MSPs Gamble with the LawBy John Hazard | Posted 2006-03-28 Email Print
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News Analysis: MSPs base their entire value proposition on recurring revenue defined by SLAs and other contracts, yet less than 50 percent have those documents prepared by attorneys, leaving MSPs vulnerable.
Robert Scott says he continues to be surprised by the number of MSPs that rely on contracts written by an office manager eight years ago to keep their house in order.
"Either attorneys don't have much to add to the process, or people are taking shortcuts that will expose them to risks," said Scott, a partner with his brother in the Dallas law firm of Scott & Scott.
Many managed service providers have improperly prepared documents binding together their relationships with clients, partners and employees, leaving their main assetsrecurring revenue generated on those contracts, their intellectual property and their employees--open to withdrawal, he said.
"[As an MSP] the value of the business is generated on the strength of those contracts," Scott said.
"A VAR has its primary value in the products it sells. For an MSP, your customers and the documents that govern those relationship and extent to which they renew are the principal driver of value.
"It is those documents that says you are getting the recurring revenue stream every month," he said. "If they're not in order, you have jeopardized your value proposition."
One of the most common hazards MSPs walk into is unbalanced contracts between clients and delivery partners, Scott said.
Many MSPs promise things in customer contracts and SLAs that are never mentioned in the contracts with partners assigned to deliver themfor instance, a customer contract that guarantees a four-hour response time and a contract with a delivery partner that guarantees a 24-hour response time.
MSPs also fail to note that delivery is sometimes made through partners.
A simple review by attorney will make sure all contracts are paralleled, he said.
Most small to midsize MSPs could get their legal affairs in order for $3,500 to $7,000, "a drop in the bucket compared to what drop in the bucket if any of the myriad of risks materializes."
Bad Clients and employees.
MSPs in attendance at the MSP Alliance Expo the week of March 27 in Orlando were most concerned about protecting their intellectual property and employees from poaching.
Several expressed concern that valuable engineers who run their business could walk off the job taking their knowledge and proprietary processes with them.
"In the service business your assets go home at night," Scott said. "As an MSP, the value of service is about process and the people who execute the process. You have to protect those assets."
MSPs also face battles over customer lists and work products, when employees try to walk away.
Simple non-solicitation clauses in client contracts and work-product agreements in employment contracts can mitigate the risk upfront, but Scott estimated that well shy of 50 percent of MSPs employ either.
Calling It Quits
Another concern for MSPs is when to terminate a contract with a bad client.
Unlike VARs who can simply end service when a customer breaches the contract, MSPs are so intimately married into a business' infrastructure it often creates more of a liability to leave the agreement.
This can leave VARs on the hook to pay delivery partners and eat their own costs, but often it can create more of a liability to terminate service, said Lowell C. Bowie, director of operations and marketing at FSN (Full Service Networking), Cincinnati, a managed network service provider.
"We have customers [situations], where if we leave we are putting them out of business," Bowie said.
"You're trapped. You could be shutting a company down. You're in a battle over who was in breach first, and you're arguing a legal point and you've just put someone out of business."
Contracts and SLAs need to be structured clearly to allow a provider to leave when a customer breaches the terms of the document, Scott said.
More importantly, you have to consider the client and partners and their financial solvency beforehand.
FSN has found the solution to be a human one.
"You meet with them," said Lawrence Van Tuyl, FSN's vice president and owner.
"If you can't even get them to meet with you, then you have a problem and you make an assessment. But business goes in cycles. People have cash flow problems. Someone may not be paying them. We have had numerous cases, where sticking with a customer through a bankruptcy or hard times has resulted in a great and loyal relationship."