Regardless of their length, whether 2 pages or 30, contracts are crucial for Managed Services Providers (MSPs) in defining and managing the specifics of their client relationships. These contracts establish mutual expectations and details about roles, responsibilities, pricing structures, and payment terms, among other areas. Often, the parties negotiating these contracts focus on defining the scope of services, pricing and payment details, service level metrics, and the length of the service term.  All of these can have significant impact on an MSP’s revenue stream; however, these are not the only contract provisions that can impact an MSP’s bottom line.  There are other contract provisions that can have just as much impact, but too many times they frequently are relegated to the realm of “boilerplate” or “standard” terms, receiving little scrutiny or negotiation.  This article looks at three such areas in the contracts MSPs utilize for client engagements.

Don’t Forget to Address Client Responsibilities

The scope of an MSP’s services often depends on the client’s compliance with certain responsibilities. Overlooking these responsibilities in the contract not only exposes MSPs to operational hiccups but can also lead to revenue loss and increased risks.

• Up-to-Date Systems and Infrastructure – For MSPs to effectively manage, maintain, and troubleshoot a client’s systems, it is important that the client’s infrastructure be up to date. Failing to address this in the contract can result in wasted hours and potential loss of income. An out-of-date system could lead to more frequent issues, complicating the MSP’s tasks.
• Securing and Maintaining Rights to Software, Data, and other Items – In any MSP contract, it is crucial to stipulate the client’s responsibility for securing and maintaining rights to essential assets like software and data, especially personal data. Operating without proper licenses or data rights can halt projects and expose you to legal risks. The contract should explicitly state that it is the client’s duty to obtain all necessary permissions and licenses, and failure to do so can result in service suspension or termination. Including this clause protects your revenue streams and shields your MSP from legal complications tied to unauthorized use.
• Timely Client Feedback – Contracts should define the timeframe within which a client needs to provide feedback or approval for ongoing work. Delays in receiving client feedback can create bottlenecks, delaying not only the current project but potentially impacting other client engagements as well.
• Testing and Acceptance Criteria – If you are delivering specialized services or software that requires client acceptance, clearly outline the testing procedures and acceptance criteria in the contract. Ambiguity in this area could result in prolonged engagements without additional compensation, essentially reducing your earning potential per client.

Leveraging Dispute Resolution Clauses to Avoid Costly Legal Battles

Dispute resolution clauses, otherwise known as jurisdiction and venue clauses, determine where legal disputes between parties will be resolved, including in which city and state litigation will take place and whether disputes will be settled in court or done through alternative means. Because most disputes often are resolved before ever reaching a courtroom, this often leads MSPs and their clients to overlook the significance of these clauses.  However, when crafted strategically, they can promote dispute resolution and deter expensive legal battles.  If a client decides to pursue legal action, having these clauses tailored in your favor can be advantageous.

• Encouraging Settlement – Dispute resolution clauses can significantly motivate parties to settle disputes well before they reach the courthouse steps.  The designated location for resolving disputes can have a sobering effect on one or all of the parties.  If an out-of-state client agrees to litigate in courts near the MSP, then the client might reconsider filing a lawsuit upon realizing the need to hire local counsel and to incur a lot of travel expense to pursue its claim.  Similarly, if both parties agree to litigate in a neutral state’s courts and traveling there is inconvenient for everyone, it can drive them to seek an amicable settlement.  
• Setting Rules to Legal Expense – Dispute resolution clauses allow the parties to negotiate ways to keep legal costs down should disputes arise.  This often can be accomplished by incorporating alternative dispute resolution methods, like arbitration or mediation.  For instance, within an arbitration clause, the parties can specify the location of any hearings, determine the number of arbitrators, limit the extent of discovery (which often constitutes a significant expense in litigation), and even outline potential timelines to ensure swift resolution. Such provisions can streamline the process, making it more efficient and cost-effective for all involved.

Hidden Potential Costs in Warranty Fine Print

Warranties are essential in MSP agreements, providing clients with assurances on service quality. However, for MSPs, poorly crafted warranties can lead to unintended liabilities and obligations.

• Specificity of Scope – Warranties must be clear about their scope. Broadly defined warranties might unintentionally guarantee aspects beyond the MSP’s intended offer, leading to potential breach-of-contract claims.
• Duration and Remedies – Clearly stipulating the warranty’s length and the solutions if breached is important. For instance, will the MSP offer a service correction, a refund, or some other form of remedy? Caps on these remedies help control unforeseen costs.
• Exclusions Matter – Effective warranties should also highlight what they do not cover.  Because MSP services often include many third-party components and services, it is important to make clear that warranties relating to those come from the third-party and not from the MSP.

Conclusion and Key Takeaways

            While it is important for MSPs to make sure that their client agreements clearly define key aspects of the relationship, such as the scope of services and payment terms, MSPs should be careful not to just breeze through those contract sections that are so often considered just “boilerplate” or “standard”.  If these sections are drafted in a way that is not fair or favorable to the MSP, they could have a significant impact on the MSP’s bottom line.  It is to the MSP’s benefit to work with legal counsel to make sure that its client contracts are working for the MSP and not setting it up for costly legal pitfalls.