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.

What about indemnification?

The SLA should include a provision in which the service provider agrees to indemnify the customer company for any breaches of its warranties. Indemnification means that the provider will have to pay the customer for any third-party litigation costs resulting from its breach of the warranties. If you use a standard SLA provided by the service provider, it is likely this provision will be absent; ask your in-house counsel to draft a simple provision to include it, although the service provider may want further negotiation of this point.

Are SLAs transferable to a third-party provider?

The issue of transferability usually arises when the service provider is acquired by or merged with another company. If the new entity intends to carry on the acquiree's business as usual, the customer will have a natural expectation that the acquirer will assume the previous provider's SLAs. Unfortunately, this may not be the case. SLAs granted by one company do not automatically transfer to a new owner of that company. If your service provider has merged or been acquired, it is likely you will need to renegotiate the terms of the SLA. In many cases, however, the new entity will not want to risk causing ill will with the client base and will therefore assume any existing SLAs.

How can I be sure the service provider is meeting the service levels set out in the SLA?

Most service providers (especially in cases where high availability is critical, such as network services) make reports available, often on a Web portal. There, you can see how your application or system is faring, whether service levels have been maintained and whether you are owed any rebates for service outages. If the service being provided is mission-critical (that is, your business is in jeopardy if the SLAs are not met), you will want to consider using an SLA management tool or monitoring service.

What is SLA monitoring and verification?

Service providers typically have their own means of ensuring that SLAs are being met. But if the service is truly critical to your business, you should consider engaging a third-party monitoring company to monitor your SLAs, ideally in real-time, so you can be sure you are getting what you paid for. It's an extra layer of hassle and expense but key for that extra peace of mind.

What are some SLA metrics?

Most SLA metrics concern the quality of work to be performed by the service provider. According to Ian S. Hayes of Clarity Consulting, a quality definition may contain several individual metrics that may form part of the deliverable's acceptance criteria, or that may serve as standalone measurements of a single aspect of service.

Examples of quality metrics include:

Defect rates. These are counts or percentages that measure the errors in major deliverables, including number of production failures per month, number of missed deadlines, number of deliverables rejected (reworks), and so on.

Technical quality. In the case of outsourced application development, this includes measurements of the technical quality of application code, normally produced by commercial tools that look at items such as program size, degree of structure, degree of complexity and coding defects.

Service availability. This indicates the amount of time/window of time that the services managed by the outsourcer are available, ranging from online application availability to delivery of reports by a specified time of day. Measures can be reported positively or negatively and usually incorporate some level of tolerance (for example, online application availability 99 percent of the time between the hours of 8:00 am and 6:00 pm).

Service satisfaction. This relates to the client's level of satisfaction with the perceived level of service provided by the outsourcer captured for each major function through internal and/or external surveys. Ideally, these surveys are conducted periodically by a neutral third party. Although subjective, they are a good double check on the validity of the other SLA metrics.

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