Technology procurement is high on the agenda for any business wishing to stay competitive. Master Services Agreements (MSA s) can be an excellent tool for efficient and cost effective implementation and management of technology procurements. This article outlines the main features and benefits of MSA s and recommends how an MSA can be implemented successfully.
The use of MSAs is a major trend in technology procurement. High profile procurement transactions using MSAs include Ericsson's partnership with China Mobile for the supply of GSM network equipment and related services covering 19 regions in China (valued at US$1 billion); the global tie-up between Huawei and Vodafone for the provision of UMTS technologies; and the agreement between Etisalat and Nokia under which handsets are supplied to Etisalat's subsidiaries across the Middle East, Asia and Africa.
What precisely are MSAs?
An MSA involves a customer and supplier entering into an "umbrella" framework agreement which sets out the legal terms upon which the customer (and often its group or associated companies) is able to procure goods and/or services from the supplier during the course of the MSA.
Individual procurements, often referred to as "call-offs", "call-off agreements" or "local agreements", are executed under the framework MSA. Typically, a call-off incorporates the MSA terms (which apply across all call-offs) by reference, and contains the commercial and special legal terms specific to the individual procurement. A call-off normally forms a separate binding contract between the respective parties. Alternatively, each call-off may exist as a schedule or annexure to the MSA.
What are the benefits of MSAs?
Single Negotiation Efficiency
In contrast to parties negotiating one-off contracts for numerous transactions, an MSA enables the parties to conduct multiple procurements on the same set of pre-agreed MSA terms.
As contractual terms and conditions (and in some cases even commercial pricing) are negotiated at the outset of an MSA relationship, the parties do not need to revisit such terms and conditions on each and every occasion that goods and/or services are purchased during the lifetime of the MSA. This "upfront" agreement can save parties considerable costs in relation to management time, administration and external legal advice over the lifetime of the MSA.
MSAs are particularly well suited for telecommunications procurements, which often involve repeated procurements of similar types of technology and hardware (i.e. networks, handsets etc), a small and specialised supplier community and consolidation of operators.
Consistent Risk Profile
Often subsidiaries within the same corporate group might negotiate varying terms in separate contracts with the same supplier. By consolidating a corporate group's purchasing and bargaining power through an MSA, customers are able to agree satisfactory terms to be used across its organisation for the purchase of goods and/or services.
Many corporate groups have in-house template MSAs incorporating all of the group's mandatory corporate legal terms and policies. A well-drafted template MSA is an excellent starting point for contract negotiations on various technology procurements.
Easy Contract Administration
Contract administration is made easier as all procurements will be subject to the same MSA terms, with special commercial and legal terms reflected in the respective call-off agreements. After working on a number of procurements under the same MSA, a contract manager will be familiar with the MSA terms and will be able to focus on the commercial and special legal terms of a procurement by referring to the particular call-off agreement.
Long Term Relationship
MSAs provide parties with the opportunity to build long-term successful relationships. Customers and suppliers who enter into MSAs have a better opportunity to understand each other's businesses, which may lead to a greater understanding of service requirements and foster a closer working relationship – the very cornerstone of success in business. Also, suppliers are able to concentrate solely on the quality of service rather than expend time and energy on repetitive legal and commercial negotiations for each transaction.
Given their essentially long-term view, MSAs allow parties the opportunity to plan strategically for continuous improvement and technology "refresh". The exchange of information and ideas between parties is often less guarded under MSAs than in one-off commercial transactions. MSAs encourage suppliers to continually innovate in order to meet customers' changing demands and requirements.
Preferable Commercial Terms
Depending on the type of transaction, customers can often obtain preferable supplier terms based on the proven long-term commitment shown in entering into an MSA with a supplier. It is not uncommon for a customer to extract "most favourable customer" status which might provide the customer with the supplier's best prices for a certain product within a given territory or area.
What issues should you be aware of ?
Despite the multitude of advantages which MSAs can deliver, parties need to be mindful of the inherent risks in entering into such long-term contractual arrangements. The complexity of MSAs can often be overlooked by parties at the time of inception. Detailed below are some common risk areas which require careful consideration.
Parties should focus closely upon the mechanics of how they interact in finalising a call-off agreement. A customer may wish for the supplier to be obligated to provide the actual goods and/or services upon request, whereas the supplier may only want to be obligated to provide a specific "work proposal" to be agreed between the parties. Such issues will need to be carefully considered prior to entering into an MSA agreement.
Parties should seek, as far as possible, to agree all essential legal terms at the inception of the MSA. The greater the amount of detail which is required to be finalised at the time of an individual "call-off", the less beneficial the MSA will be to the parties. Further, leaving critical areas for discussion at the call-off stage may only prove to exacerbate costs and increase the likelihood of a failed relationship after the MSA agreement has been signed.
MSAs often require significant governance and contract management activities which need to be managed by all parties to the arrangement. For example, a parent company should seek to disseminate information on an MSA they have entered into to their operations/subsidiaries. Key personnel need to be educated as to the scope of the MSA and how it is to be used. Governance provisions are a critical element in any MSA and can often take the form of regular review meetings between the parties to assess the current status of the MSA and identify any improvements which could be made, either contractually or operationally.
Given the overarching and long-term nature of an MSA, it is important that its legal provisions be subject to close scrutiny. Key legal issues such as priority and interaction between MSA and call-off documentation, termination, liability and dispute resolution require input from specialist legal advisers. For example, will individual "call-off" contracts automatically terminate upon the main MSA relationship ending? Are cross-termination rights applicable? How should the liability provisions between different call-offs and the MSA interact? How are disputes under the MSA to be handled? Such issues are transaction specific and will need careful consideration by the parties.
Where a template MSA is concerned, its legal provisions will have repercussions across all procurement contracts drafted based on the template. An organisation can significantly reduce its procurement legal risks by seeking early legal advice on the template MSA.
Recommendations for a successful MSA
In summary, parties should be guided by the following high-level principles for creating successful MSAs.
- Focus on ensuring the mechanics of an MSA arrangement are clear and understandable to both parties; and
- Ensure as far as possible that at all key terms and conditions for future call-off contracts are agreed at the inception of the MSA; and
- Educate all levels of the business on the benefits of the MSA and how it should be utilised in practice; and
- Obtain specialist legal advice in relation to the overarching MSA agreement to ensure that individual call-off contracts do not require revisiting by legal and/or commercial advisers; and
- Ensure the beneficiaries of the MSA are identified specifically (e.g. specific subsidiaries of a company).
Stephanie Wong, is an associate, based in Hong Kong, who handles Technology, Telecommunications and Commercial work as well as advising upon IP matters. Stephanie holds a degree in architecture as well as law. You can reach her at stephanie.wong@dlapiper. com
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