When engaging vendors or service providers for your business, having well-drafted contracts in place is essential to define the relationship, deliverables, pricing, and other key terms. Two common types of agreements used are Master Services Agreements (MSAs) and Statements of Work (SOWs).

An MSA is an overarching contract that lays out the general terms and conditions governing the business relationship between a service provider and customer. It is often used when the parties anticipate an ongoing relationship with multiple projects. The MSA itself does not include project-specific details. Rather, those are captured in separate SOWs that reference and incorporate the MSA. This structure provides flexibility, as SOWs can be added or modified as needed without having to renegotiate the entire MSA.

On the other hand, an SOW is a contract that defines a specific project’s scope, activities, deliverables, timelines, and pricing. It may be a standalone agreement or incorporated into an MSA. The SOW should be detailed enough to clearly establish expectations and allow the service provider to accurately price and plan the work.

Key Clauses in an MSA

While the exact provisions in an MSA will vary based on the industry, type of services, and needs of the parties, here are some key clauses typically included:

Services: A high-level description of the types of services to be provided under the MSA. Specific details are left for individual SOWs. Sample clause: “Service Provider will perform the services (the “Services”) described in one or more Statements of Work (each, an “SOW”) executed by the parties. Each SOW shall reference this Agreement and be subject to its terms and conditions.” The provided sample clauses go into further detail, distinguishing between “Designated Services” that are specifically listed and “Supplemental Services” that may be added. They also address topics like hardware, materials, communication services, use of client assets, productivity tools, policy manuals, regulatory compliance, and conditions that must be met before services begin. Key considerations include:

• Clearly defining the scope of services and how new services can be added
• Specifying each party’s responsibilities for providing necessary hardware, software, facilities, and materials
• Requiring the supplier to comply with the client’s policies and applicable laws
• Identifying any preconditions to starting services

Term and Termination: The length of the agreement and grounds for termination, such as for cause or convenience. An auto-renewal provision may be included. Sample clause: “This Agreement shall commence on the Effective Date and continue for a period of one year, unless earlier terminated in accordance with its terms. Thereafter, the Agreement shall automatically renew for successive one-year terms unless either party provides written notice of non-renewal at least 30 days prior to the end of the then-current term.” Consider specifying:

• The initial term and any renewal terms
• Each party’s termination rights and required notice periods
• Any fees or obligations triggered by termination

Fees and Payment: How pricing will be structured (e.g., time and materials, fixed fee) and invoicing and payment procedures. Actual prices are specified in SOWs. Sample clause: “Service Provider will invoice Customer as set forth in each SOW. Customer will pay all undisputed amounts within 30 days of receipt of invoice. Late payments shall accrue interest at a rate of 1.5% per month or the maximum allowed by law, whichever is less.” The sample clauses provide extensive detail on supplier compensation and payment procedures. They cover topics like expense reimbursement, cost of living adjustments, proration of fees, minimizing charges, invoice requirements, supporting documentation, and fee disputes. The level of specificity will depend on the nature and complexity of the engagement.

Confidentiality: Mutual obligations to protect each party’s confidential information. Sample clause: “Each party acknowledges that it may receive confidential information from the other party in connection with this Agreement. Confidential Information shall include, without limitation, the terms of this Agreement, technical information, business plans, customer data, pricing, and any other information that a reasonable person would consider confidential given the circumstances. Each party agrees to hold the other’s Confidential Information in strict confidence and not disclose it to any third party without prior written consent, except as required by law or court order. This provision shall survive termination of the Agreement.” The sample addresses confidentiality obligations in detail, including defining confidential information, setting a 5-year non-disclosure period, requiring ‘confidential’ markings, and listing exclusions.

Intellectual Property: Allocation of IP rights between the parties, both pre-existing IP and newly created IP. Often the customer will own new IP, with a license back to the service provider. Sample clause: “Each party shall retain ownership of its pre-existing intellectual property and any intellectual property developed outside the scope of Services provided hereunder. Any IP created by Service Provider specifically for and paid for by Customer shall be considered “works made for hire” and be owned by Customer, provided that Service Provider shall retain a perpetual, irrevocable, royalty-free license to use such IP for its business purposes.” The samples deal with IP ownership. They distinguish between client materials, supplier proprietary materials, third party materials, deliverables, and work product. Key issues addressed include:

• The client owns all rights to its pre-existing materials and any derivative works
• The supplier grants a license to the client to use supplier IP incorporated into deliverables
• Special handling of third party components and open source software
• Defining acceptance criteria and procedures for developed materials

Representations and Warranties: Assurances by each party, often including a warranty by the service provider that services will be performed in a professional and workmanlike manner. Sample clause: “Service Provider warrants that it shall perform the Services in a professional and workmanlike manner in accordance with generally accepted industry standards and practices for similar services. Service Provider’s sole obligation, and Customer’s exclusive remedy, for a breach of this warranty shall be for Service Provider to promptly re-perform any non-conforming services at no additional charge.” The sample contains detailed warranty provisions, with the supplier warranting items like:

• Services will be provided in a professional manner consistent with industry standards
• Work product will materially comply with agreed specifications
• Services and work product won’t infringe third party IP rights
• Compliance with laws and client policies
• No malicious code in supplier materials The client provides more limited warranties. Also consider whether to disclaim implied warranties.

Limitation of Liability: Caps on liability, exclusion of certain types of damages (e.g., consequential, incidental), and carve-outs for breaches of confidentiality, IP infringement, or gross negligence / willful misconduct. Sample clause: “Except for breaches of confidentiality, indemnification obligations, or a party’s gross negligence or willful misconduct, in no event shall either party be liable for any consequential, incidental, indirect, punitive, or special damages arising out of or relating to this agreement. Each party’s aggregate liability under this agreement shall not exceed the total amount paid or payable by customer hereunder during the 12 months preceding the event giving rise to liability.” The sample has detailed liability provisions addressing:

• Liability caps equal to 12 months of fees paid
• Exclusion of consequential, indirect, and some other types of damages
• Exceptions for indemnification, confidentiality breaches, gross negligence, and willful misconduct
• Injunctive relief

Indemnification: Obligations of each party to indemnify, defend, and hold harmless the other party against third-party claims. Sample clause: “Service Provider shall indemnify, defend, and hold harmless Customer from and against any third-party claims arising out of (i) Service Provider’s gross negligence or willful misconduct; (ii) Service Provider’s breach of its confidentiality obligations; or (iii) allegations that the Services or Deliverables infringe any third party’s intellectual property rights. Customer shall promptly notify Service Provider of any claim and cooperate in the defense.” The sample contains mutual indemnities, with each party indemnifying the other against:

• Negligence and misconduct of the indemnifying party
• Breaches of confidentiality
• Claims of IP infringement
• Non-compliance with laws The indemnification process is spelled out in detail. The key is to be indemnified for risks under the other party’s control.

Insurance: Types and amounts of insurance coverage the service provider must maintain. Sample clause: “Service Provider shall, at its own expense, maintain at all times during the Term the following minimum insurance coverage: (i) Commercial General Liability with limits of at least $1,000,000 per occurrence and $2,000,000 in the aggregate; (ii) Professional Liability (Errors & Omissions) with limits of at least $1,000,000 per claim; (iii) Cyber Liability with limits of at least $1,000,000 per claim; and (iv) Workers’ Compensation at statutory limits. Service Provider shall provide certificates of insurance evidencing such coverage upon Customer’s request.” The sample requires the supplier to carry standard insurance coverages like commercial general liability, workers compensation, and automobile liability. For tech projects, consider adding:

• Professional liability / E&O
• Cyber / privacy liability
• IP infringement Specify coverage limits and require that the client be named as an additional insured.

Governing Law and Dispute Resolution: Which state/country’s laws govern interpretation of the agreement and how disputes will be handled (e.g., arbitration, litigation). Sample clause: “This Agreement shall be governed by and construed in accordance with the laws of the State of [STATE], without reference to its conflict of law principles. Any dispute arising out of or relating to this Agreement shall be resolved through binding arbitration conducted in accordance with the rules of the American Arbitration Association.” The sample specifies the governing law (New York) while also providing a dispute escalation procedure where issues are first raised to project managers, then contract managers. The agreement does not seem to require arbitration or specify venue for litigation. Consider adding an ADR clause.

Additional key clauses include:

• Client Responsibilities: The client’s obligations to provide access to facilities, personnel, equipment, software, and data needed for the services. The supplier will want the client’s commitments clearly defined to avoid delays or disputes. For example: “Client shall provide Supplier’s personnel with reasonable access to Client’s facilities, systems, and personnel as necessary for Supplier to perform the Services. Client shall also provide all Client Materials specified in the applicable SOW.”
• Subcontracting: Rules for the supplier’s use of subcontractors and third party services/materials. The client will want consent rights and to ensure proper flow-down terms are in place. Consider specifying: “Supplier may not subcontract any of its obligations under this Agreement without Client’s prior written consent, not to be unreasonably withheld. Supplier shall remain responsible for the acts and omissions of its subcontractors.”
• Service Levels: Defining objective and measurable service level standards, along with remedies like service credits for supplier non-performance. For critical services, consider including: “Supplier shall perform the Services in accordance with the service levels set forth in Exhibit X. If Supplier fails to meet a service level, it shall provide Client with a credit equal to [X]% of the monthly fees for the affected Service.”
• Audits: The client’s rights to review the supplier’s books, records, procedures, and facilities used to provide the services. This is a key client risk-management tool. The clause should address:
• Frequency and notice requirements for audits
• Client’s audit rights (itself or through a third party)
• Supplier’s obligations to cooperate and remediate issues
• Responsibility for audit costs
• Confidentiality of audit results Sample clause: “Client may, at its expense, conduct an audit of Supplier’s books and records related to this Agreement once per calendar year with at least 30 days’ prior written notice. If the audit reveals an overbilling of 5% or more, Supplier shall pay the reasonable costs of the audit.”
• Data Security and Privacy: Obligations and procedures to safeguard client data accessed or stored by the supplier. Increasingly important to specify security controls, incident reporting, and audit rights. Key issues include:
• Defining security standards and policies the supplier must meet
• Specifying data backup, disaster recovery, and business continuity plans
• Requiring prompt notice of security breaches and remediation
• Clarifying data ownership, use rights, and return/destruction
• Prohibiting data transfer to certain locations or entities
• Requiring compliance with applicable privacy and data protection laws Sample clause: “Supplier shall implement and maintain commercially reasonable security measures, consistent with prevailing industry standards, to protect Client Data from unauthorized access, destruction, use, modification, or disclosure. Supplier shall notify Client within 24 hours of discovering any actual or suspected security breach involving Client Data.”
• Business Continuity and Disaster Recovery: Requirements for the supplier to maintain plans and capabilities to continue providing critical services during disruptive events. Consider specifying: “Supplier shall maintain a Business Continuity Plan and a Disaster Recovery Plan, copies of which shall be provided to Client upon request. Supplier shall test such plans at least annually and promptly remediate any deficiencies.”
• Disentanglement and Termination Assistance: The supplier’s obligations to cooperate in smoothly transitioning the services to the client or another supplier upon expiration or termination. Address items like:
• Duration and scope of termination assistance
• Access to the supplier’s materials and personnel
• Transfer of work product, data, and third party contracts
• Fees for additional transition services
• Supplier’s non-interference with the successor provider Sample clause: “Upon expiration or termination of this Agreement for any reason, Supplier shall provide Termination Assistance Services for up to 6 months to smoothly transition the Services to Client or its designee. Termination Assistance shall be provided at Supplier’s then-current rates, not to exceed the rates in effect at termination.”
• Supplier Personnel: Provisions regarding the supplier’s staffing of the services, including key personnel commitments, background checks, training, and replacement rights. For example: “Supplier shall assign only qualified, legally authorized personnel to perform the Services. Key Personnel may not be replaced without Client’s prior approval. Client may require Supplier to replace personnel who are not performing satisfactorily.”
• Most Favored Customer: A commitment that the client will receive pricing, terms, and service levels at least as favorable as the supplier offers to its other customers. Often limited to similarly situated customers procuring comparable services. For example: “Supplier represents that the pricing, terms, and service levels in this Agreement are comparable to or better than those offered to any of Supplier’s similarly situated customers procuring services of a similar nature and scope. If Supplier offers more favorable terms to such a customer, it shall promptly notify Client and extend the same terms to Client.”
• Benchmarking: The client’s right to periodically benchmark the supplier’s pricing and/or performance against the market using an independent third party. If the supplier is found to be non-competitive, there is typically a process to adjust terms or allow early termination. For example: “Once per calendar year, Client may engage an independent third party to benchmark Supplier’s pricing and service levels against prevailing market standards for similar services. If the benchmarking shows Supplier is charging more than 5% above the market median, Supplier shall promptly reduce its pricing to match the median. If Supplier’s service levels are below the market median, Client may terminate this Agreement without penalty upon 30 days’ notice.”

These additional clauses help further mitigate common risks and pain points in long-term service provider relationships. The specific issues to address and level of detail will depend on factors like:

• The criticality and complexity of the services
• The scale and length of the engagement
• The sensitivity of the data involved
• The client’s business and compliance requirements
• The supplier’s operational and financial maturity
• The pricing model and incentive structure
• The competitive landscape and bargaining power

In each case, the goal is to strike a fair balance between the parties’ respective interests and establish clear contractual protections, governance mechanisms, and flexibility to adapt to changing circumstances. Experienced outsourcing counsel can help navigate these issues and craft appropriate clauses tailored to the deal at hand.

Key Clauses in an SOW

An effective SOW should have several core components:

1. Scope of Work: A detailed description of the specific services, tasks, and/or deliverables the service provider will perform/provide. This is the heart of the SOW. Sample clause: “Service Provider will design, develop, and launch a new mobile application (the “App”) for Customer with the features and functionality described in Exhibit A. Service Provider will be responsible for all aspects of the development process, including project management, design, coding, testing, and App Store submission.”
2. Timeline: The start date, end date, and any interim milestones or deadlines. Be specific, but build in some flexibility. Sample clause: “The project will commence on [START DATE] and end on [END DATE]. Service Provider shall complete the wireframe designs within 2 weeks of the start date, provide a beta version within 6 weeks, and launch the final App within 10 weeks. The Term may be extended by mutual written agreement.”
3. Pricing: How much and when the service provider will be paid. Tie payments to milestones where appropriate. Sample clause: “Customer will pay Service Provider a total fixed fee of $50,000 for completion of the App, paid in installments as follows: (i) $15,000 upon signing this SOW; (ii) $15,000 upon delivery of the beta version; and (iii) $20,000 upon final acceptance and launch.”
4. Acceptance Criteria: What criteria or process will be used for the customer to accept/approve the final deliverables. Sample clause: “Service Provider shall deliver the final App to Customer for testing and acceptance. Customer shall have 5 business days to review and provide notice of acceptance or rejection due to nonconformance with the specifications in Exhibit A. If notice of rejection is not timely received, the App shall be deemed accepted. Upon receiving notice of rejection, Service Provider shall correct any deficiencies and resubmit the App within 10 days. This process shall repeat until the App is accepted or the Term expires.”
5. Assumptions and Dependencies: Any assumptions made by the service provider in scoping and pricing the work, as well as any dependencies on the customer or third parties. Sample clause: “This SOW and pricing are based on the following assumptions: (i) Customer will provide all required branding materials (logos, color schemes, etc.) within 5 days of the start date; (ii) the App will be developed for iOS and Android using a hybrid framework like React Native; and (iii) Customer is responsible for providing all content for the App. Service Provider shall not be responsible for delays or additional costs resulting from faulty assumptions or Customer’s failure to meet its obligations.”
6. Change Management: How changes to the SOW will be handled, usually requiring mutual written agreement. Sample clause: “Any changes to the scope of work, pricing, or timeline in this SOW must be mutually agreed in a written amendment signed by authorized representatives of both parties. If Customer requests additional work beyond the scope of this SOW, Service Provider will provide an estimate for a change order to be approved by Customer before commencing such work.”

The sample clauses do address these SOW components, but with a few key differences:

• Pricing is primarily addressed in the MSA rather than the individual SOWs. The MSA contains extensive compensation terms.
• Acceptance procedures focus on developed materials rather than all deliverables. Consider defining acceptance for different work product types.
• Formal change control procedures are stated in the MSA. The SOW should align with and reference those terms.

Additional SOW topics covered in the samples include:

• Incorporation of the MSA terms
• Service and project management procedures
• Subcontractor and third party services/materials
• Client obligations and dependencies
• Transition and transformation plans
• Reporting and meetings
• Service level specifications

The best practice is to ensure the SOW captures all deal-specific aspects while remaining consistent with the MSA framework. Tailoring the details to the particular project is key.

Template MSA and SOW

Here is a template MSA and SOW incorporating the key clauses discussed in the blog post:

[COMPANY NAME]
MASTER SERVICES AGREEMENT

This Master Services Agreement (“Agreement”) is entered into as of [DATE] by and between ________________ (the “Company”) and ____________________ (the “Supplier”).

1. Services
   1.1 Scope of Services. Supplier will perform the services (the “Services”) described in one or more Statements of Work (each, an “SOW”) executed by the parties. Each SOW shall reference this Agreement and be subject to its terms and conditions. The initial SOWs are attached as Exhibit A.
   1.2 Modifications. The parties may modify the Services or add additional Services by executing new SOWs or written amendments to existing SOWs.
   1.3 Performance Standards. Supplier shall perform the Services in a professional and workmanlike manner in accordance with generally accepted industry standards and practices for similar services. Supplier shall also comply with any service levels or other performance standards specified in the applicable SOW.
2. Term and Termination
   2.1 Term. This Agreement shall commence on the Effective Date and continue for a period of [INITIAL TERM], unless earlier terminated in accordance with its terms. Thereafter, the Agreement shall automatically renew for successive [RENEWAL TERM] periods unless either party provides written notice of non-renewal at least [NOTICE PERIOD] prior to the end of the then-current term.
   2.2 Termination for Convenience. Either party may terminate this Agreement or any SOW for convenience upon [NOTICE PERIOD] prior written notice to the other party.
   2.3 Termination for Cause. Either party may terminate this Agreement or any SOW for cause upon [NOTICE PERIOD] written notice if the other party materially breaches the Agreement and fails to cure such breach within [CURE PERIOD].
   2.4 Effect of Termination. Upon expiration or termination of this Agreement for any reason, Supplier shall promptly: (i) cease performing the Services; (ii) deliver to Client all Work Product and Client Materials in its possession; (iii) return or destroy all Client Confidential Information; and (iv) provide reasonable termination assistance as requested by Client. Client shall pay Supplier for all Services satisfactorily performed and expenses incurred prior to the effective date of termination.
3. Fees and Payment
   3.1 Fees. Client shall pay Supplier the fees set forth in each SOW. Unless otherwise specified in the SOW, all fees are in [CURRENCY] and exclude applicable taxes.
   3.2 Expenses. Client shall reimburse Supplier for reasonable out-of-pocket expenses incurred in performing the Services, provided such expenses are approved in advance by Client and supported by proper documentation.
   3.3 Invoicing and Payment. Supplier shall invoice Client [INVOICE FREQUENCY] in arrears for Services performed and expenses incurred. Client shall pay all undisputed amounts within [PAYMENT PERIOD] of receipt of a properly documented invoice. Late payments shall accrue interest at a rate of [INTEREST RATE] per month or the maximum allowed by law, whichever is less.
4. Confidentiality
   4.1 Confidential Information. “Confidential Information” means any non-public information disclosed by one party (the “Disclosing Party”) to the other party (the “Receiving Party”) in connection with this Agreement, whether orally, in writing, or by inspection of tangible objects. Confidential Information includes, without limitation, trade secrets, customer data, pricing, business plans, and the terms of this Agreement.
   4.2 Confidentiality Obligations. The Receiving Party shall: (i) protect the Disclosing Party’s Confidential Information using the same degree of care it uses for its own confidential information, but in no event less than reasonable care; (ii) not use the Confidential Information for any purpose outside the scope of this Agreement; and (iii) not disclose the Confidential Information to any third party, except to its employees, contractors, and advisors with a need to know and who are bound by confidentiality obligations at least as protective as those in this Agreement.
   4.3 Exclusions. The confidentiality obligations shall not apply to information that: (i) is or becomes generally known to the public through no fault of the Receiving Party; (ii) was known to the Receiving Party prior to disclosure by the Disclosing Party; (iii) is independently developed by the Receiving Party without use of the Confidential Information; or (iv) is required to be disclosed by law, regulation, or court order, provided the Receiving Party promptly notifies the Disclosing Party to allow it to seek a protective order.
5. Intellectual Property
   5.1 Client Materials. Client shall own all right, title, and interest in and to any materials, documentation, data, or other information provided by Client to Supplier in connection with the Services (“Client Materials”). Supplier shall use the Client Materials solely to perform the Services and shall return or destroy them upon Client’s request.
   5.2 Supplier Materials. Supplier shall own all right, title, and interest in and to any materials, tools, methodologies, processes, or know-how developed by Supplier prior to or outside the scope of this Agreement (“Supplier Materials”). To the extent any Supplier Materials are incorporated into the Work Product, Supplier grants Client a perpetual, irrevocable, royalty-free, worldwide license to use such Supplier Materials in connection with the Work Product.
   5.3 Work Product. “Work Product” means any deliverables, documents, designs, code, or other materials created by Supplier specifically for Client under an SOW. Client shall own all right, title, and interest in and to the Work Product upon payment of the applicable fees. Work Product shall be considered “works made for hire” to the fullest extent permitted by law. To the extent any Work Product does not qualify as a work made for hire, Supplier hereby assigns to Client all worldwide right, title, and interest in and to such Work Product.
   5.4 Third Party Materials. Supplier shall not incorporate any third party materials, including open source software, into the Work Product without Client’s prior written consent. Supplier shall notify Client of all third party materials and provide applicable license terms.
6. Representations and Warranties
   6.1 Mutual Representations. Each party represents and warrants that: (i) it has the full power and authority to enter into this Agreement; (ii) this Agreement is a valid and binding obligation; and (iii) its performance under this Agreement will not violate any agreement with a third party.
   6.2 Supplier Representations. Supplier further represents and warrants that: (i) the Services will be performed in a professional and workmanlike manner consistent with industry standards; (ii) the Work Product will materially conform to the specifications in the applicable SOW; (iii) Supplier has the right to grant the licenses in this Agreement; (iv) the Services and Work Product will not infringe any third party intellectual property rights; (v) Supplier will comply with all applicable laws and Client policies; and (vi) Supplier will use up-to-date virus protection and security measures to prevent unauthorized access to Client systems and data.
   6.3 Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
7. Indemnification
   7.1 Indemnity by Supplier. Supplier shall indemnify, defend, and hold harmless Client from and against any third-party claims, liabilities, damages, and expenses (including reasonable attorneys’ fees) arising from: (i) Supplier’s gross negligence or willful misconduct; (ii) Supplier’s breach of its confidentiality or data security obligations; or (iii) allegations that the Services or Work Product infringe any third party intellectual property rights.
   7.2 Indemnity by Client. Client shall indemnify, defend, and hold harmless Supplier from and against any third-party claims, liabilities, damages, and expenses (including reasonable attorneys’ fees) arising from: (i) Client’s gross negligence or willful misconduct; (ii) Client’s breach of its confidentiality obligations; or (iii) allegations that the Client Materials infringe any third party intellectual property rights.
   7.3 Indemnification Procedure. The indemnified party shall promptly notify the indemnifying party of any claim and cooperate in the defense. The indemnifying party shall have sole control of the defense but may not settle any claim imposing liability or restrictions on the indemnified party without its prior consent.
8. Limitation of Liability
   8.1 Exclusions. NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES ARISING OUT OF OR RELATING TO THIS AGREEMENT, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
   8.2 Liability Cap. EACH PARTY’S AGGREGATE LIABILITY UNDER THIS AGREEMENT SHALL NOT EXCEED THE TOTAL AMOUNT PAID OR PAYABLE BY CLIENT HEREUNDER DURING THE [PERIOD] PRECEDING THE EVENT GIVING RISE TO LIABILITY.
   8.3 Exceptions. THE FOREGOING EXCLUSIONS AND LIMITATIONS SHALL NOT APPLY TO: (I) BREACHES OF CONFIDENTIALITY OR DATA SECURITY; (II) INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS; (III) INDEMNIFICATION OBLIGATIONS; OR (IV) GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
9. Insurance
   9.1 Coverage. Supplier shall, at its own expense, maintain the following minimum insurance coverage during the term of this Agreement: (i) Commercial General Liability with limits of at least $[AMOUNT] per occurrence and $[AMOUNT] in the aggregate; (ii) Professional Liability (Errors & Omissions) with limits of at least $[AMOUNT] per claim; (iii) Cyber Liability with limits of at least $[AMOUNT] per claim; and (iv) Workers’ Compensation at statutory limits.
   9.2 Certificates. Supplier shall provide Client with certificates of insurance evidencing the required coverage upon request. The certificates shall name Client as an additional insured and provide for at least 30 days’ advance notice of cancellation or material change in coverage.
10. Audits
    10.1 Audit Rights. Client shall have the right, at its own expense, to audit Supplier’s compliance with this Agreement and applicable laws once per calendar year upon reasonable notice. Audits may be conducted by Client or its designated third party auditor subject to appropriate confidentiality obligations.
    10.2 Audit Findings. Supplier shall promptly remediate any deficiencies identified in an audit at its own expense. If an audit reveals an overbilling of [PERCENTAGE] or more, Supplier shall also reimburse Client for the reasonable costs of the audit.
11. Data Security and Privacy
    11.1 Security Measures. Supplier shall implement and maintain commercially reasonable security measures, consistent with prevailing industry standards, to protect Client Confidential Information and Client data from unauthorized access, use, disclosure, or modification. Such measures shall include, at a minimum, [LIST SECURITY REQUIREMENTS].
    11.2 Security Incidents. Supplier shall notify Client within [NOTICE PERIOD] of discovering any actual or suspected security breach or unauthorized access to Client data. Supplier shall promptly investigate the incident, take all necessary steps to eliminate or contain the exposure, and prevent a recurrence.
    11.3 Data Processing. Supplier shall only process Client data in accordance with Client’s written instructions and applicable data protection laws. Supplier shall not transfer Client data outside of [LOCATION] without Client’s prior consent.
12. Business Continuity
    12.1 BCPs and DRPs. Supplier shall maintain and regularly test business continuity plans (“BCPs”) and disaster recovery plans (“DRPs”) designed to minimize disruption to the Services. Upon request, Supplier shall provide Client with copies of its BCPs and DRPs and related test results.
    12.2 Force Majeure. Neither party shall be liable for any delay or failure to perform its obligations under this Agreement (except payment obligations) due to circumstances beyond its reasonable control, including acts of God, government actions, telecommunications failures, power failures, or other force majeure events. The affected party shall promptly notify the other party and use reasonable efforts to resume performance as soon as practicable.
13. Miscellaneous
    13.1 Entire Agreement. This Agreement, including all SOWs and exhibits, constitutes the entire agreement between the parties and supersedes all prior negotiations and agreements, whether written or oral, relating to its subject matter.
    13.2 Amendments. This Agreement may only be amended by a written document signed by authorized representatives of both parties.
    13.3 Severability. If any provision of this Agreement is held invalid or unenforceable, the remaining provisions shall remain in full force and effect.
    13.4 Waiver. The failure of either party to enforce any right or provision in this Agreement shall not constitute a waiver of such right or provision unless acknowledged and agreed to by such party in writing.
    13.5 Assignment. Neither party may assign this Agreement without the prior written consent of the other party, except that either party may assign this Agreement without consent to a successor in connection with a merger, acquisition, or sale of all or substantially all of its assets.
    13.6 Independent Contractors. The parties are independent contractors, and this Agreement does not create a partnership, franchise, joint venture, agency, or employment relationship between the parties.
    13.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of [STATE/PROVINCE], without regard to its conflict of law principles.
    13.8 Dispute Resolution. The parties shall attempt to resolve any dispute arising out of or relating to this Agreement through good faith negotiations between senior management. If the dispute is not resolved within [TIME PERIOD], either party may initiate binding arbitration under the [RULES]. The prevailing party shall be entitled to recover its reasonable attorneys’ fees and costs.
    13.9 Publicity. Neither party may issue press releases or other public announcements relating to this Agreement without the other party’s prior written consent.
    13.10 Notices. All notices under this Agreement must be in writing and sent by personal delivery, certified mail (return receipt requested), overnight courier, or email (with confirmation of receipt) to the addresses specified below. Notices are effective upon receipt or, if refused, upon refusal. If to Client: If to Supplier: [CLIENT CONTACT] [SUPPLIER CONTACT] [CLIENT ADDRESS] [SUPPLIER ADDRESS] [CLIENT EMAIL] [SUPPLIER EMAIL] 13.11 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but together shall constitute one and the same instrument. Electronic signatures are valid and binding.

IN WITNESS WHEREOF, the parties have executed this Master Services Agreement as of the Effective Date.

[CLIENT NAME] [SUPPLIER NAME]

By:_________________ By:_________________
Name: Name:
Title: Title:
Date: Date:

[COMPANY NAME]
STATEMENT OF WORK #[SOW #]

This Statement of Work (“SOW”) is entered into as of [DATE] pursuant to the Master Services Agreement dated [MSA DATE] by and between [COMPANY NAME] and [SUPPLIER NAME].

1. Services
   1.1 Scope. Supplier shall perform the following services for Client (the “Services”): [DETAILED DESCRIPTION OF SERVICES, DELIVERABLES, AND SPECIFICATIONS] 1.2 Deliverables. Supplier shall deliver the following work product to Client (the “Deliverables”): [LIST DELIVERABLES AND DUE DATES] 1.3 Client Dependencies. Supplier’s performance of the Services is contingent upon Client timely providing the following: [LIST CLIENT OBLIGATIONS AND DUE DATES]
2. Project Schedule
   2.1 Schedule. The project schedule is as follows: [LIST PROJECT PHASES, MILESTONES, AND COMPLETION DATES] 2.2 Changes. Any changes to the project schedule must be mutually agreed by the parties in writing.
3. Fees and Expenses
   3.1 Fees. Client shall pay Supplier the following fees for the Services: [SPECIFY FIXED PRICE, HOURLY RATES, OR OTHER PRICING TERMS] 3.2 Expenses. [Client shall reimburse Supplier for the following expenses:] OR [No expenses are authorized under this SOW without Client’s prior written consent.] [LIST ALLOWABLE EXPENSES AND COST ESTIMATES] 3.3 Invoicing. Supplier shall invoice Client [INVOICE FREQUENCY] in accordance with the Agreement. Invoices shall itemize all fees and expenses and include supporting documentation.
4. Acceptance
   4.1 Acceptance Criteria. The Deliverables shall be deemed accepted by Client upon delivery unless Client notifies Supplier of any deficiencies within [REVIEW PERIOD]. The Deliverables must materially conform to the specifications in this SOW to be accepted.
   4.2 Cure Period. If Client identifies deficiencies in the Deliverables, Supplier shall have [CURE PERIOD] to correct such deficiencies at no additional cost to Client. The corrected Deliverables shall be subject to the same acceptance process.
5. Project Management
   5.1 Project Managers. The project managers for this engagement are: Client: [CLIENT PM NAME AND CONTACT INFO] Supplier: [SUPPLIER PM NAME AND CONTACT INFO] 5.2 Status Meetings. The project managers shall conduct regular status meetings [MEETING FREQUENCY] to discuss project progress, issues, and risks. Supplier shall provide Client with [REPORT FREQUENCY] status reports detailing the work performed, upcoming tasks, and any blockers.
   5.3 Change Management. Any material changes to the scope, schedule, or fees in this SOW must be mutually agreed in a written amendment signed by both parties. Supplier shall promptly notify Client of any proposed changes and their impact on the project.
6. Assumptions and Risks
   6.1 Assumptions. This SOW is based on the following assumptions: [LIST KEY ASSUMPTIONS UNDERLYING THE SOW] 6.2 Risks. The following risks could impact the project: [LIST SIGNIFICANT PROJECT RISKS AND MITIGATION STRATEGIES]
7. Term and Termination
   7.1 Term. This SOW shall commence on the SOW Effective Date and continue until [EXPIRATION EVENT], unless earlier terminated in accordance with the Agreement.
   7.2 Termination. This SOW may be terminated in accordance with the terms of the Agreement. Upon termination, Supplier shall immediately cease performing the Services and deliver to Client all work in progress.
8. Incorporation by Reference
   8.1 MSA Terms. All terms and conditions of the Agreement are incorporated herein by reference. In the event of a conflict between this SOW and the Agreement, the Agreement shall control unless this SOW expressly states that it supersedes a specific provision of the Agreement.

IN WITNESS WHEREOF, the parties have executed this Statement of Work as of the SOW Effective Date.

[CLIENT NAME] [SUPPLIER NAME]

By:_________________ By:_________________
Name: Name:
Title: Title:
Date: Date:

This template provides a solid foundation for a comprehensive MSA and SOW, covering key legal and business terms such as:

• Detailed description of services and deliverables
• Project schedule and milestones
• Pricing and invoicing
• Acceptance criteria and procedures
• Project management and change control
• Assumptions and risk allocation
• Term, termination, and wind-down
• Incorporation of and relationship to MSA terms

Of course, this template should be carefully reviewed and customized based on the unique aspects of each engagement and the parties’ relative bargaining power. Some additional clauses to potentially include in the MSA or SOW depending on the circumstances:

• Specific service levels and credits/remedies for failures
• Most favored customer pricing commitments
• Benchmarking rights for fees and performance
• Detailed data security and privacy provisions
• Business continuity and disaster recovery requirements
• Governance structure and procedures (e.g. steering committee)
• Transition services and knowledge transfer upon termination
• Supplier diversity and social responsibility commitments
• Subcontracting rules and flow-down terms
• Technology currency and refresh obligations

When used properly, this MSA and SOW template can help streamline the contracting process, drive accountability, and increase the likelihood of a successful long-term service delivery relationship.

FAQ

What is the difference between an MSA and a Master Agreement?

A Master Services Agreement (MSA) is a type of master agreement that specifically focuses on the ongoing provision of services. The term “Master Agreement” is a more general term that can encompass MSAs as well as other types of overarching agreements, such as Master Purchase Agreements for goods or Master License Agreements for software or IP. So while an MSA is always a type of master agreement, not all master agreements are MSAs.

The key distinguishing factor of an MSA is that it sets forth the general terms, conditions, and framework for a service provider to perform work for a client on an ongoing basis, usually through a series of individual projects or work orders. These specific engagements are typically documented in Statements of Work (SOWs) that reference and incorporate the MSA terms.

In contrast, other types of master agreements may not involve services or ongoing work at all. For example, a Master Purchase Agreement often just establishes the key terms for a volume purchase commitment or pricing discount program for goods, without any services involved.

So in summary, MSAs are a specific type of master agreement focused on services and often go hand-in-hand with SOWs, while “Master Agreement” is a broader term that also includes master contracts for other subject matter beyond services.

When is it appropriate to use an MSA vs. a standalone SOW?

The choice between using an MSA with multiple SOWs or just a single, standalone SOW largely depends on the nature and duration of the service provider relationship.

An MSA is most appropriate when:

1. The client anticipates an ongoing, long-term relationship with the service provider that will likely involve multiple projects or engagements over time.
2. The client wants to establish a general framework of legal terms, conditions, and pricing that will apply across all of those engagements, rather than negotiating each one from scratch.
3. The specific details of future projects, such as scope, timeline, and deliverables, are not yet known or are likely to vary, so flexibility is needed.
4. The services being provided are similar enough that common terms make sense, but different enough that distinct SOWs are warranted to capture unique aspects.

On the other hand, a standalone SOW is more suitable when:

1. The client only needs the service provider for a single, discrete project with no anticipated future work.
2. The project is fully-scoped and well-defined upfront, so all terms can be spelled out in detail in one document.
3. The project terms are unique or customized enough that a boilerplate MSA wouldn’t add much value or could even conflict with the SOW.
4. The client wants to keep the contracting process as simple and streamlined as possible for a one-off engagement.

So in essence, an MSA + SOW structure provides flexibility and efficiency for ongoing service relationships, while a standalone SOW is better for one-time, well-defined projects. Many companies use a mix of both approaches depending on the specific situation.

If in doubt, consider whether you foresee a long-term, multi-project relationship and whether the upfront investment in negotiating an MSA will pay off in the long run through more streamlined future contracting. If not, a single SOW is likely sufficient.

What are some common pitfalls to avoid with MSAs and SOWs?

While MSAs and SOWs can be highly effective tools for structuring service provider relationships, there are several common pitfalls to watch out for:

1. Poorly defined or mismatched scope: One of the most frequent issues is a disconnect between what the client expects and what the SOW actually covers. This often stems from vague, ambiguous, or incomplete descriptions of requirements, deliverables, and assumptions. It’s critical that the SOW clearly and comprehensively defines the work to be done and each party’s responsibilities.
2. Lack of flexibility: An overly rigid MSA or SOW without adequate change control mechanisms can make it difficult to adapt to evolving needs or unforeseen circumstances. While you want to be specific, you also need a practical process to modify scope, timelines, and pricing when required. Avoid unnecessary limitations or approval hurdles.
3. Misalignment between the MSA and SOWs: Since the MSA and SOWs are separate but interrelated contracts, there is potential for conflict or gaps if not drafted carefully. Common issues include undefined terms, inconsistent language, and unclear order of precedence. Make sure the MSA and SOWs dovetail properly and address what happens if there is a conflict.
4. Inadequate performance measures or remedies: Many MSAs and SOWs fail to include clear, objective success criteria or metrics to gauge supplier performance. Without a way to measure results and hold suppliers accountable, it can be hard to ensure value or drive improvement. Consider including SLAs, KPIs, earn-backs, or other mechanisms to objectively track performance.
5. Unfavorable pricing or risk allocation: Clients can get locked into unfavorable commercial terms if the MSA or SOW doesn’t provide enough flexibility or leverage. Common issues include uncapped fees, auto-renewals, weak warranties, and unlimited liability. Carefully review and negotiate these provisions to ensure an appropriate balance of risk and reward.
6. Lack of an exit strategy: Many companies focus so much on getting to signature that they fail to plan for the end of the relationship. Yet having a clear, smooth transition plan is critical to avoiding disputes and service disruptions. Include robust termination assistance, wind-down, and data/IP transfer provisions.
7. Insufficient governance or relationship management: An MSA or SOW is the start of the relationship, not the end. Too often, clients fail to put appropriate structures in place to oversee and collaborate with the supplier on an ongoing basis. Establish clear roles, communication protocols, dispute escalation paths, and governance forums to keep things on track.

By being aware of these common pitfalls upfront, companies can take proactive steps in structuring and negotiating their MSAs and SOWs to avoid them. Engaging experienced counsel and stakeholders can also help identify and mitigate risk areas unique to each situation.

How much detail should be included in the MSA vs. SOW?

The level of detail to include in an MSA versus an SOW is a balancing act. The general principle is that the MSA should cover broad legal and commercial terms that will apply across all SOWs, while the SOW should focus on the specific business and technical details unique to a particular project or engagement.

The MSA should typically address “big picture” topics such as:

• The overall scope and nature of services that could be provided
• Billing rates and payment terms
• Confidentiality and data security obligations
• Intellectual property rights and licenses
• Warranties and indemnification
• Limitation of liability
• Termination rights and obligations
• Dispute resolution procedures
• Governing law and jurisdiction
• High-level SLAs or performance standards

These MSA terms are usually drafted in a general way to cover the full range of anticipated services. For example, the MSA may say something like “Service Provider will perform the services described in SOWs in accordance with agreed specifications, using qualified personnel, and in compliance with applicable laws.” The actual specifics of what those services, specifications, personnel, and laws are would be spelled out in the SOW.

In contrast, the SOW is where you want to get into the details of:

• The specific services, tasks, and deliverables for the project
• Project-specific roles and responsibilities
• Milestones, timeline, and delivery schedule
• Acceptance criteria and procedures
• Detailed pricing and payment schedule for the SOW
• Assumptions, dependencies, and risks
• Project governance, reporting, and change control
• Any additional terms that vary from or supplement the MSA

The SOW should act as the practical “blueprint” for the project. A good rule of thumb is that someone should be able to read the SOW and know what will be done, by whom, when, and for how much. The more specific, the better to avoid misaligned expectations.

Some additional considerations:

• For complex or long-term projects, consider breaking the SOW into phases with separate details for each
• Use appendices, exhibits, or links to include detailed technical specifications or voluminous scope documents
• If something truly applies to all SOWs, put it in the MSA; if it’s unique to one project, it goes in the SOW
• If the SOWs are likely to be very different, keep the MSA more general to maintain flexibility
• Make sure the SOW has a mechanism to modify details as needs evolve (e.g. through a change order)
• Involve delivery and technical leads to pressure-test SOW specifics, not just legal and procurement

Getting the level of detail right in an MSA and SOW is both an art and a science. The key is striking the right balance to provide clarity and accountability, while also maintaining agility and efficiency. When in doubt, err on the side of being more explicit, as ambiguity is often a greater risk than overkill.

What should be included in service level agreements (SLAs)?

Service Level Agreements (SLAs) are a critical component of many MSAs and SOWs, especially for ongoing or mission-critical services. SLAs set forth the specific performance standards and metrics that the service provider is expected to meet, along with the consequences for failing to do so.

While the exact SLAs will vary based on the nature of the services, here are some key elements to consider including:

1. Service Level Metrics: The heart of the SLA is the specific metrics used to measure performance. These should be objective, quantifiable, and aligned with the client’s business needs. Common metrics include:

• Availability/uptime (e.g. 99.9%)
• Response time
• Resolution time
• Defect rate
• Accuracy rate
• Throughput
• Customer satisfaction score

The SLA should clearly define how each metric will be calculated and measured. For example, for an availability metric, specify the exact system components covered, the measurement period, any permitted exceptions (e.g. scheduled maintenance), and the tools used to monitor uptime.

2. Service Level Targets: For each metric, define the target level of performance the supplier must achieve. Be realistic and consider industry benchmarks, historical data, and the criticality of the service. Common approaches include:

• Minimum threshold (e.g. 99.5% uptime)
• Target range (e.g. 5-10 defects per month)
• Tiered targets (e.g. Level 1 incidents resolved in 1 hour, Level 2 in 4 hours)

2. Measurement Period: Specify the time period over which each metric will be measured, such as monthly, quarterly, or annually. Consider a burn-in period for new services.
3. Performance Reports: Require the supplier to provide regular reports on actual performance against the SLA metrics. Specify the content, format, and frequency of the reports.
4. Remedies: Define the consequences if the supplier fails to meet the SLAs. Common remedies include:

• Service credits (i.e. fee reductions)
• Corrective action plans
• Termination rights
• Earn-backs for improved performance

The remedies should scale based on the severity and duration of the failure. Avoid “cliffs” and excessively punitive penalties.

6. Exceptions: Identify any situations where the SLAs would not apply, such as during scheduled maintenance, force majeure events, or client-caused issues. Be sparing with exceptions.
7. Continuous Improvement: Consider building in a mechanism for the SLAs to be reviewed and adjusted over time based on actual performance data, business changes, or market improvements.

Some additional tips:

• Focus on a small number of SLAs that reflect the most important outcomes; too many can become unwieldy
• Set SLAs at a level that drives the right behavior; if set too low, there’s no incentive to excel
• Make sure SLAs are achievable; unrealistic ones can backfire and erode trust
• Consider positive incentives, not just penalties, to encourage going above and beyond
• Align SLAs with pricing model; pay for performance whenever possible
• Involve technical SMEs and business users, not just lawyers, in crafting SLAs

Well-designed SLAs can drive accountability, align incentives, and foster a performance-focused relationship. But poorly crafted ones can lead to unintended consequences and perverse behaviors. It’s critical to put thought into what the right metrics and incentives are for each situation.

How can I ensure data security and privacy with third party service providers?

Ensuring data security and privacy is a critical concern when engaging third party service providers, especially if they will have access to sensitive client data or systems. Here are some key steps to take in your MSAs and SOWs to mitigate risk:

1. Security Requirements: Include specific security and privacy requirements the supplier must meet, such as:

• Compliance with relevant laws, regulations, and industry standards (e.g. GDPR, HIPAA, PCI-DSS, ISO 27001)
• Implementation of technical controls like encryption, access controls, firewalls, and monitoring
• Adherence to client security policies and procedures
• Use of secure development practices for custom development
• Restrictions on data use, storage, and transfer

Consider providing a security exhibit or appendix with detailed requirements.

2. Due Diligence: Conduct upfront and ongoing due diligence on the supplier’s security posture, including:

• Review of security certifications, audit reports, and penetration test results
• Assessment of security policies, procedures, and incident response plans
• Evaluation of employee background check and security training practices

2. Access Controls: Limit supplier access to client data and systems to the minimum necessary for the services. Specify requirements for:

• Least privilege access
• Unique user IDs and strong authentication
• Regular access reviews and prompt termination of access for separated employees

2. Incident Response: Require prompt notification (e.g. within 24-48 hours) of any actual or suspected security incidents or breaches. Specify:

• Supplier’s obligations to investigate, contain, and remediate incidents
• Format and content of incident reports
• Client’s right to participate in or lead incident response
• Allocation of costs and liability for incidents

2. Security Assessments: Reserve the right to conduct periodic security assessments or audits of the supplier’s controls and compliance with requirements. Specify:

• Frequency and scope of assessments
• Qualifications of assessors
• Supplier’s obligations to cooperate and promptly remediate findings

2. Subcontractor Flow-Down: Require the supplier to flow down equivalent security and privacy obligations to any subcontractors or third parties involved in delivering the services.
3. Return/Destruction of Data: Upon termination or expiration of the contract, require the supplier to securely return or destroy all client data in its possession, and provide a certification of destruction.
4. Indemnification and Liability: Include strong indemnification and uncapped liability for the supplier for breaches of its security and privacy obligations, or losses arising from security incidents.
5. Insurance: Require the supplier to carry sufficient cyber liability insurance to cover potential losses from security breaches. Consider requiring the client to be named as an additional insured.
6. Training and Awareness: Ensure the MSA and/or SOW mandates regular security and privacy training for supplier personnel with access to client data or systems.

In addition, work closely with your information security and data privacy teams to assess and monitor supplier risk on an ongoing basis outside of the contract. Conduct regular business reviews focused on security KPIs and initiatives.

No contract can fully eliminate third party security risk, but a robust MSA and SOW can go a long way in establishing clear expectations, accountability, and risk allocation. The key is customizing the contract terms to fit the specific risk profile of the engagement based on the sensitivity of the data, the nature of the services, and the maturity of the supplier.

How do I handle IP ownership and licensing in an MSA or SOW?

Intellectual property (IP) rights are a critical issue to address in MSAs and SOWs, as clarity on ownership and licensing can prevent costly disputes down the road. The appropriate approach will depend on factors like the nature of the services, the preexisting IP each party brings, and the strategic value of the developed IP. Here’s a framework for handling IP in your contracts:

1. Background IP: Start by clearly defining any preexisting IP that each party owns and brings to the relationship (“Background IP”). Common examples include the service provider’s proprietary tools, methodologies, and platforms, and the client’s proprietary data, content, and branding.

In the MSA/SOW, specify that each party retains sole ownership of its respective Background IP. Then grant the other party a limited license to use the Background IP solely as needed for the services during the contract term. Key license terms to spell out include:

• Scope of use (e.g. internal only, non-transferable)
• Sublicensing rights (if any)
• License fees or royalties (if any)
• Attribution or non-disclosure requirements

1. Foreground IP: Next, address ownership and licensing of any new IP created under the contract (“Foreground IP”), such as deliverables, work product, and any custom developments or modifications. There are a few common approaches:

• Client Ownership: The most protective approach for clients is to specify that the client exclusively owns all Foreground IP, often through an upfront “work made for hire” provision and/or a backup assignment. The service provider may still use its preexisting IP or generalized knowledge to create the Foreground IP, but would only retain a license to that Background IP, not the Foreground IP itself.
• Joint Ownership: In some cases, the parties may agree to jointly own some or all of the Foreground IP. This is most common where both parties are actively involved in development and the IP has stand-alone value to both. However, joint ownership can raise tricky issues around enforcement, licensing, and commercialization, so the rights and responsibilities of each joint owner need to be clearly delineated.
• Service Provider Ownership: In situations where the Foreground IP builds extensively on the service provider’s preexisting IP or will be reused across clients, the service provider may push to retain ownership. Here, the key for the client is ensuring it receives a sufficiently broad license to use the Foreground IP for its business needs (e.g. perpetual, irrevocable, worldwide, sublicensable). The license may also include exclusivity for a period of time.

1. Third Party IP: Consider any third party IP that may be incorporated into the deliverables or services, such as open source software or stock content. The MSA/SOW should specify:

• Which party is responsible for selecting and licensing third party IP
• Minimum terms of third party licenses (e.g. scope, duration, Ts & Cs)
• Obligations to comply with third party license terms
• Processes for scanning and tracking third party components and their license terms

1. Employee/Contractor IP: Ensure the MSA/SOW requires each party to have appropriate agreements in place with its employees and contractors to secure ownership or licenses to any IP they create. No one wants their carefully crafted IP clauses undone by a rogue consultant.
2. Residuals: Service providers often insist on a “residuals” clause allowing them to freely use any generalized ideas, know-how, and learnings from the engagement that are retained in the unaided memories of their personnel. While a well-crafted residuals clause can be acceptable, clients should push back on overly broad language that could allow reuse of their specific confidential information or IP.
3. Open Source: If the Foreground IP will incorporate any open source code, additional considerations apply to ensure compliance with open source license terms. The agreement should require the service provider to:

• Obtain client approval for any open source use
• Use only client-approved open source licenses (ideally permissive ones like MIT and Apache)
• Deliver the open source code, along with all required notices, attribution, and license terms
• Warrant against “copyleft” contamination of proprietary code
• Indemnify the client for open source related claims

Throughout, think carefully about the most equitable and pragmatic allocation of IP ownership and licensing based on each party’s strategic interests and contributions. A draconian approach in either direction is more likely to prolong negotiations and erode trust.

The goal is a balanced approach that protects the client’s core IP assets and freedom to operate, while still enabling the service provider to effectively leverage its preexisting IP and generalized expertise. When in doubt, spell it out – ambiguity is the enemy when it comes to IP. And don’t hesitate to bring in specialized IP counsel for complex situations involving high-value IP.

What should be included in a Termination clause in an MSA or SOW?

The Termination clause is a critical component of any MSA or SOW, as it governs the parties’ rights and obligations in the event of an early end to the contract. A well-drafted clause can provide a clear roadmap for navigating a breakup, while a poorly drafted one can lead to costly disputes and business disruption. Here are the key elements to consider:

1. Termination Triggers: Specify the events or circumstances that would allow one or both parties to terminate the agreement early, such as:

• Material breach (failure to fulfill a core obligation)
• Insolvency or bankruptcy
• Change of control
• Regulatory changes or legal compliance issues
• Persistent failure to meet SLAs or quality standards
• Convenience (without cause) – typically for longer term contracts

For cause termination rights, consider a cure period to give the breaching party a chance to fix the issue before termination takes effect. The cure period may vary based on the type and severity of breach.

2. Termination Process: Detail the mechanics of how a party can exercise a termination right, including:

• Required notice period (e.g. 30, 60, 90 days)
• Method of notice delivery (e.g. written, email, certified mail)
• Effective date of termination
• Partial termination rights (e.g. option to terminate just an SOW vs. the entire MSA)
• Any termination fees or wind-down costs payable

2. Transition Assistance: One of the most important parts of the Termination clause is specifying the service provider’s obligations to cooperate in smoothly transitioning the services to the client or a successor provider. Key transition provisions include:

• Scope and duration of transition services (e.g. knowledge transfer, parallel operations)
• Fees for transition services (may be different than regular fees)
• Return or destruction of client data and materials
• Transfer or license of any necessary IP
• Non-interference with successor provider
• Continued compliance with confidentiality, security, and other key obligations during transition

The goal is to mitigate the risk of service disruption and ensure the client can smoothly resume operations post-termination.

4. Survival: Identify any rights or obligations that will continue after termination or expiration of the agreement, such as:

• Confidentiality and data protection
• IP ownership and licensing
• Warranty and indemnity
• Limitations of liability
• Governing law and dispute resolution
• Any post-termination payment or delivery obligations

4. Effect of Termination: Clearly state the consequences of termination, including:

• Cessation of service delivery and work in progress
• Acceleration of outstanding fees
• Refund of prepaid fees (if applicable)
• Mutual waiver of further liability or obligations (beyond those that survive)

4. Suspension Rights: In some cases, a service provider may insist on the right to temporarily suspend services for certain triggers (like non-payment) prior to a full termination. If agreeing to suspension rights, the client should ensure:

• Advance notice requirements
• Strict limits on suspension triggers
• Maximum duration of suspensions
• Prompt resumption of services upon cure
• Service level relief and credits during suspensions

4. Step-in Rights: For mission critical services, consider negotiating step-in rights that would allow the client (or its designee) to temporarily assume control of the services if the provider is unable or unwilling to perform. Step-in rights can be complex, so specify clear triggers, processes, and liability protections.
5. Damages: Address whether either party will have a right to damages for early termination, such as:

• Actual damages for termination due to breach (subject to contractual caps and exclusions)
• Liquidated damages or termination fees for convenience termination (should be a fair estimate of actual costs)
• Exclusion of consequential or indirect damages

By carefully delineating these termination provisions upfront, parties can reduce uncertainty and pave a smoother path if the relationship does come to an early end. That said, the termination clause shouldn’t be a substitute for rigorous partner selection and active relationship management.

The best practice is to strike a reasonable balance between maximizing flexibility and mitigating risk. No client wants to feel forever trapped in an underperforming contract, while no service provider wants to face hair-trigger exits after investing in the relationship. Open communication, realistic expectations, and a bit of good faith on both sides can go a long way. And, of course, always hope for the best, but plan for the worst.

How can I ensure business continuity and disaster recovery with an external service provider?

Ensuring business continuity and disaster recovery (BC/DR) is a critical consideration when outsourcing services to a third party provider. Any disruption in the provider’s operations could have severe impacts on your own business, so it’s essential to proactively address BC/DR in your MSA and SOWs. Here’s how:

1. BC/DR Requirements: Start by clearly defining your BC/DR requirements in the contract, such as:

• Recovery Time Objectives (RTO) – how quickly services must be restored after an outage
• Recovery Point Objectives (RPO) – the max allowable data loss or time between data backups
• Minimum levels of service to be maintained during a disruptive event
• Specific BC/DR risks or scenarios to be addressed (e.g. natural disasters, cyberattacks, pandemics)

The requirements should align with your own organization’s BC/DR strategy and risk appetite. Consider conducting a Business Impact Analysis (BIA) to identify the most critical services and dependencies.

2. BC/DR Plans: Require the service provider to maintain and regularly update formal BC/DR plans that detail how it will meet your specified requirements. The plans should cover areas like:

• Backup and recovery procedures for data, applications, and infrastructure
• Alternative work arrangements and resource redundancy
• Communication protocols and contact trees
• Detailed incident response and escalation procedures

Ask to review the provider’s plans upfront, and require periodic updates and re-review. The plans should comply with relevant industry standards like ISO 22301.

3. Testing and Exercising: It’s not enough to just have BC/DR plans on paper – they need to be regularly tested and exercised to ensure effectiveness. Require the provider to:

• Conduct regular BC/DR testing (e.g. annually)
• Use realistic scenarios and objective success criteria
• Involve key client stakeholders in tests
• Document and promptly remediate any gaps or issues identified

Consider including a right to observe or participate in the provider’s BC/DR exercises.

4. Monitoring and Reporting: Ensure the MSA and/or SOW includes robust monitoring and reporting requirements around BC/DR, such as:

• Regular reporting on BC/DR metrics (e.g. backup success rates, test results)
• Prompt notification of any actual or suspected BC/DR events or incidents
• Detailed post-incident reviews and corrective action plans
• Client access to relevant monitoring tools or dashboards

4. Staffing and Expertise: Verify that the provider has dedicated, qualified BC/DR staff and expertise. Require background checks and regular training for key personnel.
5. Subcontractor Flow-Down: If the provider uses subcontractors or cloud services, ensure adequate BC/DR requirements and accountabilities are flowed down to those entities as well.
6. Financial Resilience: BC/DR is as much about financial resilience as operational resilience. Do due diligence on the provider’s financial stability, insurance coverage, and ability to weather prolonged disruptions.
7. Exit Planning: Ensure the MSA and/or SOW includes provisions for transitioning services back in-house or to another provider if the original provider experiences an extended BC/DR event. This should include:

• Detailed knowledge transfer and documentation
• Robust data backups and portability
• Licenses or rights to use any necessary tools or IP
• Participation of the incumbent provider’s BC/DR staff

4. Incentives and Penalties: Consider building in contractual incentives (like performance bonuses) for meeting BC/DR objectives, and penalties (like service credits or termination rights) for falling short.
5. Collaborative Planning: Finally, treat BC/DR planning as an ongoing, collaborative process, not a one-time contract negotiation. Schedule regular meetings with the provider to review plans, share lessons learned, and adapt to changing risks and needs.

Remember, no amount of contractual requirements can fully eliminate BC/DR risk – but they can ensure alignment on key requirements, drive provider accountability, and give you crucial leverage if disruptions do occur.

The key is striking the right balance between risk mitigation and operational feasibility. You want a provider who is committed to resilience, but not one who will pass through exorbitant costs or complexity. Aim for requirements that are stringent but achievable, with clear metrics and consequences.

Ultimately, the goal is not just to have a great contract, but to have a true partner in business continuity. Invest the time upfront to select a provider with a culture of resilience, robust practices, and skin in the game. A strong MSA and SOW is the foundation, but it’s that alignment and collaboration that will carry you through any disruptions.

How do I ensure knowledge transfer and prevent vendor lock-in with my service providers?

Effective knowledge transfer and avoiding vendor lock-in are critical considerations in any outsourcing relationship. You want to be able to leverage the specialized expertise of your service providers, but not at the cost of becoming overly dependent on them. The key is building proactive mechanisms into your MSA and SOWs to ensure a regular flow of knowledge and preserve your ability to switch providers if needed. Here’s how:

1. Detailed Documentation: Require the service provider to maintain comprehensive, up-to-date documentation of the services, deliverables, and underlying processes. This should include:

• Technical specifications and architecture diagrams
• Operational procedures and runbooks
• User manuals and training materials
• Data dictionaries and schemas
• Code repositories and version control

Specify the required format, content, and frequency of documentation updates. Ensure all documentation will be owned by you or licensed for your unrestricted use.

2. Knowledge Transfer Sessions: Schedule regular knowledge transfer sessions where the provider’s experts train and educate your team on key aspects of the services. This could include:

• Technical deep dives on the provider’s tools and methodologies
• Shadowing or reverse-shadowing on key processes
• Joint troubleshooting or problem-solving exercises
• Q&A sessions with the provider’s subject matter experts

Specify the minimum frequency, duration, and content of these sessions in the SOW. Ensure they’re not just lectures, but hands-on opportunities for your team to learn by doing.

3. Skill Transfer Plans: For longer-term engagements, consider requiring the provider to develop and execute formal skill transfer plans to progressively build your team’s capabilities. This might involve:

• Assessing your team’s baseline skills and knowledge gaps
• Defining target skill profiles and learning objectives
• Developing custom training curricula and materials
• Providing on-the-job coaching and mentoring
• Measuring and reporting on skill acquisition progress

The goal is to have a structured, measurable process for internalizing the provider’s expertise over time.

4. Staff Rotation: Consider negotiating the ability to rotate your own staff into the provider’s delivery teams for periods of time. This allows your team to learn firsthand from the provider’s experts and bring that knowledge back in-house.
5. Exit Planning: Ensure the MSA and/or SOW includes robust provisions for knowledge transfer upon expiration or termination, such as:

• Extended transition periods for shadowing and handover
• Turnover of all documentation, data, and work-in-progress
• Access to the provider’s key SMEs for questions and assistance
• Licenses or rights to continue using the provider’s IP or tools (if applicable)

By baking knowledge transfer into the exit plan upfront, you avoid scrambling to capture critical info on the way out the door.

6. Modular Architecture: Where possible, push for a modular, loosely-coupled architecture that minimizes dependencies on the provider’s proprietary tech stack. Use open standards and APIs to enable easier switching between providers.
7. Data Portability: Ensure your data is portable and not locked into the provider’s systems. Require data to be stored in non-proprietary formats and specify your rights to regularly export data for your own use.
8. Source Code Escrow: For custom-developed software, consider using a source code escrow service. The provider deposits the code with a neutral third party, and you gain access if predefined trigger events occur (like the provider going bankrupt).
9. Multi-Vendor Strategy: Consider using multiple providers for different aspects of the service, rather than a single turnkey provider. This reduces over-reliance on any one vendor and allows you to mix and match best-of-breed capabilities.
10. Continuous Improvement: Finally, make knowledge transfer and vendor lock-in avoidance a regular agenda item in your service governance meetings. Continuously assess your level of dependency, identify key person risks, and brainstorm ways to further internalize knowledge.

The goal is not necessarily to eliminate the need for outside expertise altogether – after all, that’s often why you engaged a service provider in the first place. Rather, it’s about striking a healthy balance between leveraging the provider’s knowledge and building your own in-house competencies.

The key is to make knowledge transfer a deliberate, ongoing process rather than an afterthought. By weaving it into the very fabric of the relationship – from contracting to delivery to exit – you can tap into the provider’s smarts without sacrificing your own long-term agility and self-sufficiency. It takes work, but it’s worth it to avoid waking up one day to find your business wholly beholden to a provider you no longer want or need.

What should I consider when engaging service providers in different countries?

Engaging service providers in different countries can offer significant benefits – like access to specialized skills, lower costs, and round-the-clock coverage – but it also introduces added complexity and risk. From navigating unfamiliar legal systems to bridging cultural divides, there’s a lot to consider when crafting an international MSA or SOW. Here are some key things to keep in mind:

1. Choice of Law and Jurisdiction: One of the first things to nail down is which country’s laws will govern the contract and where any disputes will be resolved. Key considerations include:

• Enforceability of contract terms under local law
• Alignment with your organization’s risk profile and preferred legal venue
• Practical ability to pursue legal action or enforcement in the provider’s jurisdiction
• Potential home court advantage for the provider

Where possible, push for your own country’s laws and courts. If you must accept the provider’s, ensure you understand any material differences or risks.

2. Language and Translations: If the provider’s team primarily speaks a different language, consider whether to draft the contract in that language or provide an official translation. Key things to keep in mind:

• Ensuring consistency and clarity of terms across language versions
• Specifying which version controls in case of conflicts
• Accommodating local language requirements (some countries mandate contracts in the local language)
• Vetting translators for subject-matter expertise and familiarity with legal/technical jargon

Even if the contract remains in your language, consider providing translations of key exhibits or documents to avoid misunderstandings.

3. Cultural Differences: Don’t underestimate the impact of cultural differences on contract negotiation and performance. Things to be aware of include:

• Communication styles (direct vs. indirect, formal vs. informal)
• Decision-making processes (consensus-based vs. top-down, fast vs. slow)
• Attitudes towards hierarchy, authority, and conflict
• Expectations around relationship-building and social interaction
• Different norms around punctuality, deadlines, and responsiveness

Take time to learn about the provider’s culture and adapt your approach accordingly. Consider engaging local liaisons or cultural coaches.

4. Time Zones: If the provider is in a significantly different time zone, think through the operational impacts and account for them in the contract. For example:

• Clarify expectations around business hours, response times, and issue resolution
• Specify which party’s time zone governs deadlines and milestones
• Build in overlapping “core hours” for real-time collaboration
• Address any overtime or off-hours support requirements

4. Currency and Payments: Clarify which currency payments will be made in and how exchange rate fluctuations will be handled. Also check on any local requirements or restrictions on cross-border payments.
5. Taxes and Compliance: Engage tax and legal experts to navigate the complex web of international tax and compliance issues, such as:

• Withholding taxes and treaty implications
• VAT/GST and other indirect taxes
• Permanent establishment risk
• Local entity or registration requirements
• Labor law, benefits, and social security compliance
• Export control and sanctions
• Antibribery/anticorruption (FCPA, UK Bribery Act)
• Data privacy and cross-border data transfers (GDPR, CCPA)

Specify which party is responsible for which compliance obligations and indemnify accordingly.

7. Intellectual Property: IP laws and norms can vary widely by country. Key things to consider:

• Strength of IP protections and enforcement in the provider’s country
• Local requirements for IP assignments or license grants
• Moral rights and other inalienable author’s rights
• Open source and third party IP risks
• Industrial design and database rights

7. Data Security and Privacy: Ensure the contract has robust data safeguards that comply with both your own country’s laws and the provider’s. Pay special attention to:

• Cross-border data transfer restrictions
• Localization requirements (e.g. data residency)
• Differing definitions and standards for personal data, consent, and breach notification
• Subcontractor flow-down and onward transfer
• Government surveillance and access laws

7. Business Continuity and Disaster Recovery: Think through any unique BC/DR risks or requirements in the provider’s locale, such as:

• Geopolitical instability or unrest
• Infrastructure reliability (e.g. power, telecom)
• Natural disaster frequency and severity
• Pandemic preparedness
• Distance from critical people and assets

7. Exit Planning: Spend extra time on termination assistance and exit planning clauses to mitigate the added complexity of disentangling from an international provider. Key things to nail down:

• Secure access to facilities, systems, and data during transition
• Ability to hire or solicit the provider’s staff
• Physical and electronic delivery of materials
• Tail period for wind-down and knowledge transfer
• Governing law and venue for post-termination disputes

Throughout, it’s about proactively identifying and mitigating the unique risks that come with crossing borders. Engage experienced global counsel and be prepared to invest extra time in structuring the deal.

The goal is not to eliminate every country-specific nuance or contingency – that’s usually impossible – but rather to surface the material issues and put appropriate contractual and operational safeguards in place.

A little upfront investment in crafting a globally-minded MSA or SOW can pay big dividends in smoother, more successful international engagements. But even the best contract is no substitute for active, eyes-wide-open global relationship management. The key is marrying robust legal terms with ongoing cultural sensitivity, operational flexibility, and a spirit of transparent, good faith collaboration. That’s the recipe for making the world your service provider oyster.

How can I use benchmarking and continuous improvement clauses strategically?

Benchmarking and continuous improvement clauses are powerful tools for ensuring your service provider relationships stay competitive and innovative over time. By regularly assessing provider performance against industry peers and pushing for ongoing optimization, you can drive better outcomes, control costs, and future-proof your partnerships. Here are some tips for using these clauses strategically:

1. Define Clear Benchmarking Rights: Ensure your MSA or SOW explicitly grants you the right to benchmark the provider’s pricing and/or performance against the market. Key things to specify:

• Scope of benchmarking (e.g. price, SLAs, quality, customer sat)
• Frequency of benchmarking (e.g. annually, bi-annually)
• Benchmarking methodology and data sources
• Qualifications and independence of benchmarker
• Provider obligations to cooperate and provide data

Be reasonable in scope and frequency to avoid undue burden or cost on the provider.

2. Set Objective Benchmark Criteria: To ensure a fair, apples-to-apples comparison, clearly define the criteria for selecting benchmark peers, such as:

• Industry and geographic relevance
• Similarity of services scope and complexity
• Scale of operations
• Comparable contracting terms (e.g. duration, liability caps)
• Overall market representativeness

Avoid cherry-picking criteria that artificially skew the results.

3. Agree on Consequences: Specify what happens if the benchmarking shows the provider is materially out of line with the market. Common outcomes include:

• Automatic price reductions to match benchmark levels
• Requirement to submit corrective action plan
• Triggers for contract renegotiation
• Termination rights for chronic underperformance

Aim for objective, data-driven thresholds that drive improvement without being punitive.

4. Use Benchmarking Strategically: Treat benchmarking as a tool for strategic partnership, not just a cost-cutting cudgel. Use the results to:

• Identify areas for joint innovation or process re-engineering
• Re-prioritize investments based on industry trends
• Right-size service levels and pricing based on business criticality
• Drive more transparent, data-driven dialogues

Share results (good and bad) openly with the provider and collaborate on win-win solutions.

5. Hardwire Continuous Improvement: In addition to benchmarking, include an affirmative obligation for the provider to continuously improve the services over time. Key elements to touch on:

• Frequency and format of improvement recommendations (e.g. quarterly reviews)
• Metrics and methodology for measuring improvement
• Approval process for proposed changes
• Gain-sharing incentives for successful improvements
• Consequences for failing to deliver improvements

The goal is to make optimization an ongoing, iterative process, not a one-off event.

6. Align Incentives: Structure the deal to reward the behaviors and outcomes you want to see. Consider mechanisms like:

• Tying a portion of fees to realized improvements or savings
• Offering innovation or transformation funds for strategic initiatives
• Using gainsharing or value-based pricing models
• Providing a “prize purse” for hitting stretch improvement targets

Motivate the provider to bring their A-game to the continuous improvement table.

7. Foster a Culture of Innovation: Clauses alone won’t drive real continuous improvement – it takes a partnership mindset and culture of innovation. Practically, this means:

• Empowering joint innovation teams and communities of practice
• Protecting the provider’s IP rights in new innovations
• Testing new ideas through proofs of concept and pilots
• Celebrating and scaling successful improvements
• Learning from and iterating on failed attempts

Make it safe and rewarding for both parties to experiment and learn together.

8. Leverage Provider Expertise: Remember, your provider likely serves many clients facing similar challenges. Use benchmarking and continuous improvement discussions as an opportunity to:

• Tap into the provider’s cross-client insights and best practices
• Leverage the provider’s investments in R&D and innovation labs
• Influence the provider’s product roadmap and investment priorities
• Collaborate with other clients on shared improvement initiatives

You’re not just buying a service, you’re buying access to a wealth of knowledge and experience.

9. Make it a Two-Way Street: While it’s important to hold your provider accountable, recognize that you play a key role in enabling (or inhibiting) continuous improvement. Consider your own obligations to:

• Provide clear, timely feedback and requirements
• Dedicate resources and SMEs to improvement initiatives
• Remove bureaucratic obstacles and red tape
• Encourage a culture of calculated risk-taking

Improvement is a team sport – be the kind of client you’d want to have.

10. Use Benchmarking Judiciously: Finally, a word of caution: benchmarking is a powerful tool, but it’s not a panacea. Used too frequently or punitively, it can erode trust and goodwill. Some key watch-outs:

• Ensure benchmarking scope and methodology are truly fair and representative
• Be transparent about objectives and use cases upfront
• Share results constructively, not combatively
• Use benchmarking to inform, not dictate, decision-making
• Balance quantitative metrics with qualitative relationship factors

At the end of the day, benchmarking and continuous improvement are means to an end – a more strategic, value-driven partnership. By embedding them thoughtfully into your MSA or SOW and wielding them judiciously in practice, you can keep your provider relationships fresh, competitive, and innovative for the long haul.

Just remember – it’s not about squeezing your provider for every last penny or SLA point, but about unlocking shared value and pushing each other to be your best. Approach benchmarking and continuous improvement with a spirit of transparency, fairness, and mutual benefit, and you’ll be amazed at the results you can achieve together.

What are some common pricing models for service contracts and when to use them?

Pricing is one of the most critical – and often contentious – aspects of any service contract. The right pricing model can drive alignment, innovation, and value realization, while the wrong one can lead to perverse incentives, cost overruns, and relationship strain. Here’s a rundown of some common pricing models and when to use them:

1. Time and Materials (T&M):

• What it is: The provider bills for actual time and materials consumed, usually at pre-negotiated hourly rates and pass-through costs.
• When to use it:
• Projects with high uncertainty or variability in scope
• Early-stage work where requirements are still being defined
• Highly time-sensitive or urgent work
• Pros: Flexibility, simplicity, pay-as-you-go
• Cons: Lack of cost predictability, potential for over-consumption, low incentives for efficiency

1. Fixed Price:

• What it is: A single, all-inclusive price for a well-defined scope of work, regardless of actual time or costs incurred.
• When to use it:
• Stable, predictable projects with clear requirements
• Commodity or off-the-shelf services
• When budget certainty is paramount
• Pros: Cost predictability, incentives for provider efficiency, simpler invoicing
• Cons: Lack of flexibility for scope changes, higher upfront pricing, adversarial change negotiations

1. Milestone/Deliverable-Based:

• What it is: Prices are tied to achieving specific milestones or acceptance of defined deliverables.
• When to use it:
• Projects with clear, measurable outcomes or value drivers
• When you want to align payment with tangible progress or quality
• As a way to phase or gate longer-term work
• Pros: Focus on outcomes vs. inputs, incentives for timely delivery, natural checkpoints and offramps
• Cons: Potential for disputes over acceptance criteria, cash flow challenges for provider

1. Outcome/Value-Based:

• What it is: Prices are linked to achieving defined business outcomes or value realization, often with variable upside/downside.
• When to use it:
• Transformation or innovation initiatives with clear ROI
• When you want to share risk/reward with provider
• Mature relationships with high degrees of trust and collaboration
• Pros: Alignment on outcomes, incentives for value creation, win-win orientation
• Cons: Difficulty defining and measuring outcomes, higher provider risk premium, potential for gaming

1. Subscription/Consumption-Based:

• What it is: A recurring fee for ongoing access to a service or pool of resources, often based on usage volume or tier.
• When to use it:
• Steady-state or continuous services with predictable consumption
• When you want to match costs to usage or demand
• Managed services or XaaS models
• Pros: Predictable spend, scalability/elasticity, potential volume discounts
• Cons: Lack of long-term price certainty, potential for lock-in, hidden costs (e.g. add-ons, overages)

1. Gainsharing:

• What it is: Provider shares in a percentage of realized cost savings, revenue uplift, or other financial gains from the engagement.
• When to use it:
• Cost reduction or revenue enhancement initiatives with clear baselines
• When you want to incentivize provider to drive incremental value
• As an overlay on other pricing models to drive continuous improvement
• Pros: Alignment on financial outcomes, self-funding improvements, upside potential for both parties
• Cons: Baselining and measurement challenges, potential short-termism, misaligned incentives (e.g. excessive cost-cutting)

1. Tiered/Volume-Based:

• What it is: Prices vary based on hitting predefined volume tiers or thresholds, often with discounts at higher tiers.
• When to use it:
• Services with high degrees of scale or volume leverage
• When you want to incentivize provider to drive adoption or consumption
• As a way to share scale efficiencies or economies of skill
• Pros: Alignment with growth objectives, automatic volume discounts, rewards for loyalty/tenure
• Cons: Potential for “lock-in” at higher tiers, difficulty forecasting or committing volumes

These models are not mutually exclusive, and in practice most service contracts use a hybrid of two or more. For example, you might use a fixed price for the core base services, T&M for variable ad-hoc work, and gain-sharing for measurable cost savings or innovations.

The key is to align the pricing model with the nature of the work, the maturity of the relationship, and the desired behaviors and outcomes. Some key things to consider:

• What are the core objectives and value drivers for the engagement?
• How predictable and stable are the requirements and scope?
• How much flexibility and scalability is needed?
• What is the risk/reward profile and tolerance for each party?
• What incentives and behaviors will the model drive?
• How easy will it be to administer and govern?
• What is market practice for similar engagements?

Equally important is building in mechanisms to revisit and evolve the pricing model over time as needs and circumstances change. Consider things like:

• Periodic price or volume re-openers
• Benchmarking or indexing to market rates
• Continuous improvement and gainsharing opportunities
• Shared investment or co-innovation funds
• Productivity or automation credits

Ultimately, pricing should be a means to drive a transparent, trust-based partnership, not a zero-sum game. By structuring a fit-for-purpose model and maintaining open, good-faith dialogue, you can ensure pricing remains a win-win value driver over the life of the deal.

What’s the difference between a warranty and an indemnity? When should I ask for each?

Warranties and indemnities are both common risk allocation tools in service contracts, but they serve distinct purposes and have different remedies. Here’s a quick breakdown:

Warranties:

• What it is: A contractual assurance or promise that certain facts or conditions are true or will happen. Common examples include warranties that:
• Services will be performed in a professional and workmanlike manner
• Deliverables will materially conform to agreed specifications
• Work product won’t infringe third party IP rights
• Provider has necessary resources, skills, and rights to perform
• What happens if breached: If a warranty is breached, the injured party can:
• Demand the breach be cured (e.g. re-perform defective services)
• Seek damages for any direct losses caused by the breach
• Potentially terminate the contract for material breach
• When to use: Warranties are appropriate when:
• You want assurance of specific, important facts or outcomes
• The risk is somewhat in the provider’s control
• Potential damages are fairly quantifiable
• Other notes:
• Warranties are often limited in time (e.g. 90 days post-acceptance) and scope (e.g. material conformance to specs)
• Remedy periods for curing breaches are common (e.g. 30 days)
• Warranties typically exclude matters caused by the other party’s actions or inactions

Indemnities:

• What it is: A contractual obligation to defend against and/or compensate for certain third-party claims or losses. Common examples include indemnities for:
• Third party IP infringement claims
• Breaches of confidentiality or data security obligations
• Bodily injury or property damage caused by negligence
• Violation of laws or regulations
• Gross negligence or willful misconduct
• What happens if triggered: If an indemnity is triggered, the indemnifying party must:
• Defend against the third party claim (e.g. with counsel)
• Pay any settlements or judgments
• Compensate the indemnified party for related losses
• When to use: Indemnities are appropriate when:
• The risk is largely out of your control
• Potential liability or damages to third parties is hard to quantify or could be catastrophic
• You want to assign responsibility for compliance or violations
• Other notes:
• Indemnities often have detailed procedures for notice, control of defense, and approval of settlements
• Exclusions for matters caused by indemnified party’s negligence or misconduct are common
• Indemnities are usually uncapped and can expose the provider to significant liability

So in essence:

• Warranties are about assuring performance and conformance to the contract. They’re two-party commitments that, if breached, typically give rise to the right to cure and claim direct damages.
• Indemnities are about shifting/allocating potential third party liability. They’re used to apportion responsibility between the parties for claims, losses or penalties to others.

Some key things to consider when deciding whether to ask for a warranty or indemnity:

• What specific risk are you trying to address? Is it performance-related or a third party exposure?
• How likely and severe is the risk? What’s the magnitude of potential liability or damages?
• How much control does each party have over the risk?
• What’s market practice for similar risks in comparable deals?
• What leverage do you have to negotiate the term?
• How might it impact the price or other deal terms?

In general, warranties are more common for performance-related risks, while indemnities are reserved for more serious third party exposures. But there’s no hard and fast rules – it all depends on the specific context and risk tolerances of the parties.

Some other tips:

• Be judicious and focus on the most material, impactful risks. If everything is warranted/indemnified, nothing is.
• Tailor the terms to the specific situation. Cookie cutter terms can miss key nuances or exposures.
• Consider pairing warranties with SLAs/service credits and indemnities with insurance/liability caps for a more balanced package.
• Think holistically about the interplay with other risk allocation terms like disclaimers, limitations of liability, and insurance.
• Align the breadth and duration of coverage with the risk profile. Not every term needs to be life-of-contract or unlimited.

Most importantly, warranties and indemnities are just backstops – they don’t prevent issues from happening and should be a last resort. The real key is picking the right partner, scoping the work properly, and actively managing risk throughout the engagement.

By strategically deploying warranties and indemnities as part of a holistically negotiated contract, you can help ensure a fair allocation of performance and third party risk. But like any risk mitigation tool, they’re only as good as the underlying relationship and governance. Approach them with an eye towards balance, reasonableness, and long-term partnership, not as blunt instruments of risk avoidance.

How can I use service credits effectively?

Service credits are a common remedy for service level agreement (SLA) breaches in IT and business process outsourcing contracts. In essence, they’re pre-agreed discounts on fees triggered when the provider fails to meet certain performance metrics. Used well, service credits can be an effective way to drive accountability, align incentives, and recoup some value for subpar service. But used poorly, they can lead to perverse incentives, contentious fights, and misaligned focus. Here are some tips for using service credits effectively:

1. Choose the right SLAs:

• Focus on a small set of SLAs that are truly critical to business outcomes. Trying to credit every possible metric dilutes focus and impact.
• Ensure SLAs are objectively measurable and within the provider’s reasonable control. Avoid SLAs that are too subjective, vague, or dependent on third parties.
• Set SLA thresholds at reasonable, market-aligned levels. If set too high, they can drive up costs or encourage sandbagging. If set too low, they lose teeth.

1. Size credits appropriately:

• Make credits painful enough to incentivize performance, but not so large as to be punitive or encourage gaming. A common range is 5-20% of the monthly fees for the affected service.
• Consider tiering credits based on severity and duration of misses. For example, a 10% credit for a Severity 1 incident, 5% for Severity 2, with multipliers for consecutive or chronic misses.
• Cap total credits at a meaningful but reasonable level, often 10-25% of monthly fees. Uncapped credits can create perverse incentives and put the provider at undue risk.

1. Allow earn-backs:

• Consider allowing the provider to “earn back” some or all of the credits if they cure the breach and hit the SLA for a certain period (e.g. 3 consecutive months).
• Earn-backs encourage providers to quickly remedy issues and get back on track, rather than giving up after a bad month.
• But be wary of overly generous earn-backs that effectively let chronic poor performance off the hook.

1. Escalate for repeat failures:

• Include escalating consequences for repeated or severe SLA breaches, beyond just credits. For example:
• Root cause analysis and remediation for 2 consecutive misses
• Mandatory improvement plan for 3 consecutive misses
• Termination right for 4+ consecutive misses
• This creates increasing urgency and accountability for endemic underperformance.

1. Pair with incentives:

• Consider balancing “penalty” service credits with positive incentives like bonus payments for exemplary performance.
• Incentives encourage providers to go above and beyond the minimum, rather than just avoiding misses.
• But be sure incentives are funded from a separate “bonus pool”, not a clawback of earned credits.

1. Make reporting transparent:

• Clearly define how SLAs will be measured and reported, including data sources, calculation formulas, and reporting frequency.
• Give yourself audit rights over the provider’s measurement and reporting tools and processes.
• Address how missing data or reporting failures will be handled (e.g. deemed misses).

1. Use constructively:

• Treat service credits as a tool for continuous improvement, not a weapon to beat up the provider.
• Use regular SLA reviews to collaboratively identify root causes, improvement opportunities, and investment needs.
• Consider pooling a portion of credits into a joint improvement or innovation fund.
• Don’t let the pursuit of credits override good-faith dialogue and partnership behaviors.

1. Revisit periodically:

• Recognize that business needs and market practices evolve over time. Don’t “set and forget” SLAs and credits.
• Include a mechanism to periodically review and adjust SLAs and credits based on changing priorities, performance data, and benchmarks.
• Consider “sunsetting” SLAs that are consistently met and adding new ones for emerging focus areas.

1. Don’t overly rely on credits:

• Remember, service credits are a cure, not a prevention. They shouldn’t be used to band-aid chronically poor performance or bad scope.
• No amount of credits can fully make up for the business impact of a botched payroll run or a crashed e-commerce site.
• Credits are a last resort – proactive communication, joint solutioning, and a trusted partnership should be the first lines of defense against poor service.

Ultimately, the goal of service credits is not to enrich one party at the expense of the other, but to fairly allocate risk and accountability in a way that drives the right behaviors and outcomes for both parties.

By taking a thoughtful, nuanced approach to structuring and operationalizing service credits, you can turn them from a blunt penalty into a powerful tool for aligning priorities, driving continuous improvement, and preserving a win-win partnership.

But like any other contractual provision, service credits only have so much power. They’re a lever, not a panacea, for complex service delivery challenges. The real magic happens in the day-to-day interactions, communications, and collaborative problem-solving between customer and provider. Approach service credits as a supplement to, not a substitute for, hands-on governance and a transparent, solutions-oriented mindset. That’s where the real money is.

How do I make sure the SLAs I’m signing up for are reasonable and achievable?

Crafting reasonable and achievable service level agreements (SLAs) is both an art and a science. Set the bar too high, and you risk constant misses, provider fatigue, and an adversarial relationship. Set it too low, and you lose the drive for continuous improvement and get less than you’re paying for. The sweet spot is SLAs that are rigorous enough to deliver meaningful value, but realistic enough to be consistently met (or exceeded) by a well-performing provider. Here are some tips for getting that balance right:

1. Benchmark against industry standards:

• Research industry standard SLAs for similar services, geographies, and firm sizes. Gartner, Forrester, and other analyst firms can be great resources.
• Benchmark against your peers who have outsourced similar services. Informal inquiries or formal market studies can provide valuable data points.
• But be sure to adjust for relevant differences in scope, scale, complexity, and risk profile. Not all benchmarks are created equal.

1. Baseline against current performance:

• Measure your current in-house or incumbent provider’s performance against the proposed SLAs. If there’s a big gap, dig into the drivers behind it.
• Consider whether the delta is due to factors that will change with the new provider (e.g. upgraded technology, streamlined processes) or structural constraints that will persist (e.g. data quality, upstream dependencies).
• Be wary of massive jumps in performance commitments from an incumbent provider at renewal time. If they weren’t hitting those numbers before, what’s really changed to enable it now?

1. Scenario plan:

• Pressure test the SLAs against realistic scenarios and use cases. How would they hold up under volume spikes, system outages, or business changes?
• Consider edge cases and failure modes. What’s the worst-case scenario if the SLA is missed? Is it catastrophic or just inconvenient?
• Model different thresholds and see how they impact cost, risk, and business outcomes. Don’t optimize for the 5% at the expense of the 95%.

1. Get multi-functional input:

• SLAs shouldn’t be set in a vacuum by Procurement or Legal. Engage IT, Security, Compliance, Business Ops, and other key stakeholders for their perspectives.
• Make sure to involve customer-facing teams who will feel the real-world impacts of missed SLAs. They can help ground the targets in operational reality.
• But also watch out for “squeaky wheels” who might push for unrealistic SLAs based on anecdotal pain points or a desire to look tough. Facilitate a balanced dialogue.

1. Understand the cost/risk trade-offs:

• Have an open conversation with the provider about the cost and risk implications of different SLA thresholds.
• Generally, higher SLAs will drive higher base fees (to cover additional resources and risk premiums) and stronger risk mitigations (like liability caps and exclusions).
• Look for the “knee in the curve” – the point at which incremental SLA improvements yield diminishing marginal returns or exponential risk. 80/20 rule often applies.

1. Focus on outcomes, not activities:

• SLAs should measure the things that truly matter to your business outcomes, not just how busy the provider is.
• For example, measure on-time payroll processing, not just time-to-resolve for payroll tickets. Measure application uptime, not just server availability.
• But be sure the outcomes are reasonably within the provider’s control. Holding them to end-to-end process measures they only partially influence can be demotivating.

1. Leave room for continuous improvement:

• SLAs should be a floor, not a ceiling. Don’t inadvertently create perverse incentives for the provider to “stop trying” once they hit the minimum.
• Consider building in a glide path for SLAs to automatically increase over the life of the contract as processes mature and efficiencies are realized.
• Use SLA data to jointly identify opportunities for process optimization, automation, and other innovations that can move the needle. SLAs are a starting point, not an end state.

1. Be judicious with zero tolerances:

• Think long and hard before agreeing to SLAs with zero tolerance for failure (e.g. 100% uptime). They can create astronomical risk premiums and perverse incentives.
• Zero tolerances may be appropriate for truly mission-critical, high-stakes processes (e.g. life safety systems). But for most business processes, some failures are inevitable (and survivable).
• Where zero tolerances are used, be sure to pair them with appropriate exceptions, liability caps, and other mitigations. No provider can absorb truly unbounded risk.

1. Keep it simple:

• It’s tempting to want to measure and SLA everything. Resist that urge. Focus on a small set of meaningful, measurable, and manageable metrics.
• Too many SLAs can be administratively burdensome, dilute focus, and create “measurement myopia”. Better to do a few things well than many things poorly.
• Also watch out for “watermelon” SLAs – green on the outside but red on the inside due to faulty math, hidden exclusions, or definitional vagaries. If it takes a PhD to calculate, it’s probably not a good metric.

1. Treat them as a living framework:

• SLAs should not be “set and forget”. Build in a cadence to regularly review performance data, reevaluate business needs, and recalibrate targets.
• Establish a transparent, objective process to “sunset” SLAs that are no longer relevant and to pilot new ones to address emerging focus areas.
• But avoid changing the SLAs so frequently that the provider can’t make informed resourcing and pricing decisions. Strike a balance between adaptability and predictability.

Finally, remember that SLAs are a means to an end – delivery of valuable services – not an end unto themselves. An SLA is not a substitute for picking the right partner, structuring a well-scoped deal, and investing in robust governance and relationship management.

The most effective SLAs are those that are co-developed by customer and provider as part of a transparent, strategically aligned partnership. They create a shared North Star – not a battlefield – for driving accountability, innovation, and continuous improvement. Approach them with rigor, yes, but also with reasonableness, flexibility, and a spirit of win-win.

If you can strike that balance, SLAs can be a powerful tool for locking in value and driving long-term success. But if you wield them as a blunt instrument of control and punishment, don’t be surprised if you get minimal compliance and maximum resentment in return. Like any other aspect of a complex services partnership, it’s all about alignment, moderation, and mutual skin in the game. Measure what matters, yes – but don’t let the metrics become the master. After all, you don’t drive a car by staring at the dashboard. Keep your eyes on the road – and your hands on the wheel of the relationship. That’s how you bring those SLAs to life in a meaningful, sustainable way.

What should I look for in a service provider’s business continuity and disaster recovery plans?

When evaluating a service provider’s business continuity and disaster recovery (BC/DR) plans, there are several key elements to look for:

1. Risk Assessment: The plans should be based on a thorough assessment of potential risks and their impact on the provider’s ability to deliver services. This includes things like natural disasters, cyber attacks, pandemics, utility outages, and supply chain disruptions.
2. Recovery Strategies: The plans should detail specific strategies for maintaining or recovering critical services during a disruption. This should cover areas like backup systems, alternative work locations, manual workarounds, and crisis communication protocols.
3. Recovery Metrics: Look for clear, measurable recovery objectives such as Recovery Time Objective (RTO) and Recovery Point Objective (RPO). RTO is the maximum tolerable duration of an outage, while RPO is the maximum tolerable amount of data loss. Ensure these align with your business requirements.
4. Testing and Exercising: The plans should be regularly tested through tabletop exercises, simulations, and live drills. Look for evidence of recent tests and their outcomes. Plans that look great on paper but are never tested may not hold up under real-world stress.
5. Continuous Improvement: There should be a process for incorporating lessons learned from tests and actual incidents into plan updates. Look for a culture of continuous improvement, not just “check the box” compliance.
6. Third Party Resilience: If the provider relies on subcontractors or other third parties, their BC/DR capabilities should also be assessed and factored into the planning. A chain is only as strong as its weakest link.
7. Geographic Resilience: Consider the geographic diversity and resilience of the provider’s operations. Are they vulnerable to localized disruptions? Do they have a geographically dispersed workforce and infrastructure?
8. Compliance: The plans should align with relevant industry standards and regulatory requirements, such as ISO 22301, NIST SP 800-34, or FFIEC BC Handbook.
9. Organizational Commitment: Look for evidence of strong executive sponsorship, dedicated resources, and a culture of resilience. BC/DR should be a strategic priority, not an afterthought.
10. Partnership Alignment: Ultimately, the provider’s BC/DR plans should align with and support your own organization’s resilience strategies. Look for a shared commitment to transparency, collaboration, and continuous improvement in the face of disruption.

Remember, no BC/DR plan is perfect, and no provider is immune to disruption. The goal is not to eliminate risk entirely, but to manage it effectively and bounce back quickly when disruptions do occur. By carefully evaluating a provider’s BC/DR capabilities upfront – and collaborating closely on resilience efforts throughout the relationship – you can help ensure continuity of critical services even amidst uncertainty and change.

How do I ensure data privacy and security compliance with my service providers?

In today’s data-driven, highly regulated business environment, ensuring data privacy and security compliance with your service providers is critical. A breach or violation by a provider can have severe reputational, financial, and legal consequences for your organization. Here are some key steps to manage third party data risk:

1. Due Diligence: Conduct thorough due diligence on the provider’s data privacy and security practices before signing a contract. This may include reviewing policies, procedures, and audit reports, conducting on-site assessments, and checking references.
2. Contractual Protections: Ensure the MSA and/or SOW includes robust data privacy and security provisions, such as:

• Compliance with relevant laws (e.g. GDPR, CCPA) and industry standards (e.g. ISO 27001, NIST CSF)
• Implementation of specific security controls (e.g. encryption, access management, monitoring)
• Prompt breach notification and response obligations
• Strict limitations on data use, sharing, and retention
• Audit and assessment rights
• Indemnification for data breaches or violations

1. Data Mapping: Map the flow of your organization’s data to and from the provider. Understand what data they will access, process, or store, and ensure appropriate safeguards are in place for each data type and jurisdiction.
2. Access Controls: Implement strict controls on provider access to your data and systems, such as:

• Least privilege access based on job roles
• Strong authentication and password policies
• Regular access reviews and prompt termination upon role changes
• Logging and monitoring of access activity

1. Vendor Management: Establish a formal third party risk management program to continuously monitor and assess the provider’s data privacy and security posture. This may include periodic audits, security assessments, and review of incident reports and remediation plans.
2. Training and Awareness: Ensure the provider’s staff receives regular training on data privacy and security best practices, and that a culture of data stewardship is promoted at all levels of the organization.
3. Incident Response: Have a well-defined, jointly exercised incident response plan that clarifies roles, responsibilities, and communication protocols in the event of a data breach or security incident.
4. Business Continuity: Ensure the provider has robust business continuity and disaster recovery plans in place to protect your data and maintain critical services in the face of disruptions.
5. Exit Planning: Have a clear plan for securing, transitioning, and/or destroying your data when the contract ends. This should include requirements for data return/deletion, format, and verification.
6. Ongoing Collaboration: Treat data privacy and security as an ongoing, collaborative effort, not a one-time checkbox. Regularly review compliance posture, share threat intelligence, and jointly explore opportunities to strengthen data safeguards.

Remember, while contracts and controls are important, they’re not a substitute for a transparent, trust-based partnership. The most effective data privacy and security compliance happens when both parties are committed to open communication, continuous improvement, and shared accountability.

Approach data risk management not as an adversarial “gotcha” exercise, but as an opportunity to align priorities, share best practices, and work together to protect your organization’s most valuable assets. With the right combination of upfront diligence, ongoing governance, and a spirit of true partnership, you can harness the power of third party data collaboration while minimizing risk and ensuring compliance. It’s a balancing act, to be sure – but one that’s well worth the effort in today’s data-driven world.

How can I build flexibility into my service contracts to accommodate changing business needs?

In today’s fast-paced, ever-changing business environment, flexibility is key to staying competitive and adaptable. But all too often, service contracts can become rigid, inflexible anchors that hinder rather than enable agility. The key is to build in the right mix of contractual and relational flexibility from the start. Here are some tips:

1. Modular Scope: Structure the contract scope in a modular, divisible way that allows for easy addition, deletion, or modification of individual service components. Use separate SOWs, service towers, or pricing schedules that can be adjusted independently without re-opening the whole contract.
2. Flexible Pricing: Avoid pricing models that lock you into a fixed scope or volume commitments. Instead, consider variable pricing based on consumption (e.g. per transaction, per user) or value delivered (e.g. gainsharing, outcome-based). Build in volume tiers, price ramps, or other mechanisms to align pricing with changing demand.
3. Scalability and Elasticity: Ensure the contract allows for rapid scaling up or down of capacity and resources in response to business fluctuations. This may include provisions for burst capacity, on-demand services, or variable staffing models.
4. Change Control: Include a clear, streamlined change control process that enables timely, bilateral adjustment of scope, SLAs, pricing, or other terms in response to evolving needs. Avoid overly burdensome approval thresholds or unilateral change restrictions.
5. Innovation and Transformation: Bake in mechanisms for continuous improvement and innovation over the life of the contract. This could include innovation roadmaps, joint R&D investments, gain-sharing incentives, or pilot programs for new technologies or processes.
6. Termination and Exit: While no one likes to think about the end at the beginning, having a clear, flexible exit strategy is critical for long-term agility. Ensure you have the right to partially or fully terminate for convenience with reasonable notice periods and wind-down support. Avoid punitive termination charges, exclusive lock-ins, or proprietary technology traps.
7. Multi-Vendor Compatibility: Where possible, structure the contract to enable multi-vendor delivery and avoid over-reliance on a single provider. Use open standards, APIs, and modular architectures that allow for easy integration and substitution of vendor components.
8. Governance and Relationship: No matter how well-crafted the contract, true flexibility comes from a governance model and relationship dynamic that prioritizes transparency, collaboration, and joint problem-solving. Establish regular touch points, escalation channels, and relationship “health checks” to surface and address changing needs in a spirit of partnership.
9. Business-Aligned SLAs: Ensure SLAs and performance metrics are aligned with current business outcomes, not just operational outputs. Build in flexibility to adjust SLAs as business priorities evolve, and use balanced scorecards to measure end-to-end value, not just siloed efficiency.
10. Proactive Demand Management: Flexibility is not just about reacting to change, but proactively shaping demand to optimize value. Collaborate with the provider to align demand management strategies, leverage consumption analytics, and drive user behavior changes that maximize efficiency and agility.

Ultimately, the key to flexibility is not trying to predict and contract for every possible future scenario, but rather building a foundation of trust, transparency, and shared incentives that enables continuous adaptation and value optimization.

Approach flexibility not as a one-time contractual exercise, but as an ongoing, iterative process of alignment, experimentation, and learning. Embrace a culture of “co-creation” with your provider, where change is seen not as a threat, but as an opportunity for mutual growth and innovation.

In the end, a flexible contract is only as good as the flexible mindset and behaviors that animate it. By combining contractual agility with a relational dynamic of openness, empathy, and collaborative problem-solving, you can build service partnerships that don’t just weather change, but thrive on it. That’s the true essence of flexibility – not just bending without breaking, but learning to dance gracefully together in the winds of change.