What Is Service-Level Agreement (SLA)? All You Need To Know!

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Service Level Agreement

Definition: What is an SLA - Service Level Agreement?

SLA stands for Service level agreement,It is a legally binding agreement between business & its service provider. It includes a list of services offered by the provider, along with inclusions, exclusions & exceptions. It also includes KPIs (Key Performance Indicators) to measure & penalties applicable when service levels are not met. Its an integral part of any contract & must be carefully drafted & agreed to by both vendors and partners.

Without a Service level agreement(SLA), your business, which depends on multiple vendors, maybe seriously compromised. Let’s understand this with an example.

A Pizza delivery company promises pizza delivery within 30 min or a money-back guarantee. To successfully deliver each order within 30 minutes, the Pizza company must ensure enough stocks of dough, vegetables, sauces, herbs, boxes, etc. For this, the suppliers must be able to replenish the stocks quickly.
The Pizza company decides to sign an SLA with all its suppliers. It will have terms for delivery schedules for business days and holidays, minimum order quantity, advance notices, weekly or monthly forecasting of purchases, deviation permitted, compensation for late delivery, etc.
With such a dossier in place, the Pizza company & its suppliers can better manage their business knowing well in advance of what is expected from them.

The most common reason for any project’s failure is because expectations & best practices were not set correctly. When that happens, costs escalate, services are delayed or unpredictable and quality suffers. Therefore, from the very start; a healthy SLA, which is fair to both parties, can serve as a strong backbone throughout the engagement. For any engagement to be successful, it is important to have both the parties in complete sync.

In addition to creating that important set of expectations and setting those ground rules, it can serve to identify responsibilities, facilitate communications to ensure a streamlined workflow, and reduce the potential for conflicts.

What are the different types of SLA?

There are multiple types of SLAs. Let’s look at some common ones used in the industry today.

Services Based SLA
It is created by a business for common services offered to all its customers. A classic example is the one offered by an ISP to all its customers. It may contain a guaranteed 99.9% uptime, issue resolution within 30 minutes, minimum upload or download speed, etc.

Customer-Based SLA
It is created by a business for a specific customer that covers multiple services. A classic example of Customer-based SLA is when a large business signs-up with a telecom company for multiple services. It may contain a guaranteed 99.9% uptime, on-site engineers, scale-up & scale down within a specific time, etc.

Multi-level SLA
It is created by a business for a large customer covering multiple services, multiple departments, multiple geographies, etc. Multi-level SLAs are complex documents.

Why is an SLA Important in business?

Yes, SLAs are an important part of any contract. It lays a common ground for both parties, the provider & the receiver (the business or customer) to clearly define metrics, responsibilities, expectations, and deliverables, best practices thereby minimizing conflicts & ensuring a long-term profitable relationship.

Service providers need SLAs to help them manage their quality for various severity levels. A vendor should also list circumstances under which they are not liable for outages or performance issues.

A business needs an SLA as it describes what to expect from the provider thereby helping them manage & run their business smoothly ensuring unhindered growth. Without an SLA, it is ambiguous what will happen if one of the partners does not deliver to the expectations of the other.

Let’s look at this with an example.

Consider that an IT Services provider which promises to resolve all issues within 30 min of being reported. Without an SLA which clearly mentions resolution time, they can claim that they never promised to resolve issues within 30 min. It is also possible that the client may demand issues to be resolved in 10 minutes. When such terms are clearly documented, both parties are aware of what to deliver & expect respectively. If the required commitments are not met, both parties are aware of the compensation as well.

It’s important to mention here that businesses must be practical and not overambitious when drafting such SLAs. Abiding by a stringent SLA is expensive & a weak one will have a negative impact on service levels. It’s important to have neutral and practical terms acceptable to both parties.

What should be included in a service level agreement?

what is an SLA

An SLA should include all common components of any legal agreement. List of parties, start and end date, inclusions, exclusions, non-performance penalties, geographies & departments supported, remedial penalties for not meeting the terms,  rewards or bonuses for overachievement, indemnities for both parties,  anything else which is specific to the engagement, etc. 

A good SLA with all the above components lays a strong foundation for a healthy and long terms relationship between two businesses.

What are the key components of a good SLA?

An SLA includes all common components of any legal agreement. List of parties, start and end date, inclusions, exclusions, non-performance penalties, remedial measures, etc. Let’s look at some of the relevant components.

Nature of Service:
A comprehensive Service Level Agreement must carry a detailed description of all services offered by the provider to the business. These should be divided into categories & sub-categories. If some services are specific to a department, then it should be mentioned. Hours of operations & resolution times are important components for any IT Services business, and these should be explicitly mentioned leaving no scope for ambiguity. Both vendors and partners must also mention application & license ownership to steer clear of any conflicts.

Key Performance Indicators (KPI):
An important aspect of any SLA is how the provider’s performance is measured. It should clearly mention the KPIs for the evaluation of service levels. Some KPIs are: Turn Around Time (TAT), First Contact Resolution (FCR), Closure Rate (CR), Number of cases handled, etc.

Risk Management:
Risks to individual processes & risk ownership must be clearly mentioned in the SLA.

Disaster Recovery:
Make a note of disaster recovery measures that each party is liable for & the cost involved towards each of such situations.

This is another very important component. Both parties must agree on all the exclusions. Exclusion of services, geographies, days, times, environmental conditions, etc.

What penalties should be charged if the vendor fails to meet the KPIs? Situations that can be considered as exceptions must be clearly identified. This is an important clause and the most common cause of conflicts; hence your document must be very explicit with this clause.

Reporting is a time-consuming process and there is a cost associated with it. Clearly mention the type of reports & frequency of submissions of each of these reports. It should also mention the cost of additional reporting which may be demanded by the client from time to time.

When deciding what metrics to measure, it’s important that the metrics are within the vendor’s control. If the vendor can’t control the then it is unfair to hold them responsible for the metric.

Pro-tip 1: Aim for automatic reporting of KPIs. This reduces human involvement; the associated man-hour cost & accuracy is unquestioned.

Pro-tip 2: Specify a baseline for the KPIs which are reasonable. Leave some scope for negotiation during a renewal of the contract.

Who prepares an SLA?

Most established service providers will already have standard SLAs reflecting different service levels and pricing. They are drafted based on the following factors:

  • ✓ Prevailing industry standards
  • ✓ Client’s generic expectation
  • ✓ Internal capabilities
  • ✓ Competition
  • ✓ Pricing

When drafting such SLAs, the typical flow of events is as follows:

  1. The service provider sends draft SLA to client
  2. The client reviews the KPI, terms & conditions, deliverables, penalty clauses, etc.
  3. The client makes the required changes and sends it back.
  4. Service provider reviews the revised terms, makes appropriate recommendations & proposes a change in pricing if any.
  5. The client reviews the revised terms & pricing changes if any.
    This process continues until both parties come to a common agreement
  6. Thereafter, both parties send the draft copy to their legal teams for approval.
  7. Upon approval from legal teams, both parties sign the SLA.

This sequence may vary based on the industry and business.