What Every MSP Executive Should Know About Contracts

Given the frenetic pace of a typical MSP executive’s day, devoting time, effort and budget to developing services contracts can often be relegated to the lower rungs of the priority list. However, contracts are a vital piece of an MSP’s business and should be treated as such. Particularly as organizations make the move from a traditional VAR or break/fix model to delivering ongoing managed services, this topic is especially important.

Why are contracts so critical? Here are just a couple considerations:

• Your business’ future. With inadequate contracts, your business can be exposed to a host of unpleasant and potentially disastrous scenarios—including lawsuits and premature customer cancellations—that can fundamentally limit your business’ prospects, if not its very survival.
• Your business’ value. For many MSP businesses, acquisitions are the ultimate exit strategy. The strength of your customer contracts will be a critical determining factor in whether a deal goes through and the ultimate valuation of your business.

Ultimately, contracts are instrumental in putting your MSP business on a solid legal foundation, which is vital to the long term viability and success of your business. When developing services contracts, there are several areas that fall into the “must-have” category. Following are some of the most important areas a well-designed services contract should cover:

• Term of service and termination rights. When MSPs kick off an engagement with a new customer, they typically have to dedicate staff time and resources to ramping up, and may even need to bring on new staff or equipment to accommodate the new customer. These up-front investments need to be recouped over a specific time frame, which is why service duration has to be factored into contracts. The MSP should include specific contract language that commits the customer to a one-year or multi-year term without rights to early termination. The only way a customer should be able to cancel the contract is if the MSP fails to meet its obligations. Further, the contract should define what constitutes a breach of contract on the part of the MSP.
• Intellectual property rights. Just about any successful MSP will have its own “secret sauce,” the unique capabilities that enable the MSP to deliver services better or more inexpensively than the competition. This can include the development of custom infrastructures, applications or tools. Alternatively, it can be attributed to specialized workflows. During the course of delivering services to customers, MSPs may by necessity be disclosing this proprietary information. It is important that contracts protect this intellectual property.
• Liquidated damages for hiring MSP employees. For MSPs, the business is truly about its people. When you have good people that are interacting directly with customers on a regular basis, there is a clear and common threat: customers will want to hire those people. Given the likelihood of this occurrence, and the damage that can be inflicted on the MSP as a result, it is important to include language that prohibits customers from soliciting or hiring the MSP’s staff. Further, there can also be specific language as to the monetary damages that should be paid if such a breach occurs.
• Privacy and confidentiality. By managing the business services and infrastructure of their customers, MSPs are usually entrusted with sensitive client information. As a result, contracts need to set clear boundaries that specify the respective roles and responsibilities of each party in protecting sensitive data. This is particularly vital for MSPs serving customers in such regulated industries as financial services, health care and retail.
• Limitations of liability. It is essential that service contracts limit the MSP’s liability. If a contract breach causes the customer some damage, the contract needs to clearly limit the amount and duration of the amount recoverable. In addition, it is good practice to exclude your MSP business from liability for more speculative, or open ended damages, for example, for being on the hook to reimburse a customer for lost profits due to an outage.
• Assignment. An MSP’s services contract should explicitly allow the assignment of the contract to another company, specifically in the event that the MSP is acquired. Given the fact that the exit strategy of many MSPs is through an acquisition, this is a critical component. If an MSP has contracts that do not provide this assignment, it can significantly diminish the MSP’s value, if not derail an acquisition completely.

Conclusion

An MSP’s prospects, valuation and long-term viability may all hinge on its services contracts—so taking the time to do these contracts right is a critical endeavor. To learn more about what your organization should be doing to establish effective contracts, be sure to download, MSP Service Contracts: Why They’re so Vital—and How to Make Sure You Get Them Right. This paper reveals the key strategies and requirements for developing service contracts that help put your MSP business on solid legal footing.

Greg Donovan is vice president of service providers at CA Technologies. Monthly guest blogs such as this one are part of MSPmentor’s annual platinum sponsorship. Read all of CA Technologies' guest blogs here.