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What Is a SaaS License?

saas license

It’s no secret that companies are buying SaaS (software-as-a-service) like never before. Case in point, the SaaS market will grow by 18% and account for $197 billion in spending in 2023 alone, according to Gartner’s predictions.

Perhaps what’s most notable isn’t just the growth of the SaaS space, though — it’s how quickly companies are accumulating new applications, subscriptions, and licenses.

And when we’re talking about the average organization running hundreds of apps, that’s a lot of licenses to manage. Zylo data shows the average enterprise maintains an inventory of 291 SaaS applications.

But something important often gets lost when we talk about the sheer volume of application quantity: SaaS licenses and the sometimes-confusing “legalese” involved with managing enterprise software.

In this post, we’ll break down what goes into a SaaS license and why understanding licensing agreements matters.

51% of SaaS licenses are used. Cut the waste today.

What Is a SaaS License?

To kick things off, we’ll highlight how the SaaS license model works in layman’s terms.

Unlike a perpetual license agreement which involves one-time payment and full ownership of software, a SaaS license is an ongoing commitment for as long as you pay for the service. Think of your license as being bundled with your SaaS subscription.

When you become a subscriber to a service, you have access to that product’s updates, latest features, and support staff. Arguably, the biggest bonus of a SaaS license the freedom from being responsible for the upkeep of servers or data. This advantage makes SaaS more affordable and easier to manage for most companies.

There are a variety of software licensing models available for SaaS, although most operate on an annual or monthly subscription.

This advantage might all seem pretty straightforward at a glance. Likewise, the downsides of a perpetual license versus SaaS are apparent, right? However, SaaS licenses can potentially cause headaches in large organizations, depending on how they manage IT assets and specifically SaaS.

How so? For starters, consider that acquisition and ownership of licenses are no longer necessarily managed by IT teams. Instead, as product-led growth has become the mantra for SaaS title makers, individual business units and employees now make up a significant portion of direct SaaS purchases. Multiple teams tied to so many services and licenses could result in overlap and waste (but more on that later).

And if your company has traditionally managed software with software asset management (SAM) processes, adjusting to cloud software license strategy compared to an on-premises license management strategy can be challenging.

Despite these issues, the ease of use, affordability, and growth of SaaS tools typically outweigh the potential cons related to licensing.

Why Managing SaaS Licenses Matters

Let’s say you’re part of an organization juggling a variety of SaaS tools (spoiler alert: most companies are). Having multiple SaaS licenses presents a distinct set of challenges to IT leaders. Below is a breakdown of the potential risks and pitfalls of poor license management.

The looming risk of shadow IT

7% of employees expense SaaSSaaS licenses are easy to acquire and deploy. And while that’s typically considered a benefit of SaaS, consider that IT teams aren’t always aware of products purchased by employees without IT’s approval. This phenomenon is known as shadow IT.

Given that nearly one in ten (7%) employees purchase SaaS applications on behalf of their companies, this all happens more often than you might think.

The most obvious problems associated with shadow IT include wasted money and resources. For example, a company might end up purchasing a new subscription or license for a product they already own.

Wasted money on lost discounts and redundant tools

When employees lead the purchasing process for a product, they’re getting a license on a “one-on-one” basis. In other words, they could be forgoing potential volume discounts for enterprise-level buyers.

Also, consider that if and when teams or employees purchase new applications without first evaluating current software inventory, redundant or duplicate purchases are frequent.

Potential overlap between many products and their peripheral features is a well-known attribute with SaaS subscription models, as title makers compete to earn best-of-breed status. While this benefits software innovation, lack of visibility into existing tools can lead to employees purchase solutions that are already being served by existing licenses.

Security and compliance issues

Simply put, employee-purchased SaaS does not undergo the same vetting and security checks as an application purchased by the IT. Lack of vetting can expose companies to risks of data breaches or compliance issues related to regulations such as GDPR, HIPAA, or CCPA.

SaaS security risksZylo data shows that the greatest risk lies with shadow IT, or software expensed by employees. Sixty-five percent of expensed software has a “Poor” or “Low” risk score.

Such problems can quickly fly under the radar, yet highlights how overlooking your SaaS licenses can result in something severe.

Licenses go unused

Did you know that as many as 51% of all licenses go unused according to Zylo’s research regarding enterprise software? Couple that with the fact that the majority of SaaS customers log into or access a product less often than once per month.

Translation? If your organization doesn’t have a comprehensive understanding of how employees use applications and how often, you’re likely letting your software budget go to waste.

saas license usage statOn a related note, license renewal can creep up on your company if you aren’t careful. SaaS licenses frequently include automatic renewal clauses. If you aren’t actively managing licenses, it becomes quite easy to accidentally re-up for software your company doesn’t want or need.

It seems like a lot of gloom and doom, right?

But as long as you create proactive strategies for how you purchase SaaS licenses and ensure that those purchases are going through the proper channels, you can avoid most of these issues with peace of mind.

Enterprise Licenses vs. End-User Licenses

To wrap things up, we’ll highlight the specifics of a SaaS license agreement as it pertains to enterprise versus end-user.

Let’s start with what an end-user license agreement (EULA) is. Also known as a click-through agreement, a EULA represents the out-of-the-box agreement that software providers give to those purchasing (or downloading) a software for individual use.

Chances are you’ve dealt with your fair share of EULAs before when downloading an app. They’re the walls of text you scroll through, and the “I agree” box you tick without worrying too much about the fine print.

EULAs are usually lengthy and daunting for an average person to trudge through. Even so, they don’t require any sort of back-and-forth with a software provider and allow for near-instant use of a software application.

The issue with EULAs is that the customer has little-to-no ability to change the terms of an agreement if desired. As opposed to an enterprise license agreement where a company would have some leverage due to their buying power.

Think about it. Who has more pull in a negotiation over terms related to data or privacy with a software provider: the individual spending $100 annually per user or the company spending tens of thousands of dollars on behalf of their employees?

Additionally, the sort of “buying in bulk” also allows for purchaser-favorable terms such a lower price-point and an appropriate customer service level.

Oh, and an enterprise licensing agreement not only means negotiating power but also avoiding the hassles related to juggling a bunch of individual software licenses (see the section above).

The IT Leader’s Guide to Software License Management

Learn More

How Does Your Company Manage SaaS Licenses?

The key takeaway here is that while SaaS has mostly made life easier for companies and IT managers at large, this ease can cause problems for organizations that overlook the fine details of their licenses.

With the help of tools such as Zylo, you can manage and optimize SaaS licenses without second-guessing your data or worrying about licenses going unused. Doing so is a win-win for your IT managers and employees alike.