Once you’ve chosen a software provider and confirmed compliance with all necessary regulatory and legal requirements, you should consider the contractual tie-ins and the potential costs associated with buying into cloud-based software. We run through the key factors in agreements between software providers and you, their customers, including assessing the commitments expected of both parties and the ease of moving to or from the provider.
Vendor and commercial lock-in
One of the key benefits of software-as-a-service (SaaS) is the low initial costs and flexibility of moving between suppliers, as no significant investment has been made in any one product. However, this benefit is eradicated if there are dependencies to the software that risk making a move to another software provider a prolonged and painful process. This is especially true if the vendor does not support the import or export of data in proprietary formats – though worth noting this scenario can apply to pretty much any type of software.
The majority of commercial (ie, paid-for and supported) cloud software by default offers monthly pricing on a ‘per user’ or ‘per client’ basis, with fairly short-term notice periods. In addition to the basic checks of how long any notice period needs to be, there are often other commercial questions to ask that could reduce the cost of using the service. Flexibility and the ability to cancel with little notice usually comes at a premium, so businesses should consider whether it is better to commit (where possible) to a longer-term agreement at typically lower overall cost, especially if a piece of software is fundamental to a user, accessed daily and not envisaged to be cancelled in the medium or long term.
SaaS solutions that involve some initial setup and implementation may come with a longer initial term as part of the agreement, so the provider can cover their initial costs and time investment. Software vendors, however, know that once an organisation is setup and integrated with their service, it is unlikely customers will cancel their contract. We recommend you use this knowledge to push for a trial period, or at the very least an agreed set of deliverable tasks as part of the setup, so that there is no financial or contractual commitment until the software is working as expected and, if applicable, fully integrated into other systems.
It’s also important to understand what happens to the agreement after the initial term – is the contract automatically renewed for an additional term, turned into a rolling contract, are there inflationary or other planned or unplanned increases to costs, or does the contract require renegotiation on an annual basis? Given accounting software price increases have been a regular occurrence for some time now, this likelihood should be factored into budgeting for cloud services.
Support
As with any third-party relationship, ensure that the responsibilities for ongoing support are documented and clearly established. It would be prudent to also ensure that there is a Service Level Agreement (SLA) against the support response and a fault resolution, as well as clear provision in the contract for any faults that impact the provision of service, particularly for services that are directly linked to an organisation’s revenue-generating activities. Most software providers have levels of escalation for support, and it can also be useful to understand what the SLAs are at the different levels as well as what criteria is used to define the severity of the issue being raised. Bear in mind that for some providers, an issue which is critical to you may not be treated as such if it only impacts a small number of customers. Similarly, understanding the channels through which bugs or feature requests can be raised should be an important part of adopting any software solution.
If you have customers who will be interacting directly with the software, you should be clear whether the software provider is comfortable with your customers contacting them directly for support. There can be good reasons why cloud providers may not wish to be contacted by your customers, but it can add a level of delay in resolving issues, which can then impact your customers’ satisfaction – always remember that customers have little patience for blame being passed onto third parties that they have not contracted with.
Another aspect of support may be the role of complimentary support services that sit outside of the scope of individual applications. This can be particularly valuable where there’s a lot of system integrations that a single software provider may not take responsibility for – much like you might have dedicated cover for your household plumbing. In such arrangements it’s important to understand whether your software provider is happy to work directly with another third-party organisation that you’ve engaged to provide such services.
Software updates and changes
A benefit of cloud software is that updates are applied by the software provider, and not by the end users, often following a regular and predictable cadence. It’s useful to understand when and how cloud software is updated (eg, if it involves an overnight outage once a month) as this may need to be factored into other processes. While these updates can add new features, they can also remove or fundamentally change features that the software provider believes are underutilised or redundant. Such changes can occur with little or no warning, and cannot usually be refused or delayed (unlike most desktop software). If any features of a software provider are key to the way an organisation is set up, or were a fundamental reason for choosing that software, then it is prudent to obtain guarantees that those services won’t be changed or deprecated (ie, support for it is removed) without sufficient notice.
For example, an organisation may have written some custom code to make use of a software’s API. Should the software provider’s API change, then the custom code may break. The software provider may not send out any prior warning to update the code, which could be a considerable impact on the organisation’s operations.
Ceasing to use a service
A key consideration is what happens once a subscription ceases. Some software providers offer a ‘grace period’ at the end of a subscription, allowing continued read-only access for a defined period. However, for others, loss of access can be immediate. Microsoft 365, for instance, has various states (expired/disabled/deleted). There are some days grace in which the subscription can be reactivated if renewal had been overlooked, but ultimately data will be deleted. Zoom is known to delete all recordings stored in the cloud for a specific user as soon as their account is closed, with limited recovery options.
Online accounting software typically has the ability for the user to request that data is deleted when a subscription is cancelled, but if the user wishes to maintain access to that data, approaches are less consistent. The scenario will vary between vendors and software products, so it is important to understand the ongoing rights you will have to access data held on the platform, should you choose to cancel the subscription. It may be that you have to pay for a single user licence to retain access. Ensure you ask for details of access in such circumstances and put plans in place to migrate or download/backup critical data before agreements are terminated.
Organisations should also be aware of the risk that cloud software provision could be discontinued at any time if the vendor decides to cease supporting it. This is especially a risk when considering smaller, niche providers. Contractual obligations in this area are typically weighted in favour of the vendor so organisations’ business continuity plans should include the possibility of losing access to the cloud software at short notice, or in a worst-case scenario, immediate loss of access if a vendor falls into administration. Having said this, desktop-based solutions are not exempt from such risks either. This has been seen recently with some accounting software products, where support for the desktop software was discontinued, effectively rendering the software unusable and forcing customers to move to other products. In such cases, the same considerations apply.
One way to manage this risk includes setting up a software escrow agreement. For Software-as-a-service platforms, the arrangement allows the cloud assets required to build and deploy the software and cloud environment to be stored with a third-party independent escrow. This means that should the software or service be discontinued, the data stored in the cloud environment can still be recovered.