What is a Managed Services Contract?
Managed services contracts are agreements between a business and a third-party managed services provider. In essence, they allow you to transfer certain responsibilities for your IT services to a professional company with the expertise to manage them appropriately.
In general, managed services refers to outsourcing certain IT activities. The idea is to allow businesses to focus on their core activities rather than on their IT tasks, which you likely do not have the infrastructure or staff to handle internally.
A managed services contract covers the scope of the services being offered by the provider . Generally, the provider will handle the entire scope or just a portion of the work. There is often an emphasis on maintenance and support so it’s important for the language in the contract to be very clear about what is included and what is excluded from the services.
In most industries, "managed services" is simply another term for outsourcing. It also tends to describe the practice of delivering network services over Internet pay-per-use models. The term is one of the more recent ways of describing the outsourcing of IT work.
The Components of a Managed Services Contract
A managed services contract is a pivotal instrument that formalizes the relationship between the service provider and the business – clearly defining the services rendered and the expectations set between the two parties. From scope of services to pricing models, the following outlines some of the must-have components of a managed services contract.
Scope of Services
Before a managed services contract is executed, the both parties must have a clear and mutual understanding of the services the end-client can expect from the provider. This scope of services generally covers the following:
Pricing Models and Fees
There is an array of pricing models that are used in managed IT services pricing. Its important for both the client and the providers to reach agreement on a pricing model and establish a structure that benefits both parties. Common pricing models include the following:
Pay as you go (block time purchasing)
Scheduled service (weekday or weekend service window)
Daily rates (with a minimum of 3-4 hours)
Subscription
Term and Termination
Managed services contracts typically involve a minimum term of 1-3 years for the services being rendered. Term refers to the duration of time which the contract is in effect and either party is bound by its obligations as outlined in the contract. Any termination of a managed services contract, for any reason, should be clearly defined and the process for voluntary and involuntary contract termination should be established. The most common grounds for termination include:
Service Level Agreements
Aside from the scope of services, there is typically a service level agreement (SLA) associated with the contract. A service level agreement is a measure of performance for the services being rendered and examples may include:
The Advantages of Using a Managed Services Contract
A managed services agreement is designed to protect the interests of both the client and the managed service provider. From a client perspective, the key advantages include the following:
Risk reduction. In almost all cases, the amount paid to the managed service provider will be less than the cost of hiring in-house staff to perform the same duties. The cap on the managed service provider’s liability helps to reduce the risk of outsourcing IT services.
Cost efficiency. Managed services are typically billed based on the number of devices being monitored. This means that clients are able to easily forecast their costs, which can be a problem with traditional IT agreements where services are billed by the hour. Managed services agreements also offer the benefit of predictable budgeting for the term of the contract because there aren’t any unpleasant surprises when a problem arises.
Management of security risks. Leaked or stolen personal information can have enormous legal consequences for a corporation. A managed service provider has an obligation to protect client data; failing to do so could result in the death of the provider’s business. For this reason, IT providers must stay one step ahead of threats to their networks. Managed service providers also have access to more advanced technology than most businesses, which gives them a leg up on identifying and addressing emerging threats.
Dangers to Watch For in Managed Services Contracts
The process of creating a managed services contract almost inevitably involves disagreement about the terms and conditions, especially when agreeing on the Statement of Work (SOW). The important thing is not to rush into a managed services contract just because you’ve reached an agreement in principle.
1. Avoid unilateral contracts
Rarely should you agree to terms that are binding on only one party. You may feel that you are getting something more, but the reality is that the terms should be reciprocal: a principle that works for all commercial agreements. A unilateral contract that ‘benefits’ the provider will reveal itself in the long run.
2. Consider whether your contract should cover intellectual property
Intellectual property is often overlooked because it doesn’t seem relevant – when we look at technical service provision we often think only of the equipment that is provided and the labor and skill that supports the equipment. But actually intellectual property ownership needs to be considered with every IT service provision.
3. Strongly consider an indemnity clause
The process of identifying and remedying insecure IT systems that could lead to intellectual property disputes can be lengthy and costly. An indemnity clause helps to protect both parties in the event of an indemnity being raised, specifically those costs and losses associated with it. A good indemnity clause in managed services contracts will be: A well written indemnity clause will provide protection against these issues.
4. Avoid the indefinite agreement
The biggest pitfall in managed services contracts is agreeing in principle despite later disagreement on the general terms of a contract. Be careful about signing even a brief contract in an effort to get things going. You can find yourself locked into a deal that is not beneficial for your business. Instead keep the ball in your court with a short letter of intent.
Reviewing a Managed Services Contract Example
Now that you have some examples of the nuts and bolts of a Managed Services Relationship, you can start to analyze which of those examples will meet your needs. As with any other contract, a Managed Services contract is often a negotiation. There may or may not be a lot of wiggle room on certain terms. You should carefully weigh everything a Managed Services Provider (MSP) wants against your business needs. An example is the allocation of costs and risk. In this section I briefly cover some of the areas that you should focus on as you negotiate the deal to ensure that it will meet your business needs.
Onboarding and Transition Periods: As discussed in the example agreements above, there can be different transition periods depending on where you find yourself today versus where you need to be. After a successful transition, there should be a "Run the Deal" period, in which you jointly monitor the agreement to see that it meets your needs. Hopefully you have also built in time for renegotiating the deal.
Parties’ Responsibilities: Now is the time to make sure you are getting what you want. For instance, you may want an MSP to be responsible for acquiring "Managed Services Enablement" such as routers, servers, and other equipment—all of which is sometimes included in a Managed Services Contract but is usually the responsibility of the customer. The last thing you want is to pay twice for something you didn’t get.
Exit Terms: My colleagues in the Litigation Department assure me that court enforced involuntary exits can be extremely damaging to a company. Check that you are getting an amount of notice that is reasonable based on the particular business and the types of services covered under the agreement. Make sure you are comfortable with the pricing, geographical restrictions, and other provisions as to employees, etc .
Timeline: As with all deals, make sure you have a timeline that meets your needs and all of the fees associated with missing it. If you are looking for something relatively cheaply (or free), make sure you have a way to enforce it in the agreement. Some of these things seem to fly out the door as you start talking about schedule. Also pay attention to what happens to the costs after acceptance. Oftentimes, there will be high costs for testing on the front end, which will go down after you have accepted the testing. Make sure you are getting the breaks that you are paying for through the inclusion of those fees on the front end.
Service Levels: There are two parts to service levels when dealing with an MSP. First, there are service levels for the services being delivered to customers. This gives you some contractual assurance that the MSP will have certain minimum standards. Second, there are service levels for your own company. These govern how timely you expect MSPs to respond when you need them. Make sure that they are reasonable and enforceable with appropriate fees for not meeting them.
Fees: There are a number of ways fees can be charged in a Managed Services and Outsourcing arrangement. You can have fixed fees, variable fees, fees based on size, or fees based on number of users, among other options. You should select the method that best fits the need for service and the scope of services provided. Finally, as with most contracts, payment terms can be important as you try to get to a mutually agreeable position if you want service level reduction, etc.
The above are just a few tips on what to look for, but it is important to have a full representation when negotiating a Managed Services arrangements. As mentioned above, these arrangements are likely a negotiation and you should consult a lawyer with any additional concerns you may have.
How to Write a Customized Managed Services Contract
A large part of the benefit of having a managed services contract with your MSP is being able to tailor it – or at least a template of it – to fit your business’ specific needs. While there are many templates available online, examining them will quickly highlight that they leave out, or make no clear provision for, those things that are most important to your unique circumstances. Because of this, it may be worth your while to have your own managed services contracts drafted or at least reviewed by a commercially aware lawyer with a good understanding of the ups and downs of managed services arrangements to make sure you’re protecting your business. Getting the language right is just one aspect of making sure you’re covered, and if you’re not careful, you could find yourself left holding the bill for repairs a system failure or data breach caused by the very same MSP you’re now paying.
There are many specific clauses which are vital to ensuring that the service you receive is up to scratch, or that you’re not hit with any nasty surprises when things go wrong. If you’ve already bought into an MSP’s sales pitch and signed a weak contract, you may find it difficult to get them to agree to a stronger version without lots of expensive haggling.
Further, just because you make a provision doesn’t mean the MSP is covered by it. For example, if your contract says that you will have access to backup systems at all times (even if it’s worded more strongly than that), then you realize that the MSP has not agreed to give you this access, you’ll have to come down on them hard, and it may be quite difficult to prove that you are entitled to the access you’re demanding, and to adequately enforce the rights you believe you have under the contract. A good services contract should always be heavily laced with caveats and disclaimers which place the burden on the MSP to ‘prove’ or ‘prove that it has done…’ something. For example, if the MSP is to ‘maintain security updates’ then at the very least it should be under a duty to ‘prove that it has done these’, rather than simply being under a duty to ‘do these’. This way, if it hasn’t, it can’t argue its way out of trouble.
As mentioned above, you will have to fight to obtain rights you thought you agreed. Furthering this point, don’t think that you necessarily have rights just because these are included in the contract. The contract is more geared towards the MSP’s operated environment. For example, if you required a backup system to be ‘at your premises’, it could be argued later that this means that there was no obligation on the MSP to provide the backup system at all, so long as it’s ‘on your premises’, even though the purpose of your asking for this was so that you could override the backup in cases of emergency.
One option that you might wish to explore is to negotiate upfront with your chosen MSP about the appropriate length for your managed services contract. It’s not uncommon for both parties to want to enter into a consistent rolling contract, with either party able to terminate at any time (perhaps, say, by giving 3 months’ notice), and it’s not uncommon for this to be disputed. The charm of an indefinite term for a contract (perhaps by reference to a ‘persistence’ clause) is that the perceived security it offers encourages loyalty from both sides and allows for investment of resources and cost as both parties look to build up and enjoy the benefits of a long-term contract. However, for the very same reasons, an indefinite term also increases the risk of the parties becoming too comfortable and not weighing up terms fairly or considering the quality of the service on offer over the short-, medium- and long-term.
If the parties are unable to agree an indefinite term, then a fixed term for the initial contract period of, say, 12 months might be a more suitable option, with an option to renew for a further fixed period of the same length, perhaps on reduced renewal rates. Whichever approach you take, partnership and transparency should be the key watchwords for any SMB entering into a contract with an MSP, and should be reflected in the contract.
Managed Services Contracts Resources and Templates
There are several resources available that can help business owners in drafting managed services contracts. I have curated a few resources here that may be helpful to you whether you’re drafting a new managed services contract or revising an existing one.
Rocket Lawyer has a managed services agreement (MSA) template you can edit and download after signing up for its service. The site offers advice about what clauses you should expect to see in a typical MSA, too. Sample Managed Services Agreement SpaceCo Business Services has a sample managed services agreement that it created as part of its Investigation Center. The sample provides a detailed overview of the elements of the contract as well as insights into why they’re important. While this sample was created by a services company, it could also be used as a starting point for a managed services buyer who is looking for an outsourced vendor . Small Business Help offers a managed services agreement template that can be customized to suit your business’s needs. After registering for a free account, you can enter your data and download a draft agreement. It also offers advice on what clauses you should include in an MSA. LawDepot provides an MSA template that you can edit before downloading — all you need to do is answer a few questions. The advantage of LawDepot’s approach is that you can provide the answers it needs to generate a customized contract with your specific business information and terms. BusyPlacement offers several MSA templates as well as a pricing sheet and other templates that might be useful as you specify what you expect from your managed service provider.