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One question I often get when advising MSPs on legal matters is: “Am I supposed to Negotiate an Agreement with my Customer before Selling any Product or Services?”
This is the question covered in this article.
What is a Master Services Agreement (MSA)?
If you desire a predictable, long-term relationship with several transactions between you and your customer, you should have a Master Services Agreement in place prior to the sale of any product or service. A Master Services Agreement is an agreement between at least two parties (normally just two parties) dealing with the terms and conditions that will apply to future transactions between the parties. It is likely used when the parties contemplate more than one service or offering between them.
What are the Benefits of an MSA?
A Master Services Agreement is a common tool utilized when an entire business function is being outsourced to a vendor. There exists a trend to outsourcing the entire technology function of a business. This trend has gained recent momentum for a number of reasons, including:
- the declining cost of equipment;
- the likelihood that the vendor can secure the equipment for less than its customer;
- the increased need for specialized services (making it more difficult for the customer to be able to secure adequate staffing on its own);
- the ability of the Managed Services Provider to reduce labor costs further by drawing upon talent from elsewhere (i.e. offshore); and
- a broader market of Managed Services Providers, thereby reducing the risk to the customer from needing to have institutional knowledge of the system, design, and implementation.
When the entire function of a business, like the technology platform of a business, is being outsourced to a vendor, it is likely that the parties will have a number of transactions between them. Most of the transactions may be contemplated at the time of the Master Services Agreement but the parties may be uncertain as to all of the services or product delivered at the time of initial engagement. In fact, the parties to a Master Services Agreement normally do not have just one single transaction between them. They contemplate a series of transactions between each other.
With Managed Services Providers in the technology field, the Managed Services Provider may acquire equipment, design of the environment surrounding the outsourced function, provide help desk services, perform regular monthly monitoring services, provide datacenters, engage in project based initiatives, monitor security and more. Each of these service offerings may have a separate Statement of Work or act as a separate transaction and be separated by long periods of time. It is not uncommon for a customer to decline certain services offered by a Managed Services Provider and then later elect to add the services later.
Master Services Agreements are an excellent tool to remove the inefficiency associated with negotiating multiple contracts, especially when the timing of services is critical. Having the Master Services Agreement in place allows the parties to focus on the central business terms surrounding each of these transactions or offerings without having to re-negotiate the terms likely to be applicable to all of the transactions. It also removes the need to come to terms out of “desperation for the deal” or fatigue in the negotiations.
Does an MSA Protect Me if Things Go Badly?
Oftentimes, parties who have dealt with each other in the past and are contemplating an expansion of the relationship will resort to doing the business deal and worry about the terms later. This approach can provide some immediate positive benefits in terms of securing the deal and expanding the existing relationship but can be disastrous for the Managed Services Provider upon the happening of a breach in services, security or failure of the system installed.
The misunderstanding between expectations of the parties leads to disagreements and there are costs associated with the disagreements.
Litigation is a process of last resort and can be very expensive especially when considering the handling of data belonging to others, reputation management issues, and jeopardizing the continued smooth business operations of the customer. Without an executed Master Services Agreement, the Court will be forced to consider the documents that did exist between the parties, together with the testimony of the understandings of the parties and the course of dealing between the parties. The “course of dealing” analysis will likely lead to an investigation of all transactions between the parties over the history of their relationship in an attempt to discover common terms present over the duration of their business dealings. It is difficult to predict the diligence of the court to discover these terms or how they will, or will not, be included in the transaction giving rise to the dispute
By adopting the Master Services Agreement, it will govern the entire relationship between the customer and the Managed Services Provider, including the initial and all ancillary transactions between them. It acts as an umbrella over the relationship or a blanket agreement to be applied to all services or offerings to the customer. As a result, it is extremely important that the scope of a Master Services Agreement be very broad, involving the entire information technology function of the Managed Service Provider’s customer and the Managed Service Provider’s relationship with the customer. The breadth of the Master Services Agreement should encompass every possible transaction or scenario the Managed Service Provider is confronted with, without detailing the specifics of any service offering. A good Master Services Agreement will even deal with excluded services or options that have been intentionally declined by the customer. It is a document which the Managed Service Provider, essentially says, if we do business together at any level, this is what you are going to agree to in advance. If litigation ensues, it is likely that the court will follow the Master Services Agreement terms and conditions and exclude the course of dealing or testimony as to oral agreements. By preventing this analysis, the cost of litigation will be substantially reduced and the outcome far more predictable. If the Master Services Agreement provides for an award of attorney fees, the expenses of the litigation may even be covered by the wrongdoing party. While litigation is not eliminated, it is far better to be in litigation with a Master Services Agreement in place.
What About Details of Specific Projects?
The specific services that are going to be offered to the customer should, actually, be contained in a Statement of Work (SOW) or an Addendum of some kind. A Statement of Work is a standard document that acts as an attachment to a Master Services Agreement. The Statement of Work outlines the specifics of the services or equipment that will be transacted between them with specific detail. The detail should not include puffery, rather, it should detail the exact requirements between the parties as to the particular transaction.
Master Service Agreements are an effective way to manage the relationship between Managed Service Providers and their customers. The existence of the Master Services Agreement provides for far more predictability of outcome and, thereby, reduces the incidence of disputes resulting in litigation.
In future posts, we’ll continue talking about Master Services Agreements and provide some more concrete examples of how they can protect you and your business. Until then, thanks for reading!
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