How long should you ask your managed services clients to commit to?
This is a question that I’m frequently asked by IT Solution Providers and Managed Service Providers (MSPs) and my answer is always that “It depends!” The length of your MSP contract terms depends on what you’re trying to do.
- Are you looking to build long-term contracted relationships to present value to a buyer in a potential sale of your MSP business?
- Do you want to reduce the time it takes to complete a managed service contract sale by offering a shorter contract length?
- Would you like to lock clients into a contract to prevent them from signing with price-focused competitors?
Let’s explore some of the options available for managed service contract terms.
Short-term vs long-term managed service contracts
If you offer your clients a short-term contract — for example, a month to month contract — then you should expect the sales cycle to be reduced. Clients are typically willing to sign deals more readily if they know they can exit them(because of bad service or a better alternative) easily.
My MSP business offered 30-day rolling contracts and we used it as a sales strategy. Our sales message was “If you don’t like us, we’ll make it super easy for you to leave.” We lived or died by the quality of our service. This was attractive to many small businesses we worked with, but conventional wisdom says that these short-term contracts aren’t attractive to a potential buyer of your business. What if somebody buys your MSP business and 30 days later, all the client contracts they’ve acquired decide they don’t want to work with you?
If you’re a growing MSP with no immediate plans to sell your business, then 30-day contracts are a good option. However, if you’re looking to build the value of your business for a potential acquisition, then longer-term contracts would be more attractive.
A one-year managed service contract is not unusual. I’ve even seen more MSPs who ask for 3-year contract terms from their clients!
In longer term contracts, you might be able to offer your clients additional benefits – making it a more attractive offer for them to sign. For instance, you could lock in today’s prices for the next year. This can help them budget their IT service needs for their next twelve months – without worrying about price increases.
Some clients will prefer longer contract terms, whereas others will prefer short-term contracts. It’s up to you to decide which you will offer, and how you position them to clients. Remember that one size doesn’t fit all.
What notice period should I give?
Another question around managed service contracts is “What notice period should clients need to give me?”
If a client wants to end their contract, then you need to have a contracted notice period in place. Offboarding a client means additional work for your MSP business. You need to hand-over passwords, third-party service accounts, and much more. It’s not something that can be done overnight.
Typically, most providers ask for a 30-day notice period for contracts. That means that if a client wants to break the contract, then they need to give at least 30-days’ notice so that all parties can adequately prepare. In some longer-term contracts, a 60-day notice period is standard practice.
As an MSP business owner speaking to prospects who were deeply unhappy with their current long-term provider, it broke my heart to see the incumbent MSP business leaning on these notice-periods to stop clients from leaving them. Many find it bad practice and unethical.
For instance, if you offer 1-year contract terms with a 60-day notice period, then it’s good practice (if not the law in some places) to be clear that the 60-day notice period is approaching. Quietly ignoring the notice period, then insisting that clients have missed their contract get-out and must sign another 3-year deal is not an ethical way to do business.
Be open and be transparent about your contracts. If a client is unhappy, then have an honest conversation with them about how you can address the situation.
“Be open and be transparent about your #MSP contracts. If a client is unhappy, then have an honest conversation with them about how you can address the situation.” – @tubblog
What if the client relationship breaks down?
If you have a contract with a client, and the relationship breaks down, then do you hold that client to their contract? Legally, yes, you are entitled to ask the client to see out the contract term or negotiate for them to pay for an early exit. However, in my experience in the small business world, contracts run second to trust and transparency.
When my MSP business experienced the rare situation where our relationship with a client had broken down, we granted them their release in a timely fashion.
If a client is upset and wants out, and you enforce a contract, then don’t expect the remainder of that contract term to be fun. Your Service Desk is likely to feel the brunt of this. Helping that client migrate to a new MSP business is a much better option. Likewise, you may want to terminate some client relationships early because the client is difficult to work with!
It’s better to have an open and honest conversation with the client about what to do next — however uncomfortable this is.
Where can I find a managed service contract template?
This article is NOT a replacement for seeking legal advice from a lawyer or solicitor local to you. I’m not a lawyer and don’t pretend to play one on the Internet. I’m just a former MSP business owner offering some friendly advice. You can, and should, seek out legal advice before offering your MSP clients a contract to sign.
If you’re looking for a sample managed service contract template to use as the basis of your conversation with a legal representative, there are two sources I recommend.
- Members of online community The Tech Tribe are offered a Managed Service Agreement template for free as part of their membership.
- MSP expert Karl Palachuk has authored a brilliant book called Service Agreements for SMB Consultants that is well worth reading, as it has sample contracts in it.
Contracts help both parties
Longer-term contracts can help you build value in your business and help clients lock-in pricing for easy budgeting. Shorter-term contracts can be easier to sell and give a client peace-of-mind knowing they can exit the contract easily if they see fit.
Whatever contract terms you decide to use within your Managed Service Provider business, just remember that in the small business space, there are no replacements for trust and transparency. Make sure you’re treating your clients how you would want to be treated!
Photo: Zerbor / Shutterstock