Financial Risks With Third Party Vendors

Like any business, a SaaS provider can go belly up. Operating in the Cloud doesn't give them immunity from that potential business reality.

In fact, Crunchbase found that 2,705 SaaS organizations closed their doors between March 2021 and February 2023.

So, what kinds of risks does your business face if your SaaS provider experiences financial trouble?

• Your CSP loses access to one of the services it provides to your business due to non-payment. In that case you lose access to that service, too, and possibly your data.

• Your CSP inserts unfavorable terms (length, renewals, etc.) into the agreement that result in onerous early cancellation penalties or staying in a toxic relationship (Alert: IT services are notorious for these kinds of agreements).

• Your CSP files for bankruptcy. Depending on the type of bankruptcy (Chapter 7 or 11) and how well the trustee understands that cloud customers need their providers to continue operating during the proceedings, this could put your data at arm’s length until the bankruptcy is resolved (Note: The trustee’s main concern will be to repay creditors).
• Remember the angst of finding this provider? It will take as long if not longer to find another one.

I first realized the importance of financial stability in assessing SaaS providers while helping an insurance agency choose between three finalists it selected for a new LOB application.

It needed to replace its ancient DOS-based program running on an equally ancient Windows 98 PC and it didn’t want to invest in software and a server to run a new solution. The Cloud was its best option.

The three finalists varied from an 18-month-old SaaS startup to two well-established software companies with long histories of serving insurance agencies.

We had already determined that the 18-month-old startup’s software best fit the agency, but we had to consider the risk of putting almost the entire business in the hands of such a young company when SaaS startups frequently fail within the first three to five years.

In my research I found that the 18-month-old startup received $8 million in four rounds of Series A funding from four venture capital firms several months earlier and had acquired another company that develops modern insurance proposals for clients.

That comforted the client and proved to be one of the deciding factors in signing with the young company.

For more information about performing a VRA on Cloud and SaaS vendors, grab your FREE copy of our e-Book, "Find Your Cloud 9's", which offers a mini-guide to the VRA process. 

To set up a Reference Interview on the questions you have about investing in new technology for your business, contact me at 302-537-4198, ericm@edminfopro.com or on our Contact form.