Service Level Agreement or service level agreement is the level of service expected from a vendor that includes the metrics by which the service can be measured and remedies or penalty factors if the service fails to meet the agreed-on level. service level agreement forms a critical part of a technology vendor contract and ensures transparency in the service commitment.

service level agreement

SLA Meaning?

SLA or a Service Level Agreement specifically defines the level of service that a customer expects from a supplier with pre-defined metrics to measure the quality and efficiency of the service. An service level agreement not only focuses on the expected results but also includes any penalties or remedies if the agreed-on service fails to meet the expected level.

Although SLAs are generally drawn between companies and external suppliers, it can also be drawn between two departments within the same company.

For instance, the SLA example of a telecom company may include an agreed-upon network availability of 99.999 percent and offers the customer a penalty of reduced payment by a particular percentage if the promised service is not achieved. The metric of the service level is, in such cases, usually measured on a sliding scale where the magnitude of the breach determines the overall service efficiency.

Why do I need an Service Level Agreement?

SLAs form a critical component of the outsourcing and IT vendor contracts. It is an integral aspect that binds together all the crucial information of the contracted services and the promised expectations into a single comprehensive document. An SLA ensures that both the parties are on secure ground, and each understands the services’ requirements on similar levels.

Since an SLA clearly states all the metrics, service responsibilities, and promised results with specified levels of expectations, the agreement significantly reduces the risk of deliberate contract infringement and misinterpretation. Thus an SLA treats both the parties on equal terms and legally protects them in the agreement.

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Who provides the Service Level Agreement?

The service providers generally provide SLAs as they usually keep standard SLAs prepared for their services. Sometimes the service providers prepare more than one standard service level agreement templates that reflect their different services and respective prices. The standard SLAs present themselves as solid starting points for effective negotiations that are further reviewed and modified by the customer’s legal team and secures an equally profitable aspect for both the parties.

What are the key components of an SLA?

More broadly, an SLA should include a proper description of the services and the expected service levels, alongside the metrics by which the services are to be measured. A service level agreement template should ideally include detailed information regarding the duties, responsibilities of both the parties, besides clarified remedies or penalty factors in case of service breach and other similar problems. Moreover, the service level agreement must point out metrics in specific reference to each of the parties’ behavior.

In a more structured understanding, the service level agreement comprises two major components, namely the services and the management.

  • Under the service area, the service level agreement should include specifics of elements like what is included (or excluded) in the service, factors of availability, time windows, respective responsibilities, costs, procedures, etc.
  • On the other hand, the management area should ideally comprise measurement standards, methods, contents, reporting processes, dispute resolution process, indemnification clause, and legitimate scope of updating the agreement if necessary.

What is an indemnification clause?

An indemnification clause in an SLA is a security element that protects the customer company from third-party litigation leading to ineffective service levels or any warranty breaches. It is an extremely critical provision that allows the customer to ensure financial security at risk due to warranty infringement. By agreeing upon this clause, the service provider legally agrees to indemnify the customer, that is, to pay the customer for any third-party litigation costs.

The indemnification clause generally remains absent in a standard service level agreement templates by the service provider and hence should be appropriately ensured into the agreement through legal counsel.

Is an SLA transferable?

Although SLAs are not usually transferrable, the provision may depend on the corresponding service provider. If the service provider is acquired by or merged with another organization, then the existing SLA should be renegotiated based on the changing business terms. However, many new service providers may want to continue with the existing SLAs with no such significant changes, given that they would not want to alienate their existing customers.

How can I verify service levels?

Many service providers offer easy to access online statistic forums that enable the customers to check and verify the SLA status. Through these online portals, the customer companies can effectively get insights regarding the service functions, whether SLAs are providing expected results, or if they are entitled to any service credits or promised penalties.

However, the customer companies can, in critical cases, also employ third-party tools to automatically keep track of the services and update SLA performance data. It is highly recommended that the customer company and the service provider pay adequate attention to SLA verification during contract negotiation in order to ensure optimum performance as well as to minimize risks of business misunderstandings.

What kind of metrics should be monitored?

The type of SLA metrics differs depending on the particular service that the outsourcing company provides. Even though many items can be appropriately monitored for SLA metrics, a simple scheme will reduce additional costs on the one hand and ensure error-free execution on the other. It will, thus, automatically enhance the effectiveness of the metrics.

Based on the type of service, the metrics to be monitored may include:

  • The availability of service is determined through the amount of time the service is made available and can be properly measured using time slots.
  • Defect rates include the overall percentage of errors in service deliveries.
  • Technical quality depends upon the examination of various factors like coding defects and program size.
  • Expected results through the incorporation of business process metrics and calculation of vendor’s contribution to existing KPIs.
  • Security prospects can be measured to ensure cost-effective solutions and minimized risks of security breaches.

What should I consider when selecting metrics for my SLA?

The metrics for an SLA should aim at optimum service performance and minimized additional expenditure. Keeping this in mind, you can consider the following point before selecting the SLA metrics.

  • Selecting a metric that motivates the proper behavior on behalf of both the parties of the SLA.
  • Choosing metrics that reflect factors mutually dependent on both sides.
  • Choose measurements that allow easy and automatic collection of data, avoiding manual metric collection.
  • Choose metrics that are neither too elaborate nor too evasive with too many or too less measurable factors and ensure a cohesive analysis of the data.
  • Make sure that the metrics are properly set at a reasonable and attainable baseline.
  • Define the expected services as well as the monitoring expectations clearly in the contract to avoid metrics data misinterpretation.

Is there room for negotiation on SLAs with cloud service providers?

Cloud service vendors are generally more restrained about modifying their standard SLAs as per client negotiation. However, in some instances, the customers can review the standard SLAs and negotiate their terms as it becomes extremely critical to scrutinize the contract to avoid any significant risks.

Can I create joint SLAs shared among multiple vendors or service providers?

The customer companies have the scope to create joint SLA metrics for more than one service provider to account for cross-supplier impacts. Operating Level Agreements or OLAs are the key solutions in such respect for IT organizations that manage more than one service provider. Through OLAs, the customer company can effectively outline the involvement of the various parties in their processes and tracks their appropriate interactions for the overall maintenance of performance.

What Does KPI Stand for? What Is the Difference between KPI and SLA?

KPI or Key Performance Indicators is simply the measurement of the performance of individual elements like business units, projects, workers, and companies, with respect to their respective strategic goals. KPIs enables the organization leaders to monitor and determine the gradual development of their business elements towards an objective and offers scope to course correct the movement. Thus KPI works as a navigational tool that highlights the areas of business that might be getting off track.

KPI differs from SLA by meaning and implementation. SLAs define the service levels & standards and agreement between a service provider and its customer. On the other hand, KPIs define the performance levels of the individual elements of the organization through measurement and monitoring of performance data. So basically, SLAs are agreements outlining wider services, and KPIs are indicators that monitor the performance of the company against their goals. Furthermore, KPIs can also be a part of the SLAs to monitor and measure the efficiency of promised service levels.