But others have worked to keep terms more flexible. Kardia's Kelly tries to negotiate payments and an option to change the number of licenses on a quarterly basis. Smaller vendors are more likely to go for the latter, a helpful provision during the recession. When Kelly's former employer, exercise-equipment dealer Second Wind, was forced to shut 10% of its retail outlets and lay off store managers, its automated work-order and maintenance-tracking software provider, WorkOasis, allowed Second Wind to reduce its number of licenses accordingly. Similarly, DataServ says that some of its customers have been relieved to learn that the software can scale down as well as up.

That's the kind of flexibility that has won Kelly over. He and other SaaS enthusiasts also point out that early fears about security and reliability have largely been dispelled. "If these guys don't provide security and guaranteed uptime, they're dead in the water," he says.

Many SaaS vendors have worked hard to answer complaints about customizability, too. The latest platforms allow at least some modifications.

While those advances have further galvanized the SaaS model, allowing it to outlive an earlier cousin, the "application service provider," it still has its work cut out for it if it is to become the panacea its marketers like to claim it is. The big question for SaaS may be this: Will it propel the concept of cloud computing, or merely ride its coattails?

Yasmin Ghahremani writes about business and technology.

7 Steps to Savvier SaaS

Five years ago SaaS (software-as-a-service) contracts were barely glanced at by business units, but today they are often scrutinized by IT or legal for all kinds of issues. Despite the fact that customers are wiser, a recent Burton Group-Ziff-Davis Enterprise survey found that 23% of organizations admitted to having no SaaS controls at all, and many fail to negotiate nonmonetary terms of standard contracts. Kerry Kane, a principal at Software Contract Solutions, offers this advice on what to look for when negotiating a SaaS contract:

1. Make sure you choose the right vendor, because switching vendors can be costly. It's often expensive to migrate off a platform, and while you shop for a new vendor you will have to keep paying the old one. Drive a hard bargain up front, because the vendor will be much less likely to negotiate good terms upon renewal.

2. Find out how the vendor will help you retrieve your data if the arrangement should end for any reason, and make sure you will get the data in a usable format.

3. Be realistic with the number of seats you commit to and the deployment time frame. Ask for a ramp-up period and flexibility for adding users. For example, secure no cost for the first three months while the application is being rolled out. Kane also suggests putting a pricing table in the contract so you can negotiate up front for different price schemes should the number of users change.

4. Ask about data protection: Who is doing backups? Where is data being stored? Is the code being held in an escrow account in case the vendor fails?

5. Make sure service-level agreements (SLAs) are clearly defined, with penalties stated for failure to meet them. Try to get the availability component of the SLA negotiated for the shortest time period possible; for example, monthly or quarterly as opposed to annually. The vendor, for instance, might have to provide 99% uptime, with the customer given the right to cancel if the vendor fails to meet that level in two consecutive months.

6. Incorporate change-of-control language into the contract to make sure that if the vendor is acquired you have an option to lock in renewal rates at your current rates for 12 or 24 months, while you decide whether you want to stay with the new vendor. Protect yourself from annual price increases, as well. Standard renewal rates should not exceed 3% or the CPI, whichever is less. Finally, make sure you have the ability — at no cost — to assign or transfer your contract if your own company is acquired or merged.

7. Consider using an experienced contract consultant who can assist in achieving best-in-market pricing, terms, and conditions. Most firms are not affiliated with the vendor community, will negotiate directly with your vendor account team, and will offer a no-risk performance model, where fees are based on a percentage of money saved.

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