Master Services Agreements (MSAs) and Service Level Agreements (SLAs) are the foundation of your business relationships. They set expectations when certain issues arise and how both parties are responsible for handling them. However, MSPs don't always understand how important it is to build strong contractual documents.
On this episode of MSPradio, we chat with Tom Fafinski, Co-Founder of Virtus Law. Tom works frequently with MSPs and provides us with proven tips to improve your client agreements and build better foundations for your business relationships.
Tune in this week and subscribe to our podcast on iTunes.
Nate: Alright. Welcome back folks to another episode of MSP Radio. I’m your host Nate Teplow.
Today’s program, we’re going to be talking about MSAs and SLAs, Master Services Agreements and Service Level Agreements and how MSPs can use them and improve them to improve and grow their business.
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So as I mentioned we are going to be getting into MSAs Master Services Agreements and SLAs and talk about how MSPs can use them. It is a lot of acronyms for one show so I’m going to try to keep them straight for you, but if I screw them up, apologies.
Anyway, our guest today on the line, he is a lawyer by trade. His name is Tom Fafinski and he works frequently with MSPs to help them with their legal contracts and help them create better legal documents ultimately to make them a better MSPs. So, Tom welcome to MSP Radio.
Tom: Thanks for having me Nate.
Nate: Yah. Glad you could make it. I think one of my colleagues met you at the HTG Conference and recommended that we connect, so I’m glad we can get you on the show today.
Tom: Yeah, that’s correct, yeah.
Nate: So to kick things off, can you tell us a little bit about your firm, where your expertise is and how that relates to MSPs.
Tom: Sure. I started practicing in 1991 and almost immediately, my firm started to serve the Information Technology sector before the onset of MSPs and my partner and I started working together in 2006 when we formed Virtus Law in 2010. That was a way to bring him into the equity position of the firm.
My first official MSP, it was probably my brother’s firm. His firm was formed in the late 1990s but it didn’t really become a managed services provider until mid-2000…early to mid-2000.
In fact, most of my managed service provider clients started out with a break/fix model. And in fact, we have been so influenced by that model that our law firm has adopted a managed services provider model for managed services providers where we render legal services on a flat monthly rate; where we do all of their legal and there is no extra charges.
Nate: Yeah, that’s interesting. I think a lot of things are going in that direction when you think about software companies are now charging month-to-month versus paying for upgrades or new versions or whatever on a one-time basis. So everything is going to go in that direction, and I guess the legal industry is doing that as well.
Tom: Well, at least we are. I haven’t found too many law firms that are doing that. I could…I love it though because it brings us into a relationship with the clients where they are without hesitation calling us now, and having us participate in their management so that we can provide them with insights from a legal prospective way. I think in the traditional, hourly service model clients are less likely to involve their attorney thinking, “Do I really don’t want to spend the money to do that?” but they’re like, “Maybe I’ll try to work through it myself first.”
Nate: Yeah. Exactly. That is what we are telling MSPs to doing. That is one of the benefits of managed services as you become that integral part of your client’s success and…
Tom: It really is cool…
Nate: Yeah, yeah, I know and of course it’s obviously the whole predictable revenue benefit too and that you know you can predict your revenues more easily and your costs and plan for growth more efficiently than the more variability of just kind of calling on an hourly basis.
Tom: Yeah, absolutely.
Nate: Great. So what kind of services do you typically provide to MSPs. What do they frequently ask of you to do for them?
Tom: Right now, we do a lot of income tax planning because there are 2 things that are happening – we have increased profits due to the model being such a successful solution for clients in that space so our MSPs are doing well. And then on the other hand, we have…the government has increased taxes associated with earning that additional income, so almost every engagement we have right now starts out with, “Okay, I’m getting killed by taxes. What can you guys do to help us out on that?” Until we go through kind of an assessment on that piece and try to find ways to reorganize their entity to deal with that tax burden a little bit better.
We work on master service agreements, of course. Sometimes we distribute first to them as service level agreements. The types that we do are kind of part and parcel, one and the same with different service level offerings.
We also work with tools that help our MSPs retain these key employees by not just employment contracts but some sort of equity participation plan like an incentive stock option or equity participation like a phantom stock type of thing. We do a lot of restrictive contract work like non-competes and non-solicitations and confidentiality agreements, of course. That is really important in that sector because when you own that client relationship and it renews every year and it’s kind of inured so your business is built up around that, you can’t have your key sales folks taken off with those things.
One of the things I really jazz that we’ve been able to start offering, and it started about 6 years ago is we started bolting on estate planning for the business owner so that when they do that flat monthly thing, oftentimes we do a full-blown estate planning for that owner as well. Oh, I forgot to mention there has been a flurry of acquisition-related activity in the last few years too.
Nate: Yeah, of course.
Tom: We do quite a bit of that work as well, the financing aspects behind acquisition-related activity.
Nate: Yeah. That’s interesting. That is a lot of different things that you have going on there. I mean, it sounds like MSPs really need the help of someone, especially when you get to a certain level of growth, you really need someone with a legal background and a legal expertise to take care of these things for you.
Tom: Yeah, in fact in our situation we can’t even do it all with one lawyer. We have 7 lawyers that all come together and have this shared practice area and so some of them will do more of the day-to-day transactions. Others will be involved in the estate plan. We have tax lawyers that get involved with the tax planning stuff and yes, I think we actually…you need a kind of a team of specialists to handle everything that an MSP is faced with these days.
Nate: Yeah, absolutely. So I wanted to touch on MSAs a little bit. Can you give me a quick definition of what an MSA is and what does it do for me as an MSP?
Tom: So, a Mastered Services Agreement is really just a kind a contract and it is between 2 parties that know that they are going to be engaging in some sort of future transactions together, or projects related to…there’s one relationship between this one group of party. And what they’re trying to do is they are trying to get together on certain terms that might be considered boilerplate that will apply to all of these transactions. And then they change the scope with an addendum or with a Service Level Agreement where the same terms are applying but the scope changes.
These terms, I’m going to give you an example of what I am talking about, the terms frequently involve invoicing, how frequently that will occur and how quickly the customer is required to pay. It will talk about warranties and any work that we do for you, this is the warranty that you’ll have for that work. Oftentimes we are talking about infringement and some of these intellectual property rights that customers are really depending upon the MSP to make sure that nothing that the MSP does to support them will create liability for them from an infringement standpoint.
The customer actually has liability if somebody else places copyrighted material, for instance into use for them. They actually have liability even if they are unwilling users of that information.
Nate: Yeah, interesting.
Nate: So, as an MSP should I be changing my MSA from client-to-client or should I have it almost standard for all of my contracts?
Tom: Oh, what a great question that is. Almost every time we do a project like this, we are recommending that you have one standard MSA that you start from. And then when we sit down with the client is trying to understand, we don’t have one template that we use. So it’s not like we distribute one template. We try to understand the issues that are important to that client. So some clients are for instance really interested in growth. So if you’re going to go in big time growth and you are buying you sales; in other words you’re just dropping your price, you’re dropping your terms so that the sales come to you and not to somebody else, well, then you are going to be far less concerned about the terms that you have or how strong they are.
But if you are somebody who has a very stable business and you are…that your repeat business is really loyal and you experience 12% growth each year or 15% growth each year and you are confident with that, then you can afford to have some real protection there so that you are not always, not always risking it.
It’s like going out to Las Vegas for a little bit, you know…you go to Las Vegas…
If you and I go out to Las Vegas, Nate you know I’d probably go in there with a lot less money than you.
Nate: I…I don’t know about that.
Tom: We are going to be engaging in the same activity.
The amount that we risk at the Black Jack table that…I’m at a $3.00 Black Jack table and somebody else might be at a $10.00 or $100.00 Black Jack table, but we’re still playing the same game; it’s just we have different terms by which we play the game. And that’s kind of what we try to understand with the client. And then once we understand that with the client, then we create the agreement to suit that.
The client then, in keeping with your question of…sure, we have a really long answer to your short question. That client then uses that Mastered Services Agreement every time they encounter a relationship.
Now, their customers will have suggestions or proposed modifications, sometimes and then our client does one of two things. We have them come back to us and say, especially if it’s a managed services relationship, they’d come back and say, “What shall we do for this? What do you say?” And we talk through it. Otherwise we will create an annotated version. In the annotated version it is for the executives, and the executives read the annotation to that Limitation of Liability clause, for instance.
Nate: Yeah. Interesting, interesting. And I like how you worked in a Vegas reference into that , too… It’s always a good thing. So we are actually coming up on our commercial breaks. So we’re going to have to stop here. Coming up next, we’re going to talk…continue talking with Tom and he’s going to give us some tips on how MSPs can improve their services agreements and some things I should be looking for in those agreements. So, we will see you all in a minute after this quick commercial break.
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Nate: Alright, welcome back folks from our commercial break. You are here on MSP radio. I am your host Nate Teplow and we are talking with Tom Fafinski of Virtus Law. He has given us some tips on MSAs and SLA, how MSPs can improve their services agreements, to grow their business and create better overall foundations for their clients.
So Tom we were just talking about MSAs and what they do. Give us some things you look for in MSAs or something things that MSPs typically do wrong when it comes to their services agreements.
Tom: Yeah, you know, it is funny how things change over the years, you know. A couple of years ago, the very first thing I looked at, I mean, without question and I’ve already touched upon it, is that limitation and liability clause.
And that was a really important thing to me back then because it was important to my clients that they not be betting on everything on every transaction. Now I take the very first thing I’d look at with all of the acquisition type of activity in the marketplace, the environment, the way it is…the very first thing I look at is, do they have an assignment clause? Because if they can’t assign their contracts, then all of the goodwill in their businesses depend upon the client consenting to the transfer in the event of a purchase. That is the first thing I’d look at in a due diligence scenario too…do they have natural services agreement…
Nate: Yeah, I can see…
Tom: …that has an assignment clause?
So I’d still like the limitational liability piece and I want that plain to understand how much they’re betting. Personally I’m actually pretty okay with 100% of the proceeds from the contract. If you can get it to 50 that’s great. If the client won’t cap it, if they say “No I’m not going to cap it to what I’m paying you.” You’re my responsibility. Let’s play some cap. I don’t care if it’s $500,000.00, let’s give those some cap, and if the client still won’t, then I’ll try the…you know, my clients’ client won’t…I’d still try to sneak in some sort of cap as it relates to uninsured issues.
So in fact if we have an insurance policy in place and it is covered by the insurance policies that that’s that act as the limitation liability.
We looked at that term, too and I think that MSP should look at this because I think it can be a rabbit hole for a lost profits. And then it is how do you deal with “out-of-scope” work? And how is that going to be addressed with the customer? Is it going to be brought to their attention?
I would almost like to see anything out of scope have it be an early confrontation rather than later on bill for it and then say, “Oh, you’re complaining about that. Yeah, we sell a managed solution but this was out of scope.” And they say, “Whoa, I wouldn’t have done it that way,” or “I would have done it differently,” or “It shouldn’t be.”
Whereas if you address it in the front end, so maybe you have another contract that says, “Any out of scope work we will do it, use our best efforts to try to bring that your attention.” At least you’re bringing it out early on. If that client is expecting that, that will be covered in the service level that they’ve selected, then you can maybe sell them into a higher service level, or a higher monthly rate, or get them to agree to include this out of scope work but we’re going to be doing it at a higher rate every month, so that you’re kind of spreading out the cast over the course of their year.
Nate: Yeah, it sounds like you got to think about for this SLA. You have to think of almost every scenario. It sounds like you can’t just kind of hack it together and say, “Oh, in the immediate future, these are kind of the things I need, and just get us out the door so I can sign this contract and bring a new client on.” You really have to consider a lot of different events that can take place before you can actually put this together.
Tom: Yeah, because it’s really – when we’re going through that template MSA with the client, or SLA, what we’re really doing is dealing with a myriad of hypotheticals.
Tom: How would you like to…And once you started looking at it in terms of…looking experienced in MSA and they have, some real live disputes to deal with, you know, this is what happened here – how should we have done that deal and – how should we have dealt with it? And let’s deal with it here. In fact, that is a very common term that we want to talk about, it’s how are we going to deal with the disputes. A lot of it is kind of cool because as long as you’re not being too aggressive, they’ll enforce certain things. We refer to it as “pigs get fed and hogs get slaughtered.”
If you say to that person, “Your limitational liability is one dollar,” it’s going to be pretty rare that a judge is going to say, “That’s unenforceable term.” They will find a way out of it. Good judges actually look for fair result and then try to back up and find the law that gets them to the fair result. So we kind of live by that notion. We explain to the client, “Pigs get fed, and hogs get slaughtered.
You don’t want to be a hog on certain things. Limitation of liability, for instance, you don’t want to be too aggressive there. In fact, you probably would want to do at least 25 per cent of the proceeds paid.
Tom: But we can change the statute of limitations, we can require them to give us notice if there is any problems, and they have a notice window, and if they fail to give us notice during the notice window as long as the window is reasonable, then would say, really have any liabilities. So there are lots of cool things they can do.
Nate: Yeah, that’s interesting. You mention judges and I’m thinking like you never want it to come to that, but how often do you see your clients or MSPs actually have to take their agreements to court with their clients?
Tom: It’s pretty rare.
Nate: That’s good.
Tom: In fact, what happens normally is…you have an extended credit if you have been paid.
Nate: Uh huh.
Tom: And then…oh geez, boy, Nate before I forget about it too. The other really important one is to make the customer have a point of contact person too because. I was just thinking about one that we had where they said, “The reason we didn’t pay because of A, B and.” Well, A, B and C came from somebody outside of the main customer point of contact. And so we were able to say, “Yeah, sorry you didn’t funnel it through your point person. And as a result that dispute doesn’t exist. You had to funnel it through them.” So, pay me my money now.”
Tom: And so often times, you’ll see that there will be the discussion about lawsuits and posturing and maybe even starting a lawsuit, but most of them get settled.
Nate: Yeah, interesting, interesting. So, I’m an MSP owner and let’s just say I am – I’m not but hypothetically an MSP owner. I have a lot of things I have to juggle, I mean in between our technicians and clients and everything – how long should I be spending. What portion of my time should I be spending on my legal documents and specifically, MSAs and SLAs.
Tom: You know, actually, If you have a managed services relationship with your lawyer, it should be very much like going to the doctor where you go in and you just sit and listen and that person tells you, “Based on what we’ve learned about you, this is what we think you have to do.” My conversations about modifications to the MSP or with the MSP relating to the mastered services agreement are normally less than 15 minutes.
Tom: So, as long as that client is or our client, the MSPs utilizing you in the appropriate way; they’ve given you all the background, they’ve allowed you to work on the master template and then somebody comes in with modifications, it’s really as simple as, “Yeah, remember that limitational liability piece. We don’t want to go more than 100 per cent. We’re not going to put the firm on any one transaction,” so that’s a showstopper when we’ve got to say no to that. And that is how the conversation goes.
Nate: Yeah, I like that analogy. I mean, it’s like a check-up and I think laws change and things are updated and it’s good to regularly go and get legal advice, correct?
Tom: Absolutely. But we do spend more time with our clients on the other things – the other issues like equity participation plans, acquisition related activity or income tax management, reorganizations and asset protections, we spend a lot of time on them than that stuff. But the MSAs, once you get it going, it should go pretty easy.
Nate: Yeah, that’s good. So we’re coming up towards the end of our show here. I wanted to ask you one last question. You’ve given us a lot of tips on just MSAs, things to look for, things to include. Is there one underlying component or thing that every MSP should be doing when it comes to their MSAs?
Tom: Yeah, I’d say the assignment thing is the one thing they should do for sure…yeah, it’s hard, a lot of these things are of equal import. One we haven’t talked about is hiring away your talent, that’s is a problem that become a problem. But that one thing right now in today’s environment, I think I’d have to say that that one thing that you should make sure you have is an assignment provision. Because there are private equity funds that are out there, that are making offers that some of us look at and say, “Wow, that’s really rich.” And you want to be in a position to say, “Okay, if you are all transferable i don’t have to go and get anybody’s consent.”
Nate: Yes, yes, that’s good to have. I would also say, it sounds like you need to get a lawyer and whether and with the MSAs too.
Nate: I would try to do that myself.
Tom: That would be a little self-serving though.
Nate: No… I know…
But I was just…after hearing everything you’ve said, I mean it sounds like it’s not something you can just hack together. It’s something that you really need somebody who knows what they’re doing and has been in the legal industry for some time because there is a lot of things that you just don’t consider before writing these legal-binding contracts.
Tom: You Know, the thing is – the people that we serve are really smart guys and gals. And they are working these transactions in and out and they have negotiated these things time and time again, sometimes with legal assistance, sometimes without legal assistance.
And they’ll do the job. But the thing is, is they are not focusing on their offense then. And their offense is going out and finding customers that can avail themselves of the MSP model and then implementing them as MSP model. In the actual negotiation of a contract has very little to do with their offense.
And so, what I would say is, “Hey, if you’re an MSP you should absolutely be working on your offense.” Lawyers or not, they are expensive. At least, we are not. Well, you can’t use us for your defence and… because truly, the MSPs defence is our offense.
Tom: That is what we do and we’re really efficient at it. So, it’s not like they can’t get there with a lot of time-investing. It’s just that a lot of time investing and, boy do they do such a good job on their offense. Why not focus on the offense?
Nate: Yeah, that’s a great plan. Well, Tom thank you very much for joining me here on MSP Radio today.
Tom: Cool thanks for having me.
Nate: Yeah, it was a great discussion. You provided us some really great tips for our audience. If people want to learn more about Virtus Law and the firm that you’re with, where can they go?
Tom: The website. We are located in Minnesota but we serve throughout the country. There are certain states that we’re licensed in, certain states that we will associate with through a friend or local counsel there, certain of the issues that we do with our federal issues so we don’t have to get state license for that – but yeah, I made a few – we work with them all across the nation and it’s www.virtuslaw.com V like victor, I – R – T like tom U – S – L – A – W. Or you can call us at 6128881000.
Nate: Great. Well, Tom from Virtus Law, thank you very much. And thank you to our listeners for tuning in to MSP Radio and we will see you next week.