Breaking Down the Differences: Professional Services vs. Software Licensing vs. SaaS Agreements

Key Takeaways:

• Your needs will change depending on whether you’re contracting for performance or project-based work, software licensing, or software-as-a-service. 
• Using different services agreement templates allow for nuanced and detailed terms based on the purpose and objectives of the deal. 
• Services agreements should accurately reflect your business team’s expectations and protect your organization’s rights. 

Have you ever wondered what the major differences are between the various types of service agreements that cross your desk? What sets apart Professional Services Agreements from Software Licensing Agreements or SaaS Agreements? 

Sit back, relax, and allow me to offer some guidance into what these various service contracts are, how they differ, and why you need to know. Understanding the key differences between these types of agreements will help you more accurately draft your business agreements and negotiate their terms to your advantage. 

1. Professional Services Agreements (PSAs) 

Professional Service Agreements traditionally cover a wide breadth of engagements including data analysis, program evaluation, and business consulting services. Under a PSA, the core output involves a highly skilled service created or provided by people, as opposed to a product or technology offering – think McKinsey & Co. or Gartner.  

Generally, a PSA covers a single project or objective where the service provider performs various steps and tasks to complete the project or objective. This generally means that the service provider is in full control of performance, and when applicable, deliverables. However, the service provider is likely not in control of the technical aspects of the performance, as these items are controlled by the customer. Meanwhile, location of performance can be determined by either party – can the work be completed remotely, or does it have to be on-site at the customer’s workplace? These details should be captured in the contract.  

SOWs and Deliverables

“Deliverables” are the end results of a product or service and may include progress reports, budget reports, and test results. Most commonly, deliverables are found in the Statement of Work (SOW). When reviewing terms regarding deliverables, consider ownership rights (who owns what, when do they own it, how does ownership transfer) and acceptance rights (importantly, how to reject or otherwise raise a deficiency dispute).  

Your SOW should clearly define the deliverables, where performance occurs, when the project is considered complete, and how to handle any performance issues that come up during the project.  

Learn More: For more expert tips on Performance-Based Agreements check out this Contract Nerds column by Jeanette Nyden.

Terms Unique to Professional Services Agreements:

In the PSA, look out for common contracting terms such as: limitation of liability, intellectual property ownership, confidential information, and indemnification and dispute resolution. Pay close attention to the payment terms since there is no gold standard for PSAs. Payment terms include:  

• Pre-payment – Customers pay before the project or service begins.  
• Hourly – Customers pay for the hours worked by specific individuals. You should expect an invoice detailing the hours worked, by whom, and what part of the project they worked on.  
• Fixed Price per Project – Customers pay a single price for each project regardless of any increases in costs that the service provider may incur.
• Time and Materials – Customers pay service providers for the actual cost of the materials and for the cost of labor. This can result in a hefty increase if costs increase during the project. For example, the housing market saw a huge increase in cost as lumber prices skyrocketed. 
• Milestones – Customers pay at intervals based on completion of agreed-upon milestones.  

All of these payment types come with unique challenges and requirements, so pay close attention before signing on the dotted line. 

2. Software Licensing Agreements 

Software Licensing Agreements are used when a vendor (also known as the licensor or intellectual property owner) provides on-premise software to the customer (also known as the licensee or permitted party) which must be downloaded and installed on the user’s computer. Sometimes the software is a physical product that you can buy at the store – for example, the CDs you buy to update the maps in your vehicle. Often, the software is purchased and downloaded from a web browser with click-through – think Microsoft Office or Adobe.  Software Licensing Agreements focus on granting permission to use a product.  

Terms Unique to Software Licensing Agreements:

Your Software Licensing Agreement should clearly define what is being licensed and should narrowly capture the scope of the license grant. To capture the scope, consider the following: 

• Number of Licensees – Will there be one or multiple licensees per license grant? In this context, “exclusive” means one user, “non-exclusive” means more than one. 
• Right to Transfer or Sublicense – Is the licensee allowed to transfer the license to someone else? What about selling a sub-license to someone else? These concepts are captured through terms such as “sublicensable” or “non-transferrable.” 
• Fee – Is the fee one-time or continual? Although fees may be periodic, generally they are one-time costs for the license, which you can pay to renew or upgrade. Be careful when using terms such as “fully paid up” if the product is subscription-based, since this phrasing could affect the vendor’s ability to collect past the first payment. “Fully paid up,” while arguably redundant since you should address payment terms elsewhere in the contract, means that no further payment is required from the licensee. If you offer a subscription-based software, be sure to avoid this term so you can continue to charge for subsequent subscription terms.   
• Usage Limits – Is the licensee’s use or access restricted to a certain geographical location? If not, the term “worldwide” should be used. Otherwise, the specific geographical location should be noted.  

The above considerations are usually captured in the following form: “Vendor grants to Purchaser a non-transferable, non-sublicensable, non-exclusive, worldwide, royalty-free license to use the Product.” 

As you can see, Software Licensing Agreements include various terms that are not found in PSAs. One of the major terms in a PSA that is absent from a Software Licensing Agreement is related to performance. For example, because Software Licensing Agreements do not involve the vendor actually performing a task or project, you may see a term that states, “The software will perform in a manner consistent with its intended purpose.”   

3. Software as a Service (SaaS) Agreements  

“As a Service” refers to cloud-based solutions that are usually limited to Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS). While we could dedicate several articles to these different concepts, this article only focuses on SaaS since this is the most common type of cloud solution.  

SaaS refers to web-based applications where the purchaser accesses the product online – think AuditBoard¹ or Google Workspace. This means that the purchaser does not download or install the application like they do with Licensing Agreements. SaaS Agreements also differ from PSAs in that the vendor usually does not perform a service. As a result, you may find these agreements lacking any terms related to performance. With SaaS products and services, the vendor generally manages the data, storage, server maintenance, and technical issues.  

Terms Unique to SaaS Agreements:

Now let’s look at what to look for when reviewing and negotiating SaaS Agreements, which focus on vendors permitting access and use of products or services. Like a Licensing Agreement, you should define the scope of the permissions granted and any limits on access or use of the product or service. Don’t let the word “Software” in “Software as a Service” confuse you. Even when the vendor uses software in their platform, having access and use of the product or service does not entitle you to access or use the underlying software.

Consider the following: 

• Are there any limitations to the purchaser’s access or use? For example, is there a limit to the number of users or amount of data input on the platform? 
• Are there any restrictions to the purchaser’s access or use? This can be similar to the restrictions detailed in a Licensing Contract but may vary in language – for example, the purchaser cannot share, sell, or reverse engineer the product or service.  
• What is the web-based application uptime? This is usually documented through a Service Level Agreement or “SLA.” The SLA should include guarantees for service availability, how to obtain support, and response times when support is needed.  
• Who owns what data? Purchasers and vendors alike should take caution when reviewing ownership rights. There may be some transfer of ownership rights – think purchaser feedback as to how the service operates. Vendors don’t want the purchaser to come back later and claim ownership of an improvement based on feedback.  
• What about security and data privacy concerns with the data input on the platform? What steps does the vendor take to ensure that your data remains protected? What happens in the event of a security or data breach? Where is the data stored?  
• Fees are usually captured in subscription form, with monthly or yearly terms the most common.  

Learn More: For more detailed information about SaaS agreements, check out the Contract Nerds’ column on Mastering SaaS Agreements by Foster Sayers.

Recap of Different Types of Services Agreements

Professional Service Agreements are based on the vendor providing a highly skilled service. The agreement terms should clearly outline the scope of service, timelines, standards of performance, and what happens if something goes awry.  

Software Licensing Agreements usually require the product to be downloaded and installed. The purchaser of such product is responsible for general maintenance including installing updates. Key terms include exclusivity, transferability, geographic restrictions, and license fees.  

With Software as a Service Agreement, the vendor manages most if not all of the technical aspects involved, data is hosted on remote servers, and the purchaser accesses the service over the internet. Key terms cover access and use rights and obligations, SLAs, data ownership, and data security and privacy rights and obligations.  

Keep in mind that each of these agreement types has its own nuances and each party may word or phrase their terms differently. Once you know the difference between these agreements, the details are significant but easy to follow.