Service-Level Agreements 101: An Executive Guide to Service-Level Agreements (SLAs)

Service-Level Agreements 101: An Executive Guide to Service-Level Agreements (SLAs)

SLAs are a critical component of any vendor contract. Beyond listing expectations of service type and quality, an SLA provides remedies when requirements aren't met.

A service-level agreement (SLA) is nothing more than a type of contract between two parties. In the context of managed IT services (in which SLAs most frequently appear), SLAs dictate the quality and type of service that will be provided to the client in exchange for a fee. SLAs also provide the remedy, such as a reduced fee structure, that will apply in the case of a service outage. So, for example, if the contract specifies 99.9999 percent uptime and that is not met, the customer would have the right to reduce its bill by an agreed-on percentage. SLAs are important because they set the tone for the relationship between the parties and will govern if and when things break down. A “good” SLA is a balance between being thorough and clear on one side, while not being overly onerous on the service provider on the other.

What is an SLA?

A service-level agreement (SLA) is a document that spells out two or more parties' rights and obligations under a contract for work (such as between a company and its service provider). The main purpose of an SLA is to spell out the level of service that will be provided under the agreement. An internal IT services organisation may also provide an SLA to its internal business “customers.”

The classic example of an SLA is with a network services provider or telecom provider, where the document dictates what penalties the provider will incur if its performance falls short of specified levels. Usually, in this case, the penalties will follow a stepped schedule — for example, “If the network is down for an hour, the customer is entitled to a 10 percent rebate of its monthly network service fees; if the network is down for two hours, the customer is entitled to a 20% rebate of its monthly network service fees” and so on.

Why is it important to have an SLA?

It is as important to have an SLA as it is to have a contract for business arrangements of all types — because it constitutes a single document that contains the terms of the agreement as understood by both parties. With the SLA in place, it is much more difficult for either party to claim ignorance if the agreement breaks down. CIOs should expect to have an SLA (reviewed by their legal counsel) in place for every significant service relationship they have.

Which side should prepare the SLA?

Most service providers will offer a standard SLA as part of the work agreement. Ideally, you should use that as a starting point. Give their SLA to your in-house counsel department, if you have one, and let counsel make adjustments that are favourable to your side. Or add some provisions that reflect your priorities. If time is of the essence, however, you may have to use the service provider's standard SLA.

What are the basic components of an SLA?

An SLA can comprise a few short pages up to a few hundred pages. The basic components are a statement of the parties' intent, an outline of the responsibilities of each party (including acceptable performance parameters with applicable metrics), a statement on the expected duration of the agreement, a description of the applications and services covered by the agreement, procedures for monitoring the service levels, a schedule for remediation of outages and associated penalties, and problem-resolution procedures.

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