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Managed Service Provider (MSP) Contract Issues

October 15, 2014

As more and more IT service providers, such as systems integrators and value added resellers, take steps to transition from “hourly-based” project and reactionary services to recurring, “fixed fee” proactive managed services, it is imperative that they adopt a clear and concise Managed Services (MSP) services contract. A carefully thought out and constructed contract can provide the MSP with both marketing benefits and legal protections.

Sophisticated customers will recognize the value of a well drafted and reasonable contract.  In addition, potential IT service provider acquirers will scrutinize contracts carefully, and strong MSP contracts can enhance the value of the MSP at acquisition, ease the post-merger transition process, and provide for consistent delivery of services to your customers.

The top considerations for Managed Services Provider customer contracts are:

  • Term of service and termination rights
    In most cases, the MSP should include specific contract language that commits the customer to a one or multi-year term without early rights to termination, especially when the MSP makes substantial financial or service investments at the beginning of the relationship. The MSP will also need appropriate opportunities to cure any alleged breach of the contract before the customer can terminate the contract.
  • Clear metrics for determining the service fees
    MSP’s can offer pricing models based on many different metrics (such as number of servers, number of end user devices, number of users, etc.). Ultimately, the contract must be clear in describing the agreed pricing terms and metrics, to avoid misunderstandings and potentially disputes over which services are “in scope” and fees due for services.
  • Intellectual property rights
    All highly successful MSP’s are unique in several aspects of their business. Including appropriate provisions in the MSP contract is one of several steps that the MSP can take to protect intellectualproperty.
  • Service Level Agreements (SLA’s)
    Many customers will expect MSP’s to implement tightly-defined service level agreements with procedures for remediation in case of failure to attain the SLA.
  • Privacy and Confidentiality
    In light of increasing regulation of privacy and security of personal information, especially in regulated fields such as health care and financial services, the MSP contract needs to establish clear boundaries and responsibilities for system access and security.
  • Limitations of Liability
    The MSP contract will usually limit the MSP’s liability to the fees paid for services over a given time period, as well as exclude the ability for the customer to recover lost profits or other more speculative damages.
  • Assignment
    The MSP contract should in most cases explicitly allow each party to assign their rights under the contract if they sell their company. If an MSP tries to sell its company without these rights in its customer contracts or with restrictions on its ability to assign the contract, the value of the MSP may be significantly diminished.