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service-level agreement (SLA)

By Paul Kirvan

What is a service-level agreement (SLA)?

A service-level agreement (SLA) is a contract between a service provider and its customers that documents what services the provider will furnish and defines the service standards the provider is obligated to meet.

A service-level commitment (SLC) is a broader and more generalized form of an SLA. The two differ because an SLA is bidirectional and involves two teams. In contrast, an SLC is a single-directional obligation that establishes what a provider can guarantee its customers at any given time.

Why are SLAs important?

Service providers of all kinds, such as network service providers, cloud service providers and managed service providers (MSPs), need SLAs to help them manage customer expectations. SLAs also define the circumstances under which they are or aren't liable for outages or performance issues. Customers can also benefit from SLAs because the contract describes the performance characteristics of the service -- which can be compared with other vendors' SLAs -- and sets forth the means for redressing service issues.

The SLA is typically one of two foundational agreements that service providers have with their customers. Many service providers establish a master service agreement to establish the general terms and conditions in which they will work with customers.

The SLA is often incorporated by reference in the service provider's master service agreement. Between the two service contracts, the SLA adds greater specificity regarding the services provided and the metrics that will be used to measure their performance. Service commitments define the services that are included with the service offering.

SLAs originally defined the levels of support that software, hardware and networking companies would provide to customers running technologies in on-premise data centers and offices.

When IT outsourcing emerged in the late 1980s, SLAs evolved as a mechanism to govern such relationships. Service-level agreements set the expectations for a service provider's performance and established penalties for missing the targets and, in some cases, bonuses for exceeding them. Because outsourcing projects were frequently customized for a particular customer, outsourcing SLAs were often drafted to govern a specific project.

As managed services and cloud computing services continue to be widely used, SLAs have evolved to address the new approaches. Shared services, rather than customized resources, characterize the newer contracting methods. Service-level commitments are frequently used to produce broad agreements intended to cover all a service provider's customers.

Who needs a service-level agreement?

SLAs are thought to have originated with network service providers but are now widely used in a range of IT-related fields. Some examples of industries that establish SLAs include IT service providers and MSPs as well as cloud computing and internet service providers (ISPs).

Corporate IT organizations, particularly those who have embraced IT service management, enter SLAs with their in-house customers -- users in other departments within the enterprise. An IT department creates an SLA so its services can be measured, justified and compared with those of outsourcing vendors.

Key components of an SLA

Key components of a service-level agreement include the following:

When developing an SLA, end users can use a template to simplify the process. Vendors will probably have their own SLA formats. Users must identify their business needs; customer experience expectations; and performance metrics such as defect rates, network latency and service-level indicators. Templates can provide placeholders for items including specific deliverables, functionality to be provided, type of service to be delivered, quality of service and response to disruptions,

What are the three types of SLAs?

There are three basic types of SLAs: customer, internal and multilevel service-level agreements.

A customer service-level agreement is between a service provider and its external or internal customers. It is sometimes called an external service agreement.

In a customer-based SLA, the customer and service provider come to a negotiated agreement on the services that will be provided. For example, a company may negotiate with the IT service provider that manages its accounts payable and receivable systems to define their specific relationship and expectations in detail.

A customer service-level agreement includes the following:

An internal SLA is between an organization, such as an IT department, and its internal customer, such as another organization, department or site.

That means that a company could have an SLA open with each of its customers, and it might also have a separate SLA between its marketing and sales departments defining the operational performance that is expected.

For example, a company's sales department might have nearly $10,000 worth of sales every month, with each sale worth $500. If the sales team's average closing rate is 20%, then sales knows that marketing must deliver at least 100 qualified leads every month.

Based on the SLA terms, the head of the organization's marketing department works with the head of sales on an SLA that stipulates that marketing will deliver 100 qualified leads to sales by a specific date every month.

This service-level agreement could stipulate that it will include four weekly status reports every month sent from marketing to sales to ensure the leads the sales team is getting are enabling them to hit their monthly sales goal.

A multilevel SLA will divide the agreement into various levels that are specific to a series of customers using the service. For example, a software as a service provider might offer basic services and support to all customers using a product, but they could also offer different price ranges that dictate different service levels. These different levels of service will be layered into the multilevel SLA.

Service-level agreement examples

One specific example of an SLA is a data center SLA. This can include the following:

Another specific example is an ISP SLA. This will include an uptime guarantee, but it will also define packet delivery expectations and latency. Packet delivery refers to the percentage of data packets that are received compared to the total number of data packets sent. Latency is the amount of time it takes a packet to travel between clients and servers.

How to validate SLA levels

Verifying the provider's service delivery levels is necessary to the enforcement of a service-level agreement. If the SLA is not being properly fulfilled, then the client may be able to claim the compensation agreed upon in the contract.

Service providers often make their service-level statistics available through an online portal. This allows customers to track whether the proper service level is being maintained. If they find it is not, the portal also allows clients to see if they are eligible for compensation. This is an important deciding factor when selecting a vendor.

These systems and processes are frequently controlled by specialized third-party companies. If this is the case, then it is necessary for the third party also to be included in the SLA negotiations. This will provide them with clarity about the service levels that should be tracked and explanations of how to track them.

Tools that automate the capturing and displaying of service-level performance data are also available.

SLAs and indemnification clauses

An indemnification is a contractual obligation made by one party -- the indemnitor -- to redress the damages, losses and liabilities experienced by another party -- the indemnitee -- or by a third party. Within an SLA, an indemnification clause will require the service provider to acknowledge that the customer is not responsible for any costs incurred through violations of contract warranties. The indemnification clause may also require the service provider to pay the customer for any litigation costs from third parties that resulted from the contract breach.

To limit the scope of indemnifications, a service provider can do the following:

SLA performance metrics

SLAs include metrics to measure the service provider's performance. Because it can be challenging to select metrics that are fair to the customer and the service provider, it's important that the metrics are within the control and expertise of the service provider. If the service provider is unable to control whether a metric performs as specified, it is not fair to hold the vendor accountable for that metric. This should be discussed up front among the parties before executing the SLA.

It is essential that data supporting the metrics is accurately collected, and an automated process might be an important solution. In addition, the SLA should specify a reasonable baseline for the metrics, which can be refined when more data is available on each metric.

SLAs establish customer expectations regarding the service provider's performance and quality in several ways. Some metrics that SLAs may specify include the following:

Another metric might be delivery of a schedule for notification in advance of network changes that may affect users and general service usage statistics.

An SLA may specify availability, performance and other parameters for different types of customer infrastructure, including internal networks; servers; and infrastructure components, such as uninterruptable power supplies.

What happens if agreed-upon service levels are not met?

SLAs include agreed-upon penalties in the event a service provider fails to meet the agreed-upon service levels. These remedies could be fee reductions or service credits against the fees incurred by the customer as well as termination of the contract for repeated failures.

Customers can enforce these service credits when service providers miss agreed-upon performance standards. Typically, the customer and the service provider agree to put a certain percentage of the monthly fees at risk. The service credits are taken from those at-risk fees when the vendor misses the SLAs.

The SLA should detail how the service credits will be calculated. For example, the customer and the vendor could develop a formula that provides service credits based on the amount of downtime that exceeds the terms of the SLA. A service provider may cap performance penalties at a maximum dollar amount to limit its exposure.

The SLA will also include a section detailing exclusions, which are situations in which an SLA's guarantees and penalties for failing to meet them do not apply. The list might include events such as natural disasters or terrorist acts. This section is sometimes referred to as a force majeure clause, which aims to excuse the service provider from events beyond its reasonable control.

Service-level agreement penalties

SLA penalties are disciplinary measures that exist to ensure the terms of the contract are maintained. These penalties differ from contract to contract. They may include the following:

In addition to service credits, there could be the following:

These penalties must be specified in the language of the SLA, or they cannot be enforced. In addition, some customers might not think the service credit or license extension penalties are adequate compensation. As such, they may question the value of continuing to receive the services of a vendor that is unable to meet its quality levels.

Consequently, it might be worthwhile to consider a combination of penalties as well as include an incentive, such as a monetary bonus, for work that is more than satisfactory.

Considerations for SLA metrics

When choosing which performance metrics to include in the SLA, a company should consider the following factors:

For the established metrics to be useful, a proper baseline must be established with the measurements set to reasonable and attainable performance levels. This baseline will likely be redefined throughout the parties' involvement in the agreement, using the processes specified in the periodic review and change section of the SLA.

What are SLA earn back provisions?

An earn back is a provision that may be included in the SLA that allows providers to regain service-level credits if they perform at or above the standard service level for a certain amount of time. Earn backs are a response to the standardization and popularity of service-level credits.

Service-level credits, also known as service credits, should be the sole and exclusive remedy available to customers to compensate for service-level failures. A service credit deducts an amount of money from the total amount to be paid under the contract if the service provider fails to meet service delivery and performance standards.

If both parties agree to include earn back provisions in the SLA, then the process should be defined carefully at the beginning of the negotiation and integrated into the service-level methodology.

When to revise an SLA

A service-level agreement is a living document and should be updated and reviewed regularly with new information. Most companies revise their SLAs either annually or bi-annually. However, the faster an organization grows, the more often it should review and revise its SLAs.

Knowing when to make changes in an SLA is a key part of managing the client/service provider relationship. Understanding when it is not appropriate to make SLA changes is also important. The two parties should meet on a set schedule to revisit their SLA and ensure it continues to meet the requirements of both parties.

An SLA should be revised if one or more the following conditions have been met:

Service providers should review their SLAs every 18 to 24 months even if their capabilities or services haven't significantly changed.

Learn more about the importance of SLA compliance in IT and all about five-nines availability and what it means. Download our free service-level agreement template to get started planning the requirements associated with your organization's DR activities.

15 Mar 2024

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