MSP Contracts Explained

Many businesses are shifting from the traditional break-fix model of IT services to managed services. This is largely because the traditional model is no longer sustainable as new technologies emerge and organizations struggle to cope with more advanced and complex IT infrastructure. According to Market Research, the global MSP market is expected to grow at a CAGR of 7.9 percent from 242.9 billion US dollars in 2021 to about 354.8 billion US dollars in 2026.

Considering this heightened demand for MSP services, Managed Service Providers (MSPs) more than ever need well-drafted managed services contracts to successfully offer their services to clients and build a solid brand. This might come as a surprise to many MSPs who may not have been attaching a lot of importance to managed services contracts. In fact, a good number of MSPs, even some of those that are rated top in this industry, have gotten so used to operating on verbal agreements that they don't recognize the value of a managed services contract. This is the wrong way to do it and it can cost you more than you can imagine.

While it's true that a contract is just a piece of paper when taken at face value, this paper is actually the most valuable part of your business. Surprised? Well, those who understand the true pillars of a business, especially investors and financial professionals, will tell you that an MSP business that is not backed by contracts with clients is merely «standing on sand». This is also true for all businesses.

Investors, for example, will not take your business seriously if it's contractless — no matter the mouth-watering project amounts involved. Think about it. What will happen if one day your most valuable client falls into financial misfortune and is unable to pay millions worth of services you have already provided. What are you going to use to recover the money if you never signed a managed services contract? What if they never had cyber security insurance, which by the way is a key item that a managed services agreement should contain these days?

A contract may be that «silent and boring» heap of documents that lies somewhere among your folders, but it's the ultimate glue that your MSP MUST not miss for all clients.

Let's discuss managed services contracts in detail and help you understand why you need them in order to secure the true value of your MSP.

MSP contract explained: What is a Managed Services Contract?

An MSP contract is an agreement between a business and a managed service provider. Under the managed services agreement, the MSP agrees to provide a certain level of services to the business in exchange for a fee. The MSP might be responsible for monitoring and managing the company's IT infrastructure as defined in the contract. They typically provide a range of service packages, such as network management, security, IT support services such as help desk support, software maintenance and more.

The length of the managed services contract is typically determined by the size and complexity of the IT infrastructure that the MSP will be managing. The managed service agreement should clearly outline the scope of services that will be provided, as well as the fees for those services.

What's the importance of contracts for Managed Service Provider?

Though it would be great to execute business transactions with a handshake and with no or less paperwork, it would bring about vagueness and misunderstanding. This is where Managed services contracts come in: they ensure everything is clear and written down. Clients place so much expectation on MSPs, and these contracts set the expectations for long-term business relationships.

Managed services contracts are essential for securing recurring revenue streams because they represent long-term financial commitment. Managed services providers with clear contracts are better positioned in the market than those that rely on verbal agreements. They also provide security for the service provider in case the client faces cash flow issues. In case of a legal battle, the managed service contract will assist in recovering payment for the services offered.

Besides marketing and legal protection, a managed services contract will help to manage client relations in the following ways:

  • Setting clear ground rules between the client and MSP during the relationship.
  • Establishing clear roles and responsibilities for both parties.
  • Creating protocols for dispute resolution and limiting liability.

Types of Managed services contracts

There are three main types of managed services contracts.

1. Master Service Agreement (MSA)

An MSA defines the general obligations of the MSP and the client. It's one of the first managed services agreements to be drawn up and normally specifies the terms of the relationship, including all the contractual and legal details, such as billing, retainer fees, and project specifications.

Master Services Agreement highlights the general obligations and liabilities of the MSP and client. Its primary purpose is to safeguard the service provider against allegations of gross negligence. However, it doesn't provide much information, such as the exact scope of service and exact pricing. Such information is included in the additional documents, like SLAs and SOWs.

2. Service Level Agreement (SLA)

A Service Level Agreement is a written contractual commitment between a managed service provider and a client. It clearly states the deliverables and delivery parameters the two parties have agreed upon. The MSP Service Level Agreement breaks down several service categories depending on the priority of submitted requests. These categories will include items such as the minimum response and resolution time.

For instance, a service downtime that disrupts the core business operations may be considered severe, and the managed services contract will outline the minimum response time and the expected resolution time.

3. Statement of Work (SOW)

A statement of work (SOW) is a document that clearly highlights the services included in a specific offering, implementation, or deliverables and consists of the SLAs, requirements, and exclusions. It is combined with the master service agreement (MSA) for the initial client engagement. A new client will sign both the MSA and SOW for a managed service.

MSPs use SOWs to modify existing services or sell new services to existing clients during a client relationship. The existing client will countersign additional SOWs for additional services or any modification to the initial service. In such cases, using the initial MSA and additional SOWs reduces the paperwork required to continue offering services to the client.

The most important items to include in an MSP contract

These are the essential elements or clauses that every managed services contract should have.

1. Liability and confidentiality

This clause carefully defines the liability that a service provider is willing to accept. The MSP will use concise, legal language to guarantee protection from tripping up over technicalities. It will also include a confidentiality agreement to protect any sensitive information.

Further reading: Should IT professionals take responsibility for cyber attacks?

2. Payments

The payments clause uses definitive language to set the payment scheme and demand an advance payment. The vendor should carefully draw this clause to include all scenarios and avoid messy payment delays and disputes.

This clause should specify when payment is due and the consequences of late payment, including any penalties and interest fees on late payment. It should also include all the services that will be on hold until payment is made.

3. Response time or coverage hours

This clause details the MSP's working days and hours. The vendor will also specify out-of-hour rates, charges for additional service above the maintenance scope, and on-site visits.

4. Remote access

This section clearly explains that there are cost considerations and potential security risks if the managed service provider or client employees work remotely. This clause is becoming increasingly important with the current trend that shows more and more employees working remotely. Approximately nine million US citizens work from home today.

5. Force Majeure

The force majeure clause ensures that the managed services provider is not held accountable for damages or losses beyond its control. External forces can impact the service provider or client business; hence the managed services contract should carefully consider such events.

6. Parties involved

It's important to list everyone involved in the relationship besides the MSP and the client. This could include third-party actors and other partners on both sides. Be sure to specify everyone's role.

7. Services covered

Include both the services that will be covered and those that will not be covered. The latter is particularly crucial because sometimes you might end up covering services that are clearly not in your role. You need to be clear about what you're going to be providing and what the client is responsible for. This is essential for preventing any misunderstandings down the road. You don't want to be scrambling to fulfill requests that are out of scope, and you don't want the client expecting things that you're not prepared to deliver.

8. Employee protection

Your employees are the greatest asset for your MSP. You spend a lot of resources to acquire and train them to become the skilled talent they are. So protect them in the contract to ensure the client does not engage them privately or even hire them. Your staff should only handle those duties defined in the scope of service as per the contract. Any roles outside this should be defined as breach of contract and be subjected to penalties.

9. General clauses

Capture the general nuances that tighten the nuts and bolts of the relationship. In other words don't leave anything to chance. For example, what is the official channel of communication, how are issues escalated and to whom? Who are the main contacts from both sides? Who are the final decision makers?

10. Termination clause

This clause specifies when and how any party can end the contract. It states the notice period and any settlement fees on termination. This allows managed service providers to protect themselves from frustration if they have clients that they can't continue serving!

Usually, the termination clause will state that either party can terminate the contract with written notice, or by providing a specific date or event that will trigger termination. It's important to make sure that both you and your client are aware of this clause, so there aren't any surprises down the road.

The items above can vary in importance depending on your industry or size of the company you are getting into contract with. But the focus is the same: ensuring that the contract is simple and clear enough to make the relationship a win-win. Avoid unnecessary technicalities that can easily weaken the contract.

Best practices for Managed services contracts

Observe these best practices for effective managed services contracts.

1. Pricing models

You need to find a pricing model that's going to work for both you and your client. There are a few different pricing models that you can use, but you need to find one that's going to be fair for both of you. The most common models are time and materials, flat rate, and bid pricing.

With time and materials, you charge your clients based on the number of hours you work on their project. This is a good option if you're not sure how long the project is going to take. With flat rate pricing, you charge your clients a set price for the entire project. This is a good option if you know what the project is going to cost and you don't want to deal with hourly rates. With bid pricing, you submit a proposal with your estimated costs and then your client decides whether or not they want to move forward. This is a good option if you want to guarantee that you'll make a certain amount of money on the project. Not sure how to price your MSP services? Please check out this MSP pricing guide.

2. Intellectual property

Make sure you have the right to audit your client's systems. This will help you to ensure that they're not infringing on your intellectual property.

Require that your client keep all software and licenses up to date. This will help to prevent them from using unauthorized software, which could infringe on your intellectual property rights.

Make sure that any trademarks or logos are used with permission. This will help to avoid any confusion about who owns the trademarks.

Require that your client protect your intellectual property as they would their own. This will help to ensure that it's not copied, stolen, or used in an unauthorized way.

3. Data protection and privacy

You need to make sure that both parties are clear on how the data will be stored, used, and accessed. You also need to have a clause in your contract that allows you to terminate the managed service agreement if the client fails to comply with your data protection and privacy policies. This is a non-negotiable part of any agreement, and you should never sacrifice your clients' safety and privacy for the sake of a deal.

4. Witnesses

Sign the contract in the presence of witnesses such that in case of any disputes, the witnesses can always testify accordingly. The witness is basically a party that is not directly involved in the arrangement but can testify to have been present and witnessed the execution. Witnesses should also sign the contract. 

5. Legal review

Have the contract reviewed by different lawyers who specialize in different aspects before signing it. This is the best way to ensure that all parties understand their rights and responsibilities. Of course you'll spend more by involving a couple of lawyers. But it'll give you the best protection in the long run. One lawyer might be very good in payment terms while another is super in data privacy, and such.

6. Compliance

Make sure that both you and your client are complying with all the relevant regulations. This goes for both local and international laws, as well as any industry-specific regulations.

Short term vs long term Managed services contracts: What's right for your MSP?

Short term managed services contracts are just that — short. They usually last for six to twelve months, and they're a good option if a client is not sure that they want to make a long-term commitment. They get all the benefits of an MSP without intense commitment. This is perfect for businesses that are unsure about MSPs or that are just testing the waters. It's a great way to see the value MSPs bring to the business.

For the MSP, shorter contracts are a great way to test out a potential client. You can get a sense of their business, how they operate, and whether or not there's a good fit. It also gives you the chance to assess their needs and see if you can provide a solution that meets those needs. The downside is that since you're not committing to a long-term relationship, you won't be able to invest in customizing your service to fit the client's specific needs. Another downside is that you may not be able to properly staff your team for the project. This can lead to downtime and unhappy employees who are overworked and underpaid. Not being able to fully commit to a project can also be seen as a negative by the client. They may view it as a lack of trust on your part, or as a sign that you're not competent to deliver results.

Long term managed services contracts, on the other hand, are typically for two or three years while some can go up to 5 years. This is perfect for businesses that are committed to MSPs and want to see the full benefits they offer.

Long term contracts are perfect for the MSP because it means you are getting into a long term opportunity which gives good security. The downside is that it can be tough to renegotiate a long-term contract if the needs of the client change. For example, you might not want to give up any of your hard-earned benefits, while the client may want more services for the same price.

Pros and cons of long term vs short term MSP contracts

Here is a summary of the pros and cons of long term and short term managed services contracts for both the MSP and the client.

Long-term contractsMSPClient

Pros

Stable income: The MSP is guaranteed a certain level of business over an extended period of time, making it easier to budget and plan for the future.

Cost savings: MSPs can often negotiate better rates when clients commit to buying in bulk over a longer period of time.

Optimum services: The MSP gets more time to properly assess the client's needs and implement best solutions.

High employee morale: By signing a long term contract, an MSP is making a commitment to their team members and helping to create a sense of loyalty. This increased morale can lead to improved productivity and better results

Better reputation: When a potential client sees that an MSP has successfully executed long term contracts with other clients, it instills confidence. 

Predictability: Clients can budget more effectively and avoid any unexpected surprises.

Security: A long term contract provides a certain level of security, knowing that the MSP is committed for the long haul.

Efficiency: A longer contract allows for better planning and coordination.

Cost savings: A long term managed services agreement will be more cost effective as the MSP may offer decent discounts. 

Improved service quality: With enough time to get to know the business, the MSP will be able to provide a higher quality of service over the life of the contract.

Cons

Resource constraints: Long term contracts can tie up valuable resources that could be used to service other clients.


Exit: Long term contracts can be difficult to get out of if the relationship sours.


Power: They can give the client too much power and control over the MSP.


Inflexible: They can be inflexible and impede the MSP's ability to scale up or down as needed.


Costly: They can be costly if the MSP needs to cancel the contract early for any reason.

Inflexible: Long term contracts typically require a high level of commitment. This can be problematic if the client's needs change over time or if they are not happy with the services they are receiving. 

Costly: Can result in high costs if the MSP is not performing up to expectations. 

Dependency: They can create a sense of dependency on the MSP, which can be problematic if the relationship ends abruptly.

Short-term contractsMSPClient

Pros

Nurturing trust: By agreeing to a short term contract, the MSP is essentially saying that they are confident in their ability to provide a high level of service. This can help to instill confidence in the client, and ultimately lead to a long-term relationship.


Flexible: If the MSP is not satisfied with the arrangement, they can always terminate the managed services agreement.


Less risky: Short term contracts are generally less risky because the MSP knows that they will only be committed to the contract for a limited period of time.


Easier to manage: There are fewer moving parts, making it easy to manage.

Sampling: Clients can try out different MSPs on a short-term basis to see which one is the best fit for their needs. 

Elasticity: Clients can use short term contracts to receive services during busy periods or periods of growth, and then scale back services (and costs) during slower times;

Negotiation: Clients can negotiate better terms and pricing on longer-term contracts once they have established a working relationship with an MSP. 

Cons

Needs assessment: A short term contract may not provide enough time for the MSP to fully understand the client's needs and implement effective solutions.

Resource mobilization: Short term contracts may limit the MSP's ability to invest in tools and resources that could help improve efficiency and effectiveness over the long run.


Marketing costs: May result in higher costs for the MSP, as they will need to reinvest in marketing and sales efforts to find new clients on a regular basis.

Low trust levels: Both parties know that the agreement is temporary. This can lead to tension and conflict, as each side tries to maximize their own interests.

Low incentives: Since the contract is only for a short period of time, there may be low incentives for the MSP to provide high-quality service.

Unpredictability: The estimated period may turn out to be an underestimate and this can be costly for the client.

Limited resources: Since the MSP is only contracted for a short period of time, they may not have the necessary resources available to complete the project successfully. This can lead to subpar service and a waste of the client's money.

Poor communication: The MSP may be reluctant to invest in building a strong relationship. This can make it difficult to resolve problems or make decisions in a timely manner.

Which one to choose: long term or short term MSP contracts?

As an MSP, you need to consider your own business model and comfort levels when choosing between short term or long term contracts with clients. If you're uncomfortable with the idea of a long-term contract, it might be better to stick with short-term contracts. And if you're a startup yourself, you might not have the resources to support a long-term contract.

For clients, the most important factor is the company's needs. If the company is growing rapidly, or if they anticipate needing more IT support in the near future, a long-term contract may be a better option. Long-term contracts often offer lower rates than short-term contracts, and they provide peace of mind knowing that the IT support is locked in for the duration of the contract. On the other hand, if a company's needs are relatively stable, or if the client is not sure how much IT support they'll need in the future, a short-term contract may be a better option. Short-term contracts offer flexibility in case the needs change, and they typically have lower cancellation fees than long-term contracts.

When is a good time to revise a Managed services contract?

Managed services contracts should be regularly reviewed and revised to ensure that they are still meeting the needs of both the MSP and the client. There are a few key times when it is particularly important to revisit the contract:

  • When the scope of services changes. This could be due to changes in the client's business, such as expanding into new markets or adding new services.
  • When there are changes in personnel. If the MSP team working on the account changes, it is important to update the contract to reflect this.
  • When there are changes in technology. As new technologies are developed, the MSP may need to revise its managed services agreements to reflect these changes.

How to handle a breach of the MSP contract

If a client breaches the contract, for example by failing to make payments on time or accessing restricted areas of the network, you ought to take action to protect your business. This may involve suspending services, terminating the contract, or taking legal action. All these actions must already be spelt out in the contract. If issues arise that might not be possible to solve by defined clauses in the contract, then a mutually negotiated solution should be explored. It's normal to encounter scenarios that may not have been anticipated and therefore not captured in the contract. This is why it's always advisable to carefully choose your clients. Make it a habit to work with the type of clients who are flexible to work towards finding solutions and not to complicate things or take advantage of the unfolding situation.

Ideally, you want to do all that you can to avoid long court battles, as they can often be draining.

Final words

As your MSP transitions from reactionary and hourly-based services to proactive and recurring managed services, it is important that you have a well-thought contract in place. This document will offer proper legal protection and help you market your services better. You might not be aware, but potential and serious clients love to work with managed services providers who show a high level of order and MSP contacts are one key way to demonstrate this. We hope that this guide has opened your eyes to the basics of managed services contracts and that you now have the right tools necessary to create managed services agreement that will secure the true value of your business.

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