Software as a Service (SaaS) is a great business model and a lot of startups build with this in mind. However, as you start to get some traction and start to grow you soon learn that things start to break along the way. Things like poor contract management are one of those aspects that are often taken for granted early on and cause massive headaches later.
This is because so much of your actionable data is driven from your contracts as a source of truth. Scaling will involve standardization of your pricing and your sales processes. Once this is in place you can build in strict rules for contract management. You’ll be able to create line items in your CRM and create automation around your quoting and contract creation. But until that you’re stuck in a land of PDF hell. Where your contracts are cut to ribbons during the redlining process and the end product often is a little bit off what your CRM says.
While you’re in this spot the difficulty is that the important data in your SaaS contracts gets trapped. Poor contract management of these contracts can result in severe risks, including financial loss, non-compliance penalties, and damaging disruptions in service. To mitigate these risks, businesses need to develop effective strategies for managing software contracts.
Business Risks of Poor Contract Management
The financial implications of poor contract management are related to understanding the service that you’re providing to your customers. Raising this with your internal teams to ensure that you are not missing renewals or getting the most value out of customers is important. Failing to accurately understand and manage the customer relationships will drive your churn up and slow you net revenue retention numbers significantly.
Secondly, non-compliance can result in penalties for things like missing your SLAs. SaaS contracts often stipulate conditions for usage, data management, and security compliance. Breaches of these conditions can trigger either financial penalties, legal action or even break clauses. Furthermore, regulatory authorities are increasingly stringent about data protection, privacy, and business continuity. Failing to comply with these requirements can impact a company’s reputation and customer trust.
Lastly, the slow build up of deviation from standard contract terms creates complexity. For every different level of liability you agree to or every different contract jurisdiction you have it is an extra piece of complexity. When SaaS contracts are not properly managed and contracts aren’t tracked, businesses run the risk of causing issues when they come to the point of fund raising or going through the contract process for mergers and acquisitions.
Avoiding these SaaS contract risks
To steer clear of these pitfalls, businesses must treat software contract management as a structured data exercise and build it into business processes for contracting. A few key strategies can significantly reduce the associated risks.
- Contract Visibility and Understanding: The first step is gaining full visibility into the contracts and understanding their terms and conditions. Details about the duration of the contract, pricing model, renewal terms, service-level agreements, and data privacy terms need to be clear to all stakeholders. Businesses should consider leveraging a contract management tool to maintain a single source of truth and enhance transparency. Contract Sent allows you to track and report on multiple data points in your contracts from jurisdiction to the ARR of each separate paper.
- Financial Management: Regularly monitor and control the ARR and renewal dates associated with the contract. This includes identifying and tracking recurring income, assessing the value received from the contract, the currency, and contract planning for renewal motions in advance. Financial management and working with your finance team will help to understand how these things will impact your key SaaS metrics.
- Regular Compliance Checks: Businesses should establish regular compliance checks to ensure they adhere to the stipulations within the contract and regulatory requirements. This involves data management audits, security checks, and adherence to service-level agreements.
- Proactive Renewal Management: Avoid disruption in your ARR by managing renewals proactively. Set up reminders for contract renewal dates, well before their renewal dates, regularly evaluate the benefits for your customers and their usage stats for your software, and decide on what renewal or expansion measures that you need to put in place well before the contract ends.
- Dedicated Contract Management Team: As businesses grow and adopt more SaaS tools, managing software contracts can become complex. Thus, having a dedicated contract management team becomes crucial. This team will ensure continuous oversight of all software contracts and carry out strategic decision-making.
Poor contract management can expose businesses to avoidable risks, loss of revenue, impacting their financial health and SaaS metrics, regulatory compliance, and operational stability. By understanding these risks and implementing strategic measures, businesses can effectively manage their software contracts, ensuring seamless operations and maximizing the benefits derived from the scaling up of their software business.