Convergence of Software-as-a-Service and Services Outsourcings

Services outsourcings and software-as-a-service (SaaS) offerings lie on nearly opposite ends of a spectrum of managed services that a service provider can provide a customer. Traditionally, they serve the customer in quite different ways and are considered to be separate services, but some service providers are offering “customized” SaaS services, which in essence lie in the middle of this spectrum of managed services. Only certain services can be offered both as a SaaS Service and through an outsourcing, but the breadth and complexity of SaaS Services, particular cloud-based SaaS Services, grows constantly.

Outsourcings are generally used to transfer responsibility for a large and complex piece of a customer’s business to a third party. The primary driver behind an outsourcing is typically cost, since the service provider generally promises to perform the outsourced services at a lower cost than what a customer can achieve internally. The cost savings comes from leveraging the infrastructure, resources and expertise of the service provider. However, outsourcings can become unexpectedly expensive for a customer when the provided solution does not neatly mesh with the customer’s remaining business functions. Change orders and scope creep drive up implementation costs.

In contrast, software-as-a-service (SaaS) offerings are typically offered as a commodity service, having set parameters and set pricing, and being available on the same terms to everybody. The advantage of a traditional SaaS service is cost, especially low upfront costs. Typically very little capital is required to sign up for a SaaS service, and only an ongoing subscription fee applies. There are fewer unexpected costs arising from the SaaS service, since it is not subject to change orders or scope creep. SaaS services are typically provided on a “take it or leave it” basis. 

Increasingly, there is a trend among SaaS providers to offer “customized” SaaS services, which are tailored in some way to meet the specific needs of a particular customer. Some SaaS providers have developed their service offerings such that they have embedded into them a large number of variable service parameters, allowing for customized end user interfaces, database and dataset compatibility, and customized monitoring and reporting tools. Certain SaaS providers have created software development kits which can be exploited by customers or third parties to develop customized applications that work with their SaaS offerings, which can provide for even greater flexibility.

I see this as a natural convergence between the two contracting models that could be of benefit to both the customer and the service provider. From a customer’s perspective, by moving to a customized SaaS service, the customer can realize greater cost savings over a stand-alone, full blown outsourcing arrangement. From a service provider’s perspective, it is able to build a platform once and sell it many times over, a potentially more profitable business proposition.

On the downside, the customer would have to be more flexible with respect to its requirements if there is not a customized SaaS solution that fits the bill. Customized SaaS solutions will only go so far, and invariably there will be requirements that they cannot meet in particular circumstances. A customer may also have to settle for service levels and technical support that is inferior to a fully outsourced solution. Some service providers may be willing to negotiate special terms for larger providers, to afford a customer dedicated support, dedicated hardware, or other particulars. However, the resulting services may rise in complexity and expense to a level equivalent to an outsourcing arrangement. 

A customized SaaS solution can be an excellent vehicle for a customer to realize cost savings, so long as it can handle not getting everything it wants from its solution. Counsel for a customer considering such a solution should address at least the following potential legal concerns that may be particularly affected in a customized SaaS service.

1. IP Ownership: In a customized SaaS solution, without any third party customization, the service provider will likely insist on ownership of the customizations. The customizations in many cases will simply amount to configuration details, which are intrinsic to the platform, and would be of little value when separated from it in any case. In other instances, the customer may be asked to pay for custom code. Some of that custom code may be for completely new features for the SaaS solution, which the service provider can resell to other customers at little incremental cost. In such cases, the customer would be wise to refuse.
2. Transition Assistance: SaaS Services typically do not allow for significant transition assistance upon termination, whereas outsourcings almost invariably do. The customer should carefully consider what type of termination assistance it might need in a customized SaaS solution, taking into account the portability of the data in the existing solution, the amount of time needed to move to an alternative solution, and the requirements for services and support during that time.
3. Key Personnel: SaaS Services typically do not identify any key personnel requirements, but outsourcings often do. The rationale in an outsourcing is that key personnel can be crucial to the success of the outsourcing, and so some restrictions are placed on their allocation and utilization. The customer should carefully consider whether similar restrictions are necessary for key personnel spearheading the customization portions of any customized SaaS Service.
4. Change Orders: SaaS Services typically do not identify a process for managing change, whereas outsourcing often do. Managing change is a crucial aspect of any large outsourcing, as other commentators on this blog have discussed at length. For the same reasons, a customized SaaS solution should contemplate some process for managing change.
5. Governance and Escalation: SaaS Services do not generally provide for a governance process involving executives of both parties to the contract, but will often offer some kind of escalation process. A customer to a customized SaaS solution may require more rapid escalation of issues that a standard SaaS Service would provide, and will likely require an escalation process that escalates to a key decision-maker of each party. Otherwise, issues, and in particular implementation and development issues, can become stalled in a customer service nightmare, without appropriate and timely recourse.

Sophisticated service providers will pre-empt customers by addressing these issues in their standard “customized” SaaS Services agreements, making it easier for customers to sign on and start enjoying their cost savings.