Keys to Drafting a Successful Outsourcing or Managed Services Contract
Reading time: 10 mins
Companies increasingly rely on Managed Services or Managed Service Providers (MSPs) to optimize their IT operations, improve efficiency, and access specialized expertise. However, the key to success in this relationship lies in the proper structuring of the managed services contract.
A well-designed contract not only establishes the terms of the relationship with the provider but also determines the success or failure of the outsourcing initiative. With the MSP market projected to triple over the next decade, it is essential to learn how to draft a contract aligned with the company’s strategic objectives to maximize its value.
1. The Importance of a Well-Structured Managed Services Contract
A solid contract enables companies to:
Align the service with business strategy: 60% of companies outsourcing IT services find that their initial contracts do not fully reflect their needs, resulting in costly adjustments.
Define clear expectations for performance and value: According to World Commerce & Contracting, 85% of IT contracts contain ambiguities, which can lead to conflicts and affect service quality.
Reduce legal and operational risks: KPMG reports that 9 out of 10 companies have faced contractual issues with MSPs due to vague terms or non-compliance with Service Level Agreements (SLAs).
Optimize service management and monitoring: Gartner highlights that companies with well-structured contracts reduce dispute management time by 30% and decrease penalty-related costs by 25%.
2. Common Mistakes in Drafting Managed Services Contracts
Lack of Clarity in Service Scope
Impact: 31% of IT contracts fail due to ambiguous definitions, leading to conflicts over responsibilities (World Commerce & Contracting).
Real Case: In 2022, a global financial company renegotiated its contract with an MSP after incurring additional costs of over $2 million due to poor scope specification.
Ambiguity in Performance Metrics and SLAs
Impact: 42% of companies fail to establish clear KPIs, making it difficult to evaluate the provider’s performance and enforce penalties (IDC).
Real Case: In 2023, a manufacturing company discovered that its provider met technical SLAs, but the resolution time for critical incidents was 40% higher than expected. The lack of defined KPIs prevented penalizing the MSP.
Lack of Flexibility to Adapt to Changes
Impact: 63% of MSP contracts lack flexibility clauses, hindering technological adaptations or strategic shifts (Forrester).
Real Case: A telecommunications company had to bear an additional 15% of the contract cost for not including updates to its cloud infrastructure at no extra charge in the agreement.
3. Keys to Drafting a Successful Managed Services Contract
1: Align the Contract with Business Objectives
Before negotiating with an MSP, it’s necessary to define:
- Strategic objectives: How does the contract contribute to the business vision?
- Service scope: What functions and responsibilities does it include?
- Engagement model: What are the roles of the company and the provider?
Example: A CIO outsourcing IT support should ensure the contract includes user satisfaction indicators and system availability, not just technical SLAs.
2: Define KPIs and Governance Model
The success of a managed services contract is measured through clear performance indicators (SLAs and KPIs). Essential elements include:
- Business-aligned KPIs: Measuring not only service availability but its impact on operations.
- Penalties and incentives: Establishing mechanisms to encourage provider compliance.
- Governance model: Defining regular review meetings and performance reports.
Key Fact: According to World Commerce and Contracting, poor contract management can cost companies up to 9% of their annual profitability.
3: Integrate Risk Management and Regulatory Compliance
Since MSP contracts can impact data security and regulatory compliance, it’s critical to include provisions covering:
- Business continuity plans (BCP) and disaster recovery (DRP).
- Compliance with regulations such as GDPR, CCPA, or industry-specific standards.
- Dispute resolution protocols and escalation mechanisms.
A Risk Manager must ensure the contract includes periodic risk assessments and security audits.
4. Key Considerations When Selecting an MSP
The contract’s success also depends on choosing the right provider. Critical factors include:
- Provider’s industry experience.
- Flexibility in pricing models and service scalability.
- Support level and incident response capability.
- References and prior success cases.
When evaluating MSPs, it’s recommended to use a framework that considers qualitative and quantitative criteria, ensuring the relationship goes beyond a mere commercial transaction.
Take full control of all your contracts and suppliers.
5. Prepare an Exit Strategy
While many companies don’t consider contract termination clauses until it’s too late, defining an exit strategy is as important as negotiating the initial terms. Key aspects include:
- Service transition: Plans to minimize disruption in case of a provider change.
- Data and asset ownership: Ensuring the company retains control over critical information.
- Termination causes: Including clear criteria for early contract termination.
A well-structured exit strategy prevents unforeseen costs and reduces operational risks if the MSP relationship doesn’t work as expected.
Avoid Risks with Technology and Efficient Contract Management
Even with impeccable drafting, the complexity of managed services contracts makes their monitoring and management a constant challenge. Many companies lack a dedicated Contract Manager or adequate tools to ensure agreements are fulfilled as stipulated.
40% of organizations lack visibility into their providers’ actual performance due to manual and inefficient contract management, leading to millions in unnecessary costs and poorly applied penalties. (Source: World Commerce & Contracting)
55% of contractual issues with MSPs could have been prevented if companies had automated monitoring systems and alerts for SLA breaches. (Source: Gartner)
How to avoid these problems?
Automating contract management enables continuous oversight of agreed terms, reducing operational and financial risks. Companies implementing digital contract management solutions have reported:
- 30% fewer contractual disputes due to greater transparency in service execution.
- A 25% reduction in breach-related costs by identifying issues before they escalate.
- Better strategic alignment between IT, procurement, and finance teams by centralizing contract data.
Is your company ready to optimize contract management with providers? With HOLO, you can automate and enhance contract administration, ensuring more efficient management aligned with business objectives.
Request a demo today and discover how HOLO can transform contract management in your company.
The Importance of an Intelligent Contract Management Platform
To tackle these challenges, more companies are adopting specialized platforms for managing provider contracts, which enable:
- Centralizing and digitizing all contracts, ensuring stakeholders have access to up-to-date information.
- Automating SLA and KPI oversight with real-time alerts for potential breaches or renewal dates.
- Optimizing agreement traceability and audits, facilitating future negotiations and reducing contractual risks.
HOLO is a solution designed to efficiently manage relationships with providers and managed services contracts, ensuring agile, transparent administration aligned with the company’s strategic objectives. With a focus on automation and data control, HOLO enables organizations to turn contract management into a competitive advantage, ensuring each agreement fulfills its purpose and delivers the expected value.
In an environment where proper contract administration can mean the difference between successful outsourcing and ongoing issues, tools like HOLO allow companies to manage agreements proactively and strategically, rather than reactively.
