IT Services Contracts 101: NDA, MSA, SoW Explained

Ironically, if you want to build trust, first you have to outline all the ways in which that trust may be forfeited. Read: to start any business partnership you need to sign a contract. Think of IT services contracts as an airbag that protects you against some big-time business accidents.

Yes, outsourcing paperwork may seem daunting initially, but it is one of the most important parts of any business partnership. The thing is that the right contracts turn doubts into confidence. 

And the same holds true for outsourcing.

3 Cornerstone Types of IT Services Contracts in Outsourcing 

Legal documentation is essential to forming transparent relationships with your vendor. Contracts outline terms of collaboration, set clear expectations on both ends, and allow taking legal measures if any of the sides violate the agreement.

In a way, IT services contracts dismantle the ever-existing myth that your vendor is a business genie, capable of fulfilling unlimited wishes at any time. They also make sure you are not viewed as a walking wallet, lured into investing more than you should. From this perspective, outsourcing contracts serve as a foundation for a fair and equitable partnership where everyone gets the expected outcomes.

Your outsourcing partnership will be backed by three key documents:

  • Non-disclosure agreement (NDA)
  • Master Service Agreement (MSA)
  • Statement of Work (SOW). 

NDA and MSA lay the foundation for subsequent project-specific agreements. An NDA lends security to the information you share. An MSA ensures that you and your vendor are on the same page about terms of collaboration. These two documents regulate your partnership on a large scale, without ties to the project’s detailed scope of work. Therefore, you will usually need only one copy of each document. 

The SOW provides a detailed look at the project by clarifying what needs to be done, how, and by whom. So, every service type and unique project will require a completely different statement of work, while NDA and MSA will stay the same. 

Now, let’s take a closer look at each type of outsourcing contract. 

What is an NDA?

A non-disclosure agreement (NDA) is a legally binding document that governs the exchange of confidential information between you and your vendor. It outlines which information can and cannot be divulged to third parties.

An NDA contract does not obligate the parties to actually agree to collaborate. 

In software development, the confidential information may include documentation, ideas, source code, software, copyrights, trade secrets, patents, passwords, and any other intellectual property interests. 

However, confidentiality agreements cannot contain publicly available information or such that has been disclosed by either party at any point before the signing of the NDA. For example, if you have some of your source code published on GitHub, you cannot protect this information by an NDA. 

The two types of NDA in IT outsourcing:

  • Mutual NDA: where both sides seek to protect their information from disclosure to other parties (e.g. your outsourcing partner also does not want to divulge prices).
  • One-way NDA: where only one side of the agreement needs to keep the info from disclosing.

Signing an NDA early on has a number of benefits: 

  • Facilitates free discussion of confidential information with IT vendors
  • Allows legal action to be taken if one party breaches the confidentiality
  • Safeguards any confidential business information
  • Establishes trust between you and your outsourcing partner

What an NDA covers: 

  • A description of the parties involved
  • A definition of what is confidential
  • Disclosure period
  • Confidentiality exclusions
  • The time period of confidentiality
  • What to do with confidential materials at the end of the agreement
  • The recipient’s obligations regarding confidential information
  • Types of admissible disclosure — such as those mandated by law or rulings 
  • What constitutes a breach of contract 
  • The jurisdiction under which the issues will be resolved 

Usually, you will need to sign the NDA when you enter the negotiation stage with your potential outsourcing vendor (right before the discovery phase or pre-engagement discussions).

At Edvantis, we provide our clients with an NDA early on, so they can freely discuss their project scope and needs, without having to worry that we will disclose the information to their competition/third parties. However, no one forces you to sign an NDA before the first call. Also, the template of this document can be from us or from you. 

What is an MSA?

Master Service Agreement (MSA) is a contract that contains information about the future relationships with your outsourcing vendor, detailing the collaboration objectives, key project responsibilities, roles, services to be provided, and agreement terms among other operational commitments. MSA sets the baseline expectations for each party. Basically, this document is a “promise” of collaboration that summarizes the terms but does not call for any actions or obligations on either party’s part. 

Writing an MSA is a lengthy and complex process. However, after it is endorsed by both sides, MSA can be used as a reference template for future scope of work agreements. 

Being such a foundation for all subsequent documents, MSA removes the need for renegotiating and re-examining many of the conditions already approved. You can create new documents faster and more efficiently, simplify legal processes, and reduce outsourcing paperwork. 

What an MSA covers:

  • The scope of services
  • The terms of a partnership
  • Each party’s commitments 
  • Payment conditions
  • Terms of termination
  • IP provisions (ownership, disclosures, etc)
  • Liabilities and liability indemnification
  • Warranties/guarantees (if applicable)

Outsourcing vendors usually prepare an MSA document on their end. But they will still need your input for refining certain provisions. So, provide timely feedback. You usually sign an MSA before discussing the details of work. The longer it takes you to agree on it, the later the development process begins. 

The signing of an MSA marks the beginning of your partnership. Having reached this milestone, you can now discuss the specifics of the project with your outsourcing provider. This means that MSA does not bind your vendor to start the development process right away, but rather obligates you two to begin preparing for it. 

It is SOW that signals about the beginning of work, being the final document you will need to sign. 

What is SOW? 

Statement of Work(SOW) is a document that sums up and describes the scope of the project — what should be done and what’s excluded. This is a legally binding document, specifying the type of work the vendor commits to delivering under the set terms. A clear, concise, and easy-to-read SOW is imperative to the project’s success so it shouldn’t leave room for doubt or ambiguity.

The contract clarifies such aspects of a project as deadlines, terms, standards, payment information, acceptance criteria, estimations, etc. SOWs can also include other project information, like security concerns, post-project support, penalties for late or poor-quality deliveries, or terms for early termination. 

A signed SOW marks the beginning of the actual work. 

When working without an SOW or with a poorly constructed one, there is no understanding of project nuances. This may consequently lead to:

  • Slow time-to-market
  • Overruns in budgets
  • The mismatch between vision and the end-result
  • Miscommunication
  • Poor-quality product
  • Scalability issues 

What a SOW covers:

  • Purpose of the project
  • Service description
  • In scope/out of scope
  • Team composition/roles (if applicable)
  • Tasks and their estimations
  • Deliverables
  • Schedules
  • Standards and testing
  • Requirements
  • General budget
  • Team ramp-up/down rules (if applicable)
  • Organizational aspects of work
  • Acceptance criteria (if applicable)
  • Payment terms

Usually, SOW is provided following the discovery phase or requirements gathering. This document will be developed by your outsourcing vendor, but you will need to review and refine the contents.

Conclusion

Each signed document signifies an important step towards building trust between you and your vendor. Initially, you need to feel comfortable with sharing project information (NDA), then agree to general terms of collaboration (MSA), and finally, outline in detail how you are going to work together (SOW).

Then it’s just a matter of getting down to work. However, don’t forget: your responsibilities do not pass entirely to your vendor right after you sign the last contract. To achieve the desired outcome, you will still need to participate in the working process by refining the vision, updating requirements, and providing feedback.

New to IT outsourcing? Contact Edvantis team to schedule a no-sales workshop, where you can get all your questions answered by one of our experts.

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