
- Data security and privacy: In accordance with specific regulations, how will the customer’s data be handled, processed, stored, and secured?
- Termination and renewal: What terms and conditions must be met for renewals and terminations? Will renewals be done automatically? What are the required notice periods? Are there any applicable refunds for terminations?
5 Common challenges with SaaS contract management
Contract management in the SaaS industry comes with a unique set of challenges. This can be attributed to the typical multifaceted nature of SaaS contracts, the constantly evolving industry regulations, and the growing concerns around data security and privacy. Let’s get into more details below.
#1 Complex pricing structures
SaaS vendors typically include a variety of pricing structures to accommodate different customer needs and usage patterns. These pricing structures can include per-user licensing, tiered pricing, usage-based pricing, or a combination of these.
Managing these complex pricing structures can be challenging, especially when multiple pricing tiers, add-ons, or customizations are included in the contract. Executing such contracts requires you to carefully monitor and track usage data and ensure that every add-on, discount, and price change is accurately reflected in your billing and invoicing.
Also, when your pricing structure contains add-ons and customizations, standardizing contracts will be more challenging. Furthermore, when customers have to manually pick the features they wish to pay for, negotiation cycles may take longer, especially when they try to negotiate discounts or freebies.
#2 Data security and privacy concerns
SaaS vendors often rely on third-party providers for various aspects of their service, like payment processing, data storage, and hosting, among others. This raises concerns over the security of shared data, as any loopholes from the third-party vendor can put the customers' data at risk.
Because SaaS companies typically manage large volumes of contracts at any given time, tracking and monitoring data handling processes by in-house teams and third-party providers can be challenging.
Furthermore, there are several data privacy regulations such as GDPR, CCPA, SOC-2, HIPAA, and more that SaaS organizations have to deal with. Ensuring compliance with these regulations while managing SaaS contracts at scale can be challenging, especially if you're storing data in different jurisdictions or working with third-party vendors.
#3 Difficulties with contract renewal
Contract renewal is crucial to SaaS businesses because that's how they create sustained revenue. However, to ensure smooth renewal processes, you need to track your contracts and monitor renewal dates closely. This process is more straightforward for smaller companies with fewer contracts. But for fast-growing organizations with large contract volumes, tracking renewals for individual agreements can be tricky and time-consuming, especially with manual processes.
The challenge is more pronounced when you consider the renegotiations that may occur during contract renewals as well as the need to maintain compliance with changing regulations for each contract at the time of its renewal.
#4 Changing industry regulations
Industry regulations control how organizations manage contracts at all stages.
However, these regulations change occasionally, and organizations must keep up to avoid falling into non-compliance.
The constantly changing regulations often complicate contract management processes for SaaS organizations by making them change the structure and content of existing contracts, renegotiate SLAs, modify templates, and reassess data handling processes from time to time.
#5 Tracking SLAs
SaaS contracts typically include SLAs that define specific guarantees like service uptime, support response times, performance levels, and maintenance schedules. Ensuring compliance with these SLAs and managing the associated penalties or credits requires consistent tracking and monitoring.
On a small scale, this is usually less challenging. But with large volumes of contracts, tracking service performances, managing disruptions and escalations, and creating service level reports can be substantially more difficult, especially with manual processes.
10 Best practices for SaaS contract management
Effective SaaS contract management is paramount for simplifying operations, minimizing risks, and maximizing value for SaaS providers and customers. While the challenges of SaaS contract management may seem overwhelming, it only takes a set of simple approaches to curb them.
#1 Ensure complete clarity during contract negotiation and review
It is important to ensure that all parties fully understand the details of the SaaS contract before committing to it. This is partly because SaaS contracts (especially B2B SaaS) are often characterized by vendor lock-in, making it relatively more difficult to exit the contract once it has started running.
Clearly define the scope of services, pricing, and conditions in the contract, specifying deliverables, milestones, and any required customizations.
You must also ensure the content of the contract align with your business’s goals and service capabilities.
One of the downsides to thorough contract negotiation and review processes is the time delay involved, especially when dealing with complex contracts and multiple teams. But this can be expedited using SaaS contract management software, like SpotDraft.
SpotDraft enhances contract negotiation and review processes by offering a collaborative cloud environment for drafting and redlining. It also comes with robust version control and audit trail functionalities you can utilize to track the contract as it goes through multiple rounds of revisions.
Also read: 8 Top Contract Management Software Platforms
#2 Mind your vendors by conducting due diligence
Let's say you use a third-party vendor for processes like data storage, payment processing, hosting, and email delivery. You must understand that the effectiveness of these vendors ties directly to your ability to serve your SaaS customers satisfactorily.
Do due diligence on each vendor you intend to partner with, ensuring that their reputation, policies, and capabilities align with your business needs.
You can do this by checking customer reviews on third-party platforms and directly conversing with the vendors to validate specific considerations.
Establish and maintain reliable communication channels with your vendors to promptly address any issues that may arise during the course of your partnerships.
Furthermore, maintain a regular performance review schedule and hold your vendors accountable to SLAs.
#3 Provide better data security and privacy
Data security and privacy is a major concern in the SaaS industry. To ensure your customers’ data is not compromised, you must establish robust security measures for storing and handling their data in accordance with specific industry and jurisdictional regulations.
“Data privacy is actually pretty straightforward, common sense stuff. The key thing to keep in mind is this: Tell people what you are doing with their personal data, and then do only what you told them you would do. If you and your company do this, you will likely solve 90% of any serious data privacy issues.”
~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
Ten Things: Data Privacy - The Essentials
This includes implementing industry-standard encryption algorithms, secure authentication mechanisms, and regular security audits to identify and address vulnerabilities.
Also, run a thorough check on prospective third-party vendors to ensure they have proper data security practices, privacy policies, data handling procedures, and certifications to partner with your business.
#4 Define realistic SLAs
SLAs offer guarantees and inform customers on what to expect from the contract. While strong guarantees make customers keen to sign the contract, being realistic about expectations is crucial to avoid getting overwhelmed by pressure.
Clearly outline realistic service expectations, such as uptime guarantees, response times, and support availability.
It is also important to regularly monitor and track performance against these SLAs to promptly identify and address any performance issues.
In case of any SLA breaches, it's essential to have a process in place to handle them. This may include compensation or service credits.
#5 Standardize your contract processes to maintain consistency
Establishing a clear structural process for drafting, negotiating, approving, and executing your contracts is critical for productive SaaS contract management.
Start by developing a set of templates that capture all the necessary terms and conditions specific to your SaaS offerings. This helps maintain consistency and prevents errors. Your templates should include clauses related to SLAs, data security, intellectual property rights, and other vital aspects relevant to your SaaS business.
“The absence of contract templates leads to non-standardization and makes contracts prone to errors. The legal team, therefore, is required to delve deep into contracts and proofread all clauses with a fine-tooth comb to identify and rectify the simplest of human errors."
~ Igor Poroger, Director of Legal, EMEA, Vectra AI
How CLMs Empower Legal Teams in B2B SaaS Companies
Additionally, you should establish straightforward processes for standard procedures like contract reviews, approvals, and more, assigning specific roles and responsibilities to stakeholders involved in each process.
This can significantly accelerate your contracting process and prevent confusion.
Many fast-growing SaaS organizations leverage SaaS contract management software to set templates and establish contract workflows without worrying about complex manual steps.
SpotDraft, for instance, comes with a robust contract template builder, which you can utilize to generate comprehensive templates in a few clicks. Its templates come fortified with the necessary legal guardrails to ensure your company is always protected.
It also includes tools for setting up automated workflows for your SaaS contracts. This allows you to safely automate routine and time-consuming processes like contract approvals, reviews, follow-ups, etc.
Also read: Contract Workflow—A Step-By-Step Guide
#6 Streamline renewals and termination processes to protect revenue losses
Poorly managed renewal and termination processes come with several negative impacts on reputation and revenue. So you must ensure you have reliable strategies for streamlining them.
You should implement systems for constantly tracking every contract automatically and deliver renewal reminders to all parties in advance. You should also include clear renewal and termination policies that are reasonable to both your organization and customers. This ensures that all parties are treated fairly, minimizing the chances of disputes or unintentional extensions.
Ensure that your contract renewal and termination processes align with applicable regulations and that every change is communicated and reflected within the contract.
You can streamline terminations for your customers by offering detailed self-service termination options within your customer portal. This allows them to initiate the termination process online and reduces the need for manual interventions.
Additionally, you can set up termination workflows with SaaS contract management software like SpotDraft, including notifications and triggers for processes like account deactivation, data archiving and deletion, and compliance checks.
“Like the start date of the contract, being crystal clear on when the contract ends can save you a lot of heartache. Spend the necessary amount of time thinking about all of the reasons you’d want the agreement to terminate and make sure those are included.”
~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
Ten Things: I know it’s Boilerplate
#7 Ensure consistent compliance with relevant regulations
Business laws and industry regulations are constantly evolving, impacting how SaaS organizations handle data and deliver services to customers.
To maintain consistent compliance with these regulations, you must commit to regular compliance checks, weighing your contracts against current industry regulations and ensuring that every new development is accurately reflected.
#8 Enhance collaboration between stakeholders
SaaS contract management typically involves multiple stakeholders, such as the SaaS provider, the client or customer, legal teams, procurement departments, and sometimes even third-party vendors or consultants.
Each stakeholder brings their own perspectives, requirements, and expertise to the table. Therefore, streamlining collaboration between these stakeholders is vital to achieving a successful outcome.
SpotDraft helps you achieve this in several ways. It offers a built-in collaborative editor that allows multiple stakeholders to draft, redline, and track contracts from one intuitive interface.
It also comes with a secure and searchable repository for centralizing all contract documents. This allows stakeholders to get visibility into details like contract status, upcoming renewals, deal sizes, and crucial contract KPIs.
Furthermore, SpotDraft integrates with several business tools like Saleforce, HubSpot, Slack, Greenhouse, DocuSign, Google Drive, and more out of the box. This allows stakeholders to collaborate from their existing business tools and not jump between unfamiliar systems.
#9 Provide adequate training and education
SaaS contract management is a complex and multifaceted process, and providing adequate training ensures that employees have the specialized knowledge to navigate its complexities of and make informed decisions more confidently.
You should ensure they're updated with current trends and best practices for contract drafting and negotiations, legal provisions, risk assessments, and contract analyses.
Start by assessing their current level of knowledge and awareness, then provide valuable resources or training programs to help them build on existing expertise and meet your company's needs.
Training options may include in-person workshops, online courses, webinars, mentoring programs, or a combination of different approaches.
#10 Maintain ongoing evaluation and optimization processes
By regularly evaluating your SaaS contracts and their performance, you will continuously identify areas for improvement, cost-saving, and optimization opportunities, ensuring alignment with evolving customer, organizational, and industry requirements.
Check in with your customers occasionally, requesting feedback to gauge their satisfaction with your services. Also, track your organization's performance against metrics like uptime, response time, contract negotiation turnaround times, average costs per contract, etc., and identify ways to optimize them.
SpotDraft's insights functionalities allow you to quickly dive into your contract data and identify opportunities for maximizing value and mitigating risks. The SaaS contract management software also comes with reporting functionalities you can utilize to share your findings with various business teams.
“Yes, sales deals must close promptly, and legal teams prioritize the same. However, they must also ensure that contracts are future-proofed, with zero margins for error.”
~Igor Poroger, Director of Legal, EMEA, Vectra AI
How CLMs Empower Legal Teams in B2B SaaS Companies
Working above the benchmark
SaaS contracts are inherently complex and relatively more challenging to manage, considering the many moving parts and delicate procedures involved. However, implementing simple proven strategies is all you need to do to see remarkable improvements in your SaaS contract management processes.
Technology has also solved the majority of the issues associated with SaaS contract management. We discussed a few ways a purpose-built platform like SpotDraft could help streamline specific contract management processes for your organization. But that's only the tip of the iceberg!
If you'd like to get a more in-depth view of how SpotDraft can help your SaaS business close more deals and improve your bottom line, feel free to request a personalized demo.