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Software as a service needs a clear service level agreement

New model spells new legal issues

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Software houses must create a whole new kind of service level agreement (SLA) if they start selling their software as a service rather than a product, according to a body which represents software developers.

Software developers are increasingly offering their products as an on-demand service with full support rather than simply as boxed products. But the very different nature of the delivery of software has significant legal implications, says the US-based Software & Information Industry Association (SSIA).

"For software as a service (SaaS) providers, the SLA is used to set realistic expectations for their customers," says the report, Setting Expectations in SaaS (PDF). "The SLA clearly defines the service level commitments established by the software provider and identifies their obligations to the customer and methods of reasonable compensation should these obligations not be met.

"For the SaaS customer, the SLA introduces a new level of accountability from the software provider and a means to measure and monitor service performance," it says.

The software industry does not have extensive experience with SLAs because it has traditionally sold products rather than services. In services industries, such as telecoms, they outline what standard of service a customer and provider agree is acceptable for the negotiated price.

Customers and providers alike must take care in the details of an SLA as it is a legally binding agreement. One key area is in credits. Penalties for worse service than is agreed in an SLA generally come in the form of credits, which are applied as discounts in the next period of service.

"Because of the legal nature of the SLA, it is important to carefully draft the limits to the remedy for credits for both parties to the agreement," says the SSIA report. "The credit calculation must unambiguously cover the different types of failure and should clearly define compensation due for extended single outages or cumulative periods of downtime within a fixed period.

"Unless these credits have been unmistakably defined, there is a huge risk of misinterpretation for credits due. In addition, the SLA must outline the maximum credit that will be available for any period," says the report.

It should also be made clear in what circumstances no credits will accrue. This can be for unexpected circumstances out of the control of either party, known as "force majeure", for changes ordered by the customer outside of the original agreement, and for scheduled downtimes.

The agreement should detail what hours the provider is available and when it is not, as well as the expected availability of the provided service, expressed as a percentage. The customer should agree with the service provider what kind of failures count as chronic, and how penalties will apply.

"This white paper specifically focuses on how the SaaS model requires formalised commitments between provider and consumer," said David Thomas, executive director of the SIIA software division. "It is part of the continuing story of how the SaaS model requires new and different operational methods compared to traditional software."

Copyright © 2007, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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