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A managed services agreement (MSA) is a written contract between a provider and its client that outlines the level of service the provider will deliver. Essentially, the agreement outlines responsibilities of the provider and client to include services delivered, minimum response time and liability protection for the provider. Additionally, the agreement specifies a payment structure agreed to between both parties.
Most managed services agreements will contain terms and conditions that govern all related transactions between the provider and client. The goal is to establish a long-term business relationship with the client. Where some providers may act as a brief intermediary between a service and what the client needs, a managed services agreement gives clients stability in knowing they can rely on one provider at all times. Agreements are usually long-term binding contracts that renews annually or at the end of the term of the agreement.
What to Include in a Managed Services Agreement
Several items are crucial to creating a managed services agreement. In addition to detailing the terms and a termination clause, the agreement should also explain limitations of provider liability under certain conditions. Clients need to know the associated fees and payment schedule for the duration of the contract.
Typically, the service provider should go into granular detail about support and escalation procedures, hours of coverage and exceptions for service outside normal hours of coverage. Not only should the agreement clearly detail services that will be provided, but it should also explain what is excluded from support services.
Specific terms and conditions in a managed services agreement primarily depends on the type of services rendered. Other things in typical agreement may include:
If a service provider hires subcontractors to assist with providing services, the agreement should also state what type of client information is accessible to the subcontractors. Generally, this should only be limited to information directly related to subcontractor services.
Delivering services under this type of contract is usually the first step in closing a deal with a prospective client. In most cases, a legal advisor should review the document to make sure that provider rights, as well as clients' rights, are protected.
What a Managed Services Agreement Does for Clients and Companies
Clients may find plenty of value in having a managed service agreement with a specific provider. An agreement that is prepared properly gives a level of certainty that clients can depend on the provider to resolve their issue. Clients will have documentation in clear and easy-to-understand language the services that they can expect to receive. Additionally, clients will know how those same services are delivered.
Provider companies also can realize benefits to having a managed services agreement with clients. They can have a guaranteed amount of revenue to ensure profitability since most agreements include monthly payments for coverage. Protection from potential lawsuits is minimized because the responsibilities of both parties are documented. In addition, the agreement can be used as an instrument to measure customer satisfaction and performance.
Potential Contract Issues
More service providers from all industry categories are transitioning from providing hourly based work to fixed fee services. This proactive approach to business and client relationships carries many benefits for both parties. Adopting a clear and concise contract adds layers of protection for client expectation and business services. Not only so, but a carefully thought out contract brings marketing benefits to the table as providers try to expand their client base.
Nevertheless, anyone in business knows that even a thoroughly constructed contract is not without legal challenges. Somewhere in the provider-client relationship, one party might feel that a wrong occurred. Sophisticated clients understand the value of having a reasonable contract that delivers consistent services. Some of those same clients – and providers – will also recognize if some part can be breached. Because of this, there are some priority issues that both parties should consider.
Terms of Service and the Right to Terminate
In many cases, the service provider should include contract language that specifies the commitment level expected from clients. This could be for a 12 month term or 36 month term without rights to early termination. Canceling the agreement before the agreed term expires will have certain consequences. While this provision works to protect the substantial financial and service investments the provider made, there is no real guarantee that all clients will honor these terms. There could, however, be a chance for the provider to cure an alleged breach before the customer terminates the contract.
Metrics Used to Determine Service Fees
Pricing models are commonly used in managed services agreements. Generally, these are based on different metrics to place a real number on the value of services offered. Misunderstandings and potential disputes can arise if the contract does not clearly describe pricing terms and metrics. Services within the scope of the contract should be directly linked to fees that clients are expected to pay.
Intellectual Property Rights
Intellectual property rights continue to be a domestic and international issue in the business community. A solid service agreement should take this fact into consideration, not only for the provider, but also for clients. At no time during the length of the contract should one party's interests infringe upon the interests of the other. Both sides come to the agreement with a determination to protect their intellectual property rights. Having access to certain information and knowing what is done with the information during the course of business is crucial to upholding this protection.
Privacy and Confidentiality
The managed services agreement should establish clear boundaries and responsibilities for maintaining privacy and confidentiality. This concept should be honored even after the service contract ends with clear boundaries of the types of information that is acceptable for public sharing. Assuming there is no renewal, the security of business and personal information remains at the fore of business practices. A slight breach in the expectation of confidentiality and privacy can raise a host of legal problems.
Usually, the service contract places limitations on the provider's liability to repay fees for a given period of time. Additionally, this part of the contract may also exclude the client's right to recover lost profits or speculative damages.
Assignment of Agreement
Strong agreements take into considerations what can happen if the provider is acquired by another business. Rather than leaving clients without needed services, many agreements actually enhance the value of an acquisition or merger. The acquiring business has a guaranteed set of clients. Clients are reassured of a consistent delivery of service.
Just as this can be a good thing for both parties, the opposite is true when the contract fails to explain the rights of each side. An explicit detail of the rights for both provider and client to assign their rights is essential if the company is sold. Trying to sell the business without these rights – or even with restrictions on assigning the contract – can significantly diminish the value of the business.
Assigning your accounts receivable to a factoring company
It is important to understand that the invoices that represent the services are bound by the agreement and terms the two parties have signed. The service provider should be able to assign the payments for invoices accepted by the customer to a factoring company or asset based lender. A notice of assignment is sent to the customer letting them know that the payments have been assigned and the factoring company is a secured lender.
Risk Mitigation Strategies
Several strategies exist that can go a long way to mitigating the potential risks within a managed services provider agreement. One area is within the warranties and representations section of the contract. The service provider should outline specifics of the types of services covered. This section should also detail services that the provider will not perform.
Other strategies that may help to mitigate contract risks include insurance provisions and indemnification. Typically, a professional liability policy already covers circumstances that fit this situation. However, the service provider should let clients know about the provision. They should also indemnify clients from potential infringement actions that result from provider performance.
For the most part, service providers are in the best position to control the outcomes of an agreement with clients. They assign the work that employees and contractors perform for clients according to contract terms. Still, clients also have responsibilities to honoring the agreement. The key to mitigating risks to a successful provider-client relationship is using foresight and overcoming the issues during the negotiation phase.