An SLA (service level agreement) is a contract between a service provider and a customer designed to clarify expectations of both parties regarding responsibilities, adherence to performance standards, response time, billing, guarantees, and any penalties (or rewards), which may be incurred by either party. An SLA is advantageous for both the customer and vendor in anticipating and heading off issues due to calculated or inadvertent misinterpretation of service expectations. SLA’s are common in outsourced IT services and with telecom providers, and typically address the following questions:
- When is service available? (i.e. what is the definition of uptime?)
- What is the definition of acceptable downtime? When is the service expected to be unavailable for updates, maintenance, etc.?
- Who reports unexpected downtime? Is it the responsibility of the service provider or the user?
- What is the consequence? Does the user receive a credit, the ability to terminate, both?
Many service providers have a standard SLA, however, it is the responsibility of the customer to determine whether this will adequately meet the service requirements of their particular organization. If approached critically, an SLA can help a business more effectively manage costs by allocating more spending for critical services and commodity pricing where minimum requirements or best effort will suffice.
Important Considerations
Definition of service(s)
What will be measured? Devising, tracking, and analyzing the metrics for service level compliance is complicated and time consuming, so less is more. Focus on those services that are crucial to the success of your business.
Performance measurement (metrics)
The KISS principle applies again: The more elaborate the procedures for monitoring and repairing service lapses, the more difficult it will be to track and analyze, and the less likely they are to be successful. What sort of measurement period would leverage the best results? Longer measurement periods are higher stake, but give the supplier more time to make up for bad performance. Shorter measurement periods are less forgiving of shortfalls, but give the supplier more opportunities to begin with a clean slate.
Problem Management
This is a game plan for how service lapses or errors will be addressed/remedied. Issues are often dealt with by the levying of penalties which fine suppliers for non-conformance. Conversely, buyers may be either penalized for late payments and/or rewarded for early payments. A well crafted SLA will support and encourage the desired behavior on both sides.
Warranties
This is a promise made by the seller to replace, fix, or be responsible for present or future losses incurred due to a defect in the quality, condition, or quantity of a product provided. A warranty can be unintentionally voided by using a product for something other than its intended purpose, or by allowing a third party to fix the item. In addition to clarifying warranty terms in advance, it is important to get them in writing, verbal warranty agreements are difficult to enforce.
Change Clause
Provides a formal method for modifying the agreement to accommodate the changing needs and priorities of your business.
Termination of Agreement
This will specify the nature and quantity of service level breaches that must occur for the customer to be able to terminate the contract without incurring an early termination penalty.
The lack of visibility into contract terms, the infrequency of compliance monitoring, and the inability to collect and analyze transactional data from various business systems remains one of the most persistent challenges in contract management. In a 2003 Benchmark study, published by the Aberdeen Group, SLA’s were overwhelmingly reported to be one of the most difficult contractual obligations to monitor. Because the terms defining delivery, documentation, and performance milestones are qualitative and require input and tracking from multiple stakeholders, they are inherently more difficult to measure. Failure to adequately and frequently track such factors can result in performance risks and missed opportunities for savings. If approached correctly, an SLA should balance the risk and reward between the customer and service provider in a way that is mutually acceptable.
An automated contract management solution can help organizations stay on top of SLA terms by:
- Tracking compliance with SLAs
- Collection of key metrics
- Increased visibility via dashboards.
- Audit/Reporting capabilities
- Automatic notifications of compliance issues.
Useful Resources
The 10 Key Questions for Developing Effective Service Level Agreements-Brad L. Peterson
Establishing Service Level Agreements-Naomi Karten