MSPs have a great understanding of the proactive benefits associated with outsourcing services to a professional for technology management.
How does this work when outsourcing legal services? Essentially, outsourcing legal services to a professional means you have a defensive coordinator on your team.
The following is a fictional story compiled from the experiences of many Virtus Law clients. It is not based upon any one single client; rather, it is intended to depict what an MSP might experience with a legal subscription.
MSP Inc. was started 10 years ago by Joe. Joe had a few independent contractors willing to work part-time for him. He drafted some independent contractor agreements, copied a Services Agreement from one of his competitors (which has not been updated since) and hit the streets looking for sales. In fact, over the 10 years, Joe has been responsible for all sales of MSP Inc. Joe eventually made his first full-time technology hire, Stephanie. Others were hired as sales grew, including sales in other states – all recruited, interviewed and trained by Joe.
Unfortunately, as MSP Inc. grew, Joe spent less and less time working on sales, dedicating time toward contract renewals, hiring team members and administrative work (i.e. insurance policy review, employee handbooks, policies and procedures). To provide some bandwidth, Joe hired a sales and marketing administrator to help him generate leads.
What Joe really wanted was a salesperson to replace himself, but he just doesn’t have the time to train a salesperson. He sporadically finds time to nurture leads (prepare to convert them to prospects) and decides he will seek assistance with lead nurturing. While Joe has a high sales conversion ratio, it is not uncommon that he develops a relationship with a prospect that has been appropriately nurtured, conducts an analysis or preliminary assessment, spends time preparing the proposal, and then is unable to get the Services Agreement signed. Joe believes that his declining close ratio is attributable, in part, to the time pressures associated with managing the business.
The technical team did not have a leader, other than Joe, but it seemed to work okay because Stephanie would provide some instruction when required. MSP Inc. was growing at 25% or more per year for 5 years running. Joe needed help. Desperate to free up some of his time, Joe approached Stephanie and explained, “I am running sales, contract negotiation, contract drafting, finance, customer account management, administration, human resources, technical and more. Can I lean on you to run the technical team?”
Stephanie replied with “I would like to do that formally, with an appropriate title, compensation increase and a path to ownership.”
“I promise you will become a partner,” Joe said. “I have to figure out how that looks and what needs to happen to make it work. Give me some time and I will get back to you with a plan.” Stephanie became the CTO and Joe added “giving Stephanie equity” to his list of administrative items to complete when he had time.
Joe relied upon Stephanie more and more to provide technical thought leadership. Joe asked Stephanie for assistance with staffing. Stephanie was already recruiting, interviewing, hiring and training the technical staff. While Stephanie enjoys the technical aspects of her job and is willing to live with participating in hiring decisions, she does not like meeting new people, interviewing them and making the hiring decisions. Stephanie is a team player, though, and she thought, “Rather than looking for a new job, I will help Joe with hiring.”
For a while, this gave Joe the time to work on sales but not enough time to train others to help with the sales effort. As sales grew even slightly, Joe became more involved in renegotiation of pricing upon the expiration of 1-year terms pursuant to MSP Inc.’s MSA with customers, implementation following the initial assessment and general account management. He did not have the time to develop systems to handle the accounts. Joe really felt like he wanted to change the term of his managed services SOW but did not know how to accomplish this with the MSAs floating around with different terms. Over the next 2 years, Joe was only able to expand sales by 5% annually. He just didn’t have enough time to spend on sales and failed his 2 attempts at training salespeople he hired. He thought about buying another company to expand sales and secure talent but realized this would make an even bigger mess for him to deal with. Stephanie was growing frustrated with her expanding responsibilities and no path to equity being presented to her by Joe.
MSP Inc. had pretty much plateaued in its revenue growth. It was stuck at $1.5M in gross revenue. Joe did not have the time to make good on his promise to give Stephanie ownership and Stephanie recently commented, “The employment market is pretty strong and the only reason I am not looking is because I see a path to ownership at MSP Inc. By the way, when are you going to propose a plan for me to have equity?”
Joe understood this as a veiled warning that he needed to get going on the partnership plan or lose Stephanie.
“I have good news and bad news,” said Joe’s accountant. “The good news is that you were very profitable last year, but the bad news is that you have to come up with $75,000 for state and federal tax obligations.”
“Is there any way I can reduce these taxes?” pleaded Joe.
“Nothing significant that I can think of. Besides, the year has already closed and we can’t change your history,” replied his CPA. “Maybe we can look at doing some planning for next year.”
Joe thought to himself, “I thought you were already doing planning…” Joe started researching ways to minimize income taxes on his own – another item on his task list.
Thankfully, Joe did not pursue acquisition because a leading software company changed its program and he had to deal with guaranteeing license fees for his clients. His dated Services Agreement templates were short term, some even month to month. The contracts had not been updated since the onset of cyber security breaches and did not have automatic price escalators, protection from cyber breach incidents, or protection for the loss of talent. He was forced to renegotiate every contract he had with customers for any kind of price increase and defensive protection. Some of his clients never even signed the Services Agreement. He needed to speak with an attorney. He added the renegotiation of these contracts to his task list, and by this time, he knew he could never complete all of the items without help.
His attorney did not have any other MSP clients. After introductory comments, Joe’s lawyer said, “Now, Joe, how is an MSP different than any other consultant and why wouldn’t we make the customer proceed directly with Microsoft?” Joe was distraught, as he had no confidence that his lawyer even understood the industry. Now he had to train his lawyer – another task list item. He started to explain how MSP Inc. needs to secure protection from these types of fees, limit its liability, and not become the guarantor against cyber security breaches. Joe excused himself from the call because he was overwhelmed with all he had to address and didn’t know where to start. He turned to the internet and searched MSP lawyers and found Virtus Law. Joe hired Virtus Law as an outsourced provider for a monthly fee for all of the federal legal issues that need to be addressed by an MSP.
Virtus Law started by addressing the guaranteed license fees because that was most pressing issue for MSP Inc. It then moved to overhaul the dated Services Agreement, updating it to a Master Service Agreement applicable to all services offered to its customers with “best in class,” market rate terms for price escalation, automatic renewals, placement fees for technicians hired away and manageable limitations of liability provision modifications.
Virtus Law built MSP Inc.’s MSA so that it became a sales tool. MSP Inc. followed a sales process whereby Joe would lead with the Master Services Agreement before touching the prospect’s technology environment or proposing any specific service. Joe only expended his precious sales time effort on prospects that already agreed to sign up to MSP Inc.’s MSA. SOWs followed after an initial assessment of the customer’s technology environment.
To address Stephanie’s continued contributions, a synthetic equity plan was created for Stephanie that rewards her for staying with MSP Inc. in virtually the same way she would enjoy ownership with stock options, but without generating any immediate tax consequences for either Stephanie or MSP Inc. The solution protected the current value of MSP Inc. for Joe (“base value”) and rewarded Stephanie with a percentage of synthetic ownership for the value MSP Inc. received in excess of the base value and only in the event of Stephanie’s death or the sale of MSP Inc. – even if the sale was to Stephanie and the value she accumulated inside the plan is used as a down payment to purchase MSP Inc. herself.
Joe’s insurance carrier notified him that it was time to renew MSP Inc.’s insurance policy. Joe mentioned this to the Virtus Law attorney assigned to MSP Inc. as primary. Virtus Law reviewed the insurance coverages for adequacy, especially as it related to cyber coverage. Joe spent less than an hour on his insurance policy renewal but had never felt more confident of his coverage.
MSP Inc.’s financials and tax returns were analyzed by Virtus Law’s managing shareholder, who is a tax lawyer, during the first few months of the subscription as a part of Virtus Law’s legal assessment. The legal assessment resulted in a deliverable that identified issues that required attention by MSP Inc. The plan led to a legal restructuring of the enterprise that yielded operational and income tax savings that exceeded the cost of the subscription, thereby generating a return for MSP Inc. on its investment in legal fees.
Not only did MSP Inc. save more than the cost of the subscription, MSP Inc. was also able to create a solid defense to build its business – a defense that scores points for MSP Inc.
Subscriptions were extended out to 3 years and had automatic renewals. MSP Inc. had price protection for software price increases, had an automatic increase in service fees at the rate equal to the consumer price index and spent far less time on re-negotiating contracts with existing customers. For the first time in ten years, Joe felt adequately insured. Joe secured Stephanie’s continued employment and used the same tool to provide a completely new exit alternative he had never considered. Joe was able to use the time he formerly spent on defense and administration to return to selling and MSP Inc. grew beyond its former plateau.
Have you struggled to find time to work on your company’s offense (i.e., revenue generation) because of all of the time expended on defensive issues (i.e., MSAs, insurance policies, retaining key employees, tax mitigation, employment policies)? If you do believe you are spending too much time and taking too many risks, maybe it’s time to put a defensive coordinator on your team. To understand if you are eligible for Virtus Law’s subscription program or if you would like to experience a return on your investment in legal fees, email the author at [email protected] for a consultation to discuss.
