Chicago Software Licensing Lawyer & Attorney : Sam Conforti Law Firm : Master Service Agreements, Negotiations, Outsourcing : Cook County, Illinois

There are many items to consider before deciding to adopt a SaaS approach to your IT operation.  Marcia Gulesian, a software developer, project manager, CTO, CIO, and author of numerous feature articles on IT, has captured the salient points in her article SaaS: Financial, Legal & Negotiation Issues.  As the title to her article suggests, the financial implications should be addressed first.  Gulesian has a very descriptive section on the differences between buying the software application and leasing it.  She discusses the differences of owning an asset and its tax advantages of the deductibility of depreciation as opposed to the leasing option.  There is a brief explanation of cash flows between the two alternatives, finding your opportunity cost, and making your determination on the comparison of the present values of the cash flows from the cost of owning versus the cash flows from the cost of leasing.  Before we go too far afield, my readers can attest to the fact that I always try to define our terms before delving into the nuances that the subject line suggests.

Wikipedia’s definition of SaaS is very complete yet succinct:

“Short for Software as a Service, SaaS is a software delivery method that provides access to software and its functions remotely as a Web-based service. SaaS allows organizations to access business functionality at a cost typically less than paying for licensed applications since SaaS pricing is based on a monthly fee. Also, because the software is hosted remotely, users don't need to invest in additional hardware. SaaS removes the need for organizations to handle the installation, set-up and often daily upkeep and maintenance. Software as a Service may also be referred to as simply hosted applications.”

I also have a posting in this blog, which I must admit has become quite popular based on the number of hits registered to it, entitled SaaS is the Future.  In it I discuss how a Managed Service Provider (“MSP”) can help software developers get their product to the market faster since the infrastructure barriers and capital expenditures are significantly lessened.  In another posting about Unified Communications I have quoted Mat Taylor, a senior software architect with British Telecom, regarding the benefits of SaaS:

"The ability to get things done faster, get workers more engaged in a business scenario, provide better customer service, are all big productivity wins that benefit the bottom line"

In light of the above discussion surrounding “lower total cost of ownership and quicker time-to-value”, Gulesian cautions us that the other factors to include in the financial calculation is the maintenance and support fees that come with ownership as compared to the SaaS fees which includes these items.

SO WHAT DO I INCLUDE IN THE SAAS CONTRACT?

Gulesian points out three areas that must be addressed in the contract:

·         Integration with your non-SaaS systems

·         Loss of control of data

·         Dependence on the provider for security

The CIO and his or her team are the main players to address the integration issue.  Although the next two points also require the IT organization’s participation and input, these are matters that must be addressed upfront in the agreement itself.

Risk of loss of your data is paramount.  In the event that the SaaS provider is unable to provide the support anticipated, it is essential that you have access to the applications as well as your proprietary data.  Inability of the provider to provide support may happen for a myriad of reasons such as bankruptcy of the provider or a real or threatened patent infringement claim and subsequent injunction.  The preferred approach to protect against such loss is to insist that the provider place its code into an ESCROW account.  Language can be drafted which will instruct the trustee  of the escrow ( an independent and trusted third party) to release the code to the beneficiary (i.e. you) upon the happening of certain events which are defined in the escrow language in your SaaS agreement.  One shortcoming to this occurrence is the downtime that may be involved in getting your systems up and running, but this is a necessary protection that you must include in your contract.

Transition assistance is another item to consider.  In the future you may wish to change the SaaS application currently in use.  Language should be included to require the provider’s assistance in developing the data migration strategies and the procedures to be followed so you can move your data to another application.

Since the SaaS model is economical by nature (see Wikipedia definition above), traditional discounting expectations are not available.  Pricing is based on users or seats.  The more users subscribed, the more likely the cost per user can be discounted.  So plan accordingly and try to build in volume discounting per blocks of users.

Other items Gulesian notes for inclusion in the agreement are:

·         Service Level Agreements (SLAs) regarding

§  Availability

§  Response times

§  Notifications of outages

·         Regulatory compliance

·         Data integrity

·         Data Privacy

·         Frequency of backups

·         Disaster Recovery

Gulesian’s article hits the main points and I highly recommend it to my readers.

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The next phase in the rapid move to the mobile web is 4G.  I discussed this progression in my post to this blog Future of Wireless Devices on December 26, 2007.  What this means for us no one can say with any certainty. Right now it is safe to say that we will be getting faster downloads and much more functionality to include mobile-video sharing.  The two wireless networking standards are WiMAX and Long Term Evolution.

Wikipedia defines WiMAX as follows:

WiMAX, the Worldwide Interoperability for Microwave Access, is a telecommunications technology that provides wireless data in a variety of ways, from point-to-point links to full mobile cellular type access. It is based on the IEEE 802.16 standard, which is also called WirelessMAN. The name "WiMAX" was created by the WiMAX Forum, which was formed in June 2001 to promote conformance and interoperability of the standard. The forum describes WiMAX as "a standards-based technology enabling the delivery of last mile wireless broadband access as an alternative to cable and DSL" (and also to High Speed Packet Access). Currently, Pakistan has the largest fully functional Wimax network in the world.

Wikipedia defines Long Term Evolution (“LTE”) as follows:

3GPP LTE (Long Term Evolution) is the name given to a project within the Third Generation Partnership Project to improve the UMTS mobile phone standard to cope with future technology evolutions. Goals include improving spectral efficiency, lowering costs, improving services, making use of new spectrum and refarmed spectrum opportunities, and better integration with other open standards. The LTE project is not a standard, but it will result in the new evolved Release 8 of the 3GPP specifications, including mostly or wholly extensions and modifications of the UMTS system. The architecture that will result from this work is called EPS (Evolved Packet System) and comprises E-UTRAN (Evolved UTRAN) on the access side and EPC (Evolved Packet Core) on the core side.

Judy Mottl has an excellent analysis in her InternetNews.com article entitled Who’s ahead in the 4G race?   At present it would seem as though the winner in the race could be WiMAX.  They have deployments up and running, however there is a surge in the acceptance of the LTE networking standards by the likes of AT&T, Verizon Wireless, and Nortel.  Sprint-Nextel is backing WiMAX.  Mottl has done her homework and I highly recommend her article.  She concludes with a look to the acceptance of 4G by enterprises and quotes Carmi Levy, senior VP, strategic consulting for AR Communication:

"Enterprises need to be watching and be aware of what's coming though it's not really in the line of vision at this point," Levy said, adding that vendors will be focused on providing what's most important to business -- solid voice and data networking performance at lower price points.

"In three to four years we'll know what will be. At this point it's about watching the landscape develop and adapting, if necessary, to leverage what's coming," Levy said.

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Far be it for me to offer anyone advice on their taxes. Lucky for us R. Ray Wang has done the due diligence and reports in his blog for May 19, 2008 that the Economic Stimulus package signed by President Bush this past February contains two (2) provisions that may spur the purchase of software to the SMB marketplace. He identifies these 2 opportunities at tax savings as follows:

• “Bonus depreciation”: SMB purchasers of software can forgo the 5 year straight line write-off for depreciation and take a full 50% depreciation expense in the first year.

• “179 deduction increase”: The annual purchase of such capital qualifying for such a deduction has been increased from $500,000 to $800,000 with an increase in the deduction allowed for such qualifying purchases by SMB’s from $125,000 to $250,000.

For those of us not up to speed on what a 179 deduction is, Wikipedia provides this brief description:

Section 179 of the United States Internal Revenue Code (26 U.S.C. § 179), allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes, as an expense (rather than requiring the property to be capitalized and depreciated). This property is generally limited to tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business. … The 179 election is NOT mandatory, and the equipment may be depreciated according to sections 167 and 168 if preferable for tax reasons. Further, the 179 election may only be taken in the year the equipment is placed in use and is waived if not taken in that year. However, if the election is taken, it is irrevocable unless special permission is given.

As a non-tax expert, it appears that the above items allow for a faster write-off of the expense (i.e. purchase of the software). The conventional thinking is the more one is allowed to expense, the lower the taxable income. This should provide an added incentive to the SMB purchaser to complete the purchase, however, as Wang emphasizes, the software must be deployed this year in order to take advantage of the additional tax savings.

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Before we discuss the enforceability (or lack thereof) of such agreements, it is probably best that we at least define our terms so we all know exactly what type of agreement we will be examining. Wikipedia has the following definition:

A clickwrap agreement (also known as a "clickthrough" agreement or clickwrap license) is a common type of agreement (often used in connection with software licenses). Such forms of agreement are mostly found on the Internet, as part of the installation process of many software packages, or in other circumstances where agreement is sought using electronic media. The name "clickwrap" came from the use of "shrink wrap contracts" in boxed software purchases, which "contain a notice that by tearing open the shrinkwrap, the user assents to the software terms enclosed within".

Click-wrap is the electronic equivalent of the shrink-wrap method which allows users to read the terms of the agreement before accepting them.

The content and form of clickwrap agreements vary widely. Most clickwrap agreements require the end user to manifest his or her assent by clicking an "ok" or "agree" button on a dialog box or pop-up window. A user indicates rejection by clicking cancel or closing the window. Upon rejection, the user can no longer use or purchase the product or service. Classically, such a take-it-or-leave-it contract was described as a "contract of adhesion, which is a contract that lacks bargaining power, forcing one party to be favored over the other". The terms of service or license do not always appear on the same webpage or window, but they are always accessible before acceptance.

As a contract negotiator by inclination, I have a natural aversion to such forms of agreements. Simply put, one cannot negotiate such agreements. I’m grateful that Wikipedia acknowledges that such forms of agreements in the past were called ‘contracts of adhesion’. Please note that in the past these types of agreements lacked the bargaining element; however these forms of agreements are evolving. The law has a term that may be applied to a vast number of these clickwrap agreements, Caveat Emptor, Buyer Beware.

Jason Haislmaier in his blog ThinkingOpen addresses the necessary elements for the ever-present “click-to-accept” contracts that many of us often face in his article How Do I Build an Enforceable Online Agreement? — Not (Always) the Way SalesForce.com or Google Would. I strongly recommend Haislmaier’s article. In it he discusses the American Bar Association’s Committee on Cyberspace Law and its year-long study regarding such agreements. Haislmaier discusses in depth the committee’s “bottom line” steps required in order to have an enforceable online agreement and adds some anecdotal evidence when online vendors might fall short of these steps. The four “bottom line” steps as espoused by the ABA’s Committee on Cyberspace Law are as follows:

1. The user must have adequate notice that the proposed terms exist;

2. The user must have a meaningful opportunity to review the terms;

3. The user must have adequate notice that taking a specified, optional action manifests assent to the terms; and

4. The user must, in fact, take that action.

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