Study: MSPs Are Taking Legal Risks

Managed services providers operating under tight customer and partner contracts not only protect themselves legally but also raise the value of their companies.

But according to a recent study by the MSP Alliance, some of the companies providing managed services to users don’t take legal protection seriously enough. In some cases, companies forgo legal counsel in drafting contracts, thereby exposing themselves to potential legal trouble, while in other cases no contracts are in place at all.

By failing to protect themselves legally, companies decrease the value of their business, said Rob Scott, managing partner at law firm Scott & Scott in Dallas, specializing in IT industry legal matters.

The valuation of MSP businesses’ proper documentation is considerably higher than that of a traditional VAR focused on product sales and break/fix services, he said. But the value drops if the MSPs don’t have the proper legal protection and business documentation, Scott said.

“The documents themselves have a direct correlation to the value of the business on the one hand, and how the business is perceived, on the other hand,” Scott said. “The more professional your document looks, the better perceived you’re going to be.”

And that helps when a business is looking for lines of credit or searching for real estate, he said. A high valuation also is important when the time comes to sell the business.

PointerClick here to read more about how some MSPs are gambling with the law.

Proper legal protection and documentation typically take the form of master service agreements, which spell out the MSP’s responsibilities to the client, and SLAs (service-level agreements), which commonly guarantee certain levels of service and minimized disruptions to a client’s business.

Fifteen percent of companies delivering managed services to clients through contractual arrangements don’t have anything on paper to formalize their customer relationships, according to the research by the MSP Alliance, in Chico, Calif.

Of the MSPs that have formal master services agreements, about 25 percent did not use an attorney to prepare the contracts, relying instead on consultants, a company executive or an internal team of managers, the alliance found in a recent survey.

That, said MSP Alliance President Charles Weaver, puts those companies at risk, because whoever drafts the documents may not have had the necessary legal knowledge to make the contracts rock-solid.

The same holds true for those companies that lack SLAs, he said. The alliance study found that 40 percent of MSPs do not have these agreements, and of those who do, 45 percent said they used an attorney to prepare them. In addition, 40 percent don’t even ask their customers to sign the agreements.

That compares to 10 percent of MSPs with master service agreements in place that haven’t gotten around to having their customers sign them, according to the study.

“You want to talk about high-risk behavior, that is just reckless, in my view,” Scott said.

eWEEK.com Special Report: Legal Actions

As with master services agreements, companies that didn’t use a lawyer to prepare their SLAs said they relied on consultants, a company executive or an internal team of managers.

Ten percent of the companies that participated in the MSP Alliance study did not provide managed services but partnered with MSPs to resell them. About 63 percent of them said they had nothing in writing with their MSPs, and 36 percent said they did not inform their clients they were actually reselling the services as opposed to providing them themselves.

“I think that’s extremely dangerous,” Weaver said. The lack of a contract, he said, puts everyone involved at risk, from the MSP to the company reselling the services to the customer.

Seventy-five percent of participants said they had business liability insurance, while 10 percent said they did not know if they had it. Thirty-seven percent of study participants said they were covered for security breaches and 50 percent said they did not know.

Weaver said MSPs have to revise their attitude toward contracts. Considerable improvement is called for if the MSP industry has any hope of being viewed as a legitimate body of professionals, he said.



Comment on this article
Be the first to comment on this article.
POPULAR TOPICS
Managed Services
Security
Channel Business
Distribution Channel
System Integration
IT Resellers
Software Vendors
Supply Chain Management
>” title=”>”/> Ziff Davis White Paper Library<br class=
>” title=”>”/> Baseline ROI Calculators<br class=
>” title=”>”/> eWEEK Labs RFPs and Tools
</div>
</div><!-- end ziffhtml //--></div></span></div></div><div style=
RSS SUBSCRIPTIONS
XML
Add Channel News, Product Reviews, Trends and Analysis to your RSS newsreader or My Yahoo!
Advertisement
MICROSOFT RESOURCE CENTER
Help boost your sales with BONUS PACKS.
Let BONUS PACKS help you sell more PCs – with up to $1,200 in valuable products and services. Visit Buy Local Partner site >>
Join the Microsoft Empower program for ISVs.
A relationship with Microsoft allows you to compete with the big dogs. Learn more about resources, tools and training. Get the documentation >>
Reporting piracy works. See the proof
Microsoft has filed over 50 lawsuits during the last year – with more to come. Learn more >>
Free Hands-On Training Lab
Find out how key features of SBS 2003 can help you open up a new line of revenue. Register now >>
SBS 2003 Sales Reference Card
This handy reference card contains features at a glance, sales objection handling, pricing guidelines & more. Get it now >>
Microsoft Empower for ISVs rewards your big idea with big benefits and support.
Access key development tools at a low cost to help you develop that idea into an innovative application. Learn more >>
FREE WHITE PAPER
Attention Microsoft Solution Providers!


High capacity. High Speed. High Value.
Seagate Momentus offers a variety of mobile drives to suit every taste.


There’s a variety of Seagate Momentus mobile drives to satisfy every taste.


Download a free perpendicular recording white paper!
>> brought to you by Seagate
Want to gain a competitive edge? Try Microsoft Watch FREE!

Each week you receive:
  • Microsoft News and Insider Information
  • Expert Analysis
  • Code Names of Upcoming MS Products
  • Year-Ahead Calendar, updated monthly
Click Here to sign up now for your FREE 14 Day Trial to Microsoft Watch.