The Contract Narrative

There has long been a narrative around the IT industry that legacy contracts are what hold MSPs back. There is a lot of truth to this, as I myself have experienced these challenges first hand. I recall a point where it felt like no matter how many new, lucrative contracts we’d sign, our eldest customers would somehow find a way to eat the profits. They were more demanding on our support staff, had the most outdated infrastructure, all while paying the lowest rate. While it was certainly our fault for letting this happen, it was not without reason, which many MSPs can relate to. 

Your oldest customers are often the most loyal and they gave you a chance when no one else would. Trying to hit them up for rate increases can be awkward and sometimes ruffling their feathers simply doesn’t seem worth it. This is what causes these contracts to age, as even decades go by without a formal renewal. Of course there will be some customers who are more than willing to pay more if you ask, however there is also a cohort that feel somewhat “entitled” to such discounts, even as you grow. 

Forget Rate Increases

While attempting to re-contract your legacy customers is not a novel idea, I want to approach it from a slightly different perspective than what you’ve probably heard. In fact, we’ve even covered this topic before through the lens of sales tactics for renegotiation. That’s because the conversation up until this point has largely been around price, profitability and growth. This is still valid, but growth in itself is becoming a less important factor compared to risk. That’s why this time around, the approach I’d like to take is centered around risk, stability and value.

Times have changed and so has the risk profile of acting as an MSP. It’s time that we separate contract renewals from rate increases entirely. Contracts serve many other purposes other than simply agreeing to a rate, and those purposes have never been more important. If rate increases are what is holding you back, forget about that for a moment. Formally renewing a legacy contract at an existing rate is still a better outcome than not renewing at all. 

Why The Urgency?

Here are some of the key reasons why MSPs must re-contract their customers, regardless of rate increases: 

Acquisition Value 

Before we dig into some of the short term risks associated with aging contracts, let’s look at the long term. In a way, the value of your business is the sum of the profits on the contracts that you hold, multiplied by the risk of those contracts. For an investor or acquisition partner, a legacy contract is a risk that comes with a cost. This very topic was brought up by an MSP in a recent workshop with Hannah Paige, Director of Worklyn Partners. As she explains: 

“A key point of the diligence process is reviewing customer contracts. If a Seller doesn’t have current customer contracts there is real risk of customer churn that the acquirer will have to underwrite. This is why the acquirer will make it a point to ensure that there are current customer contracts. If the acquirer is underwriting the risk then they will be less willing to ‘pay up’ for the business, as they will have to work to get all of those contracts put in place once the deal closes.”

Essentially what this means is that regardless of what your customer is willing to pay, their contract must be up-to-date for it to hold its true value. If you wait until right before you exit to re-contract, you may lose the trust of these customers, as the optics of that situation are quite poor. If you don’t do it at all, the burden falls on the acquirer and they are going to make you pay for that. This is why it is best to handle these renewals early and often, so that it is a non-factor when you have an opportunity to exit. 

Stack Alignment

Keeping your contracts aligned with your technology stack is incredibly important. I completely understand and have experienced the difficulty of this. MSPs sell technology. Technology evolves at an exponential rate. Growing MSPs are more likely to pivot. These are all the reasons why the services offered by a growing MSP are subject to constant change, as they try to find market-fit and keep up with technology trends at the same time. 

As Matt Solomon, Co-Founder of Channel Program puts it: “From my thousands of conversations with MSPs, most re-evaluate their tech stacks every 6-12 months. I find that the more mature MSPs are closer to once a year, and the less mature ones are closer to 6 months. MSPs that are still in those initial scaling stages are acquiring new customers with new needs more often, and technologies that worked for them when they had less or smaller customer bases might not scale.” 

If you’d like proof of this sentiment, just take a look back at your contracts and proposals from a few years ago and see how the line items have changed. Some will say that’s the point of “managed services,” as you’re able to fold in new technologies and retire old ones seamlessly for your customer. The problem is that not all of these technologies are the same and some carry more risk than others. If you are going to routinely update your stack, you should also review and revise your contracts accordingly, whether you are folding those costs into your customer’s fixed rate contract or not. 

Cyber Liability

While it used to be that the contracts agreed to were only between an MSP and their customer, this is no longer the case. There are other parties that have skin in the game now, specifically those that are providing cyber liability insurance to both you and your end customers. To help measure the importance of this, I reached out to Will Brooks, MSP Channel Chief of FifthWall Solutions. Here’s what he had to say: 

“Having a direct link to their clients’ network, MSPs need to be carrying Tech Errors and Omissions coverage, but most insurance carriers want to know that managed clients are under contract and may even request a copy of said contract. If you’re providing managed services, it’s going to be a massive hurdle maintaining this important coverage if clients are on outdated contracts. It could even lead to claim issues down the road.” 

This might be the most important point in this article, because it also offers an incentive to everyone involved. If you or your customers want to avoid claim issues in the event that something goes wrong, you need to have a current contract in place. Since your customers are not going to be asking for this, it’s on you to initiate the re-contract process and explain to them the risks they are also taking if they don’t comply. Again, this conversation will likely go a lot smoother when there isn’t a price increase looming over it. That’s why it might be better to de-couple the two and fight that battle another day. 

Regulatory Compliance

Aside from insurance providers, regulatory agencies are also taking interest in contracts written between an MSP and their customers. In this case, the contract may act as additional proof-of-compliance to support the following of best practices for technology infrastructure, policies and procedures. In the event of a failed compliance audit, the contract can also help to sort out who’s at fault between the customer and the MSP and how to resolve the matter. To shed light on this, I talked to Tim Golden of Compliance Scorecard, who had this to say: 

“As regulatory environments change, MSPs invite ongoing compliance risk if they don’t review and update their existing contracts. Managing those legacy contracts isn’t just about meeting compliance standards; it’s about maintaining trust with clients and safeguarding operational reliability in a constantly evolving digital landscape. Proactive re-contracting mitigates these risks, aligning service agreements with the rigorous demands of current regulations and ensuring that both provider and client stand on solid, compliant ground. Aligning legacy agreements with current regulations ensures smooth service delivery and legal validity. ”

If you are servicing customers in regulated industries, you should consider the re-contracting process as non-optional. No matter how great your relationship is with your customers, if they lose their ability to do business because of something they “assumed” you were responsible for, they may look to you to recoup whatever losses they endure. The contract is there to clearly define what your obligations are, and if you are meeting those obligations it may protect you in these situations. 

Legal Clarity 

As I’ve already expressed, providing technology services presents unique challenges, especially when it comes to maintaining legal clarity in your contracts. Over a relatively short amount of time, the interpretation of contract terms might become ambiguous or outdated due to changes in technology, business practices or legal standards. Revising these contracts regularly can help clarify terms and conditions, ensuring both parties are clear about their obligations and rights at all times. There are very few people more qualified to speak on this topic than Bradley Gross, President at Law Office of Bradley Gross, PA. As he states: 

“Updating legacy clients to newer and more comprehensive service agreements provides MSPs with the opportunity to address industry realities that have evolved over time. (For example: Not too long ago, Microsoft NCE did not exist, minimum cybersecurity requirements were not required industrywide, and NIST CSF was in its infancy.)  By updating their service agreements to address these realities, MSPs can set proper expectations, ensure that they are operating within a modern legal framework and, of course, stay out of court.”

As Bradley pointed out, while your contract may have been suitable at the time that it was executed, it could contain language that over time may be interpreted differently. In some cases this could be perceived as including obligations which you’ve not actually agreed to. Since these interpretations are largely out of your control, the only way to avoid these issues is to revise your contracts to clarify these nuances as the landscape changes. 

Conclusion

While contracts are not the most exciting topic to talk about, this is a reality that MSPs must face. The ‘if it’s not broken, don’t fix it’ rule does not apply. While it might lead to difficult conversations with your customers, separating the financial and legal aspects of your contract processes can reduce friction enough to get it done. Once these habits are formed and customers come to expect annual revisions, you can sleep well knowing that you’ve done everything you can to protect yourself, your business, and even your customers.