Software licensing v SaaS: a guide for software providers and customers

Commercial considerations

Software licensing often requires significant upfront investment, which may not be practical for SMEs. SaaS, by contrast, spreads costs over time with predictable monthly or annual payments (a SaaS subscription provides users with access to cloud-based software on a recurring basis) which can be more attractive to smaller businesses. For software providers, offering flexible subscription models can help broaden their market reach, but they must ensure that revenue models are sustainable in the long term.

SaaS is generally more scalable than traditional software, enabling SMEs to adjust their subscription levels as their business grows without the need for additional infrastructure investments. For software companies, scalability is a key selling point, but it requires robust backend systems that can handle increasing demand to avoid performance degradation.

Legal/contractual considerations

Ownership and access (On-Premises v Off-Premises)

In traditional software licensing, the licensee obtains a licence to install and use the software on their own servers or hardware (on-premises). This grants significant control to the licensee as the licence is often perpetual, but limits flexibility for scaling as the licence usually specifies a set, limited number of user devices on which the software can be installed.

Conversely, SaaS operates on an off-premises basis, where the software is hosted by the provider in the cloud (usually on third-party servers, such as Amazon Web Services, or Google Cloud, or on servers owned and managed by the organisation within its own data centre or physical location) and the customer is granted access rights rather than a traditional licence. Access is typically granted to authorised users, which are individuals within the subscribing organisation with a need to use the procured solution. The user accesses the software via their web browser without the need to install locally on customer’s premises and infrastructure, offering flexibility and reduced infrastructure management for organisations. SaaS contracts tend to be more granular, requiring the customer to name and authorise specific users and undertake contractual obligations to ensure access only by those authorised users. This allows SaaS providers to closely monitor access and usage patterns which can result in tighter control over their proprietary rights in the software.

Updates and maintenance

With traditional software licences, software updates are often not included and require separate agreements and additional fees. SaaS agreements typically include automatic updates and ongoing maintenance as part of the subscription relieving users from managing this in-house. This shift to continuous updates requires a robust Service-Level Agreement (SLA) to define parties’ responsibilities in regard also to future versions of the software and upgrades.

Data security and control

Data protection is a major consideration for customers and software providers. Licensed software that operates on-premises allows customers to retain a strong grip over their data as providers do not typically host or store customer data. However, SaaS relies on the security measures of the provider, as customer data is typically stored on the provider’s servers.

Customers often seek safeguards to ensure their data are safely hosted in provider’s environment and that remedies are available in the event of a breach, while providers typically aim to limit their liability exposure. A growing trend shows providers asserting ownership rights over service meta-data and other usage data for the purposes of using this to improve their service offering or for marketing purposes. Customers frequently express concerns over this practice, as they fear it could compromise their ownership and control over their data. Responsibilities of the parties with respect to data ownership are usually set out in a data processing agreement and/or provider’s policies such as their data privacy policy.

Limitation of liability

Traditional software licences often include broad liability exclusion disclaimers, placing greater responsibility on the licensee for software bugs and downtime. SaaS subscriptions, however, typically offer SLAs that provide specific guarantees on data recovery, uptime availability, and remedies in the event of a service failure or data loss. To limit their liability exposure, providers often seek to incorporate limitation of liability clauses in the contracts. Negotiations over liability caps are common with providers aiming to exclude their liability for indirect and consequential losses while proposing caps on their financial responsibility in the occurrence of a breach. On the other hand, customers insist on provider’s unlimited liability or as a fall-back, attempt to negotiate higher liability thresholds for certain high-risk liability pools such as data protection, Intellectual Property infringement and breach of warranties.

Conclusion

For software providers, the challenge lies in drafting contractual forms that make it clear what rights are licensed over the software (or type of access being granted), ensuring the appropriate legal framework is in place to protect their valuable Intellectual Property and prevent unauthorised use. For SMEs that might need to engage into a ‘battle of the forms’ especially when negotiating with more established organisations, clearly conveying the differences between the two models at the onset of the discussion can be crucial for expediting execution and saving up resources. This approach helps lay the foundation for protecting their Intellectual Property, even if they ultimately contract on customer’s terms.

For customers, the difficulty is in carefully reviewing licensing terms to ensure that appropriate rights are granted for their intended use. This is important especially if the customer intends to sublicense the software, achieve interoperability between the software and third-party solutions and create Application Programming Interfaces (APIs) as they must verify that the licensing terms permit this without violating contractual obligations. Finally, negotiating liability is crucial for both sides to ensure customers have appropriate contractual recourse in the event of a breach and providers not overly expand their liability exposure.

As software solutions are increasingly becoming ‘cloud agnostic’, where applications and tools are expected to migrate seamlessly between multiple cloud platforms or between on-premises and cloud in a hybrid model to ensure data portability and avoid vendor lock-in, navigating through the nuances of the two models and preparing contracts that are tailored to the specific solution becomes a necessity.

If you are debating a software licence v SaaS subscription, find out how our tech experts can guide you.