A Service Level Agreement or SLA Agreement is part of a contract 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, nature, and scope of service that will be provided under the agreement. These pacts are common to a business when signing on new customers. They are also used by sales and marketing departments to lay out goals and engaging leads.
They are important in a business relationship, for they set the tone for arrangements and also layout the procedure to be followed when the deal breaks down. With an SLA in place, it is difficult for either party to claim ignorance in case of a breach.
Who Are the Parties to a Service Level Agreement?
The category of the agreement determines the nature of parties to an SLA. For example, in a Customer Service-Level Agreement, the main parties, the vendor, and the customer. In an Internal Service-Level Agreement, the parties are departments within the company itself. Similarly, a Multilevel Service-Level Agreement deals with both the customers as well as the business’ internal departments.
Specific examples of SLAs are:
- Internet Service Provider – The Network service providers ensure that an SLA is laid out on their website, in order to attract more users and prevent conflicts in case of non-compliance.
- Cloud Computing – Earlier, in cloud computing, all the Service Level Agreements were negotiated between a client and the service consumer. Nowadays, with the initiation of large utility-like cloud computing providers, most Service Level Agreements are standardized until a client becomes a large consumer of cloud services.
- Outsourcing – It involves the transfer of responsibility from an organization to a supplier. SLA defines the boundaries of the outsourcing projects in terms of the functions and services that the service provider will deliver and identifies the service standards that the service provider must meet.
Purpose of the Service Level Agreement- Why Do You Need It?
In today’s world of emerging economies, providing quality services has become a necessity to outperform competitors in a constantly evolving market. Customer satisfaction has become an important consideration for firms, as we no longer live in monopolistic environments. The consumer of services is also increasingly becoming aware of her interests, and the need to protect them. In such a scenario, it becomes crucial for both parties to negotiate and lay down a clear go-to document, which not only clarifies the terms of service but also provides insights into remedial mechanisms. This is the purpose of a ‘Service Level Agreement’ serves. Some of the major purposes of a service level agreement are:
- One of the main reasons is that an SLA sets clear and measurable guidelines. It ensures that the service provider and the customer are on the same page, thereby giving the former a golden opportunity to improve customer satisfaction and retention. The chances of disappointing the client are lower, and the business relationship is strengthened at its core.
- An SLA also provides recourse in case of unmet service obligations. This serves the interests of both the company and the client. In case of failure to meet obligations, there can be significant consequences for the company’s reputation. Similarly, the client can also suffer a substantial loss in critical dealings. An SLA ensures that monetary penalties which make the company accountable, are provided. This leads to the sustainable management of expectations.
- SLAs also increase business for a company. Attentiveness towards a client’s needs and expectations attracts prospective customers who have suffered poor service in the past.
Contents of a Service Level Agreement
The contents of an SLA vary with the purpose of the agreement. However, there are a few key points which must be included in all service agreements:
- Summary of Agreement – An overview of the arrangement, including the business objectives and service provisions, should be mentioned at the start of the SLA.
- Goals of Both Parties – Here, a clear mention of the end mutual goal, in consideration of both parties’ capabilities, is made.
- Periodic Review – There should be a clause dealing with a timely review of the agreement, as well as outlining of an effective expiry date and other particulars.
- Service Conditions – This is the largest section of an SLA; it highlights the scope and details, as well as the availability of service.
- Remedial Mechanism/Compensation – In case performance standards are not achieved, monetary recompense is provided to the suffering party. This clause also gives the client a right to terminate a contract in case of failure by the other side.
How to Draft an SLA?
Points Should Be Kept in Mind While Preparing an SLA
A successful SLA basically requires mutual consensus between the parties and unambiguous drafting of the terms. The following pointers should be considered:
- The entire responsibility of drafting the SLA must not be on the service-provider; else, the agreement might turn into a marketing document. It is vital for customers to go through the process of deciding what services need to be provided, how they are to be provided, when, where, and to whom.
- An SLA must be negotiated at the very beginning of a business deal. Leaving it for the last minute gives the service provider the opportunity to exploit client interest.
- Periodic revision of the SLA must be a priority. This ensures that sub-standard performance is not delivered over long stretches of time and also guarantees effective SLA management.
- Finally, there must always be a right to terminate, and the right to receive compensation in case of a ‘critical failure’ of an SLA.
The correct individual should be selected for understanding and drafting the agreement. The culture of most organizations suggests that compatible, and ‘equally’ ranked parties must be chosen for discussing the terms. Preparation is another essential: familiarity with the other party, as well as comprehensive knowledge of the subject of the SLA ensures success in negotiations. This preparation should also extend to specific concerns which the clients might have. An appropriate time schedule must be developed to ensure lucidity in communication.
Benefits and Drawbacks of a Service Level Agreement
While, on the one hand, SLAs provide clarity, conciseness, and peace of mind to both parties, they also lead to certain complications. More often than not, SLAs are drafted by the company: this provides them the chance to mold customer interests to attain their set profit motives. In such cases, there is also a lot of subjectivity and lesser critical overview of service requirements.
Often, technical portions of an SLA are incomprehensible to the customer. This leads to inefficient monitoring of goals and lesser incentives to work. The company often turns complacent in such scenarios.
Lastly, SLAs are treated not as legally binding arrangements, but as mere guidelines to facilitate negotiation. This defeats the entire objective of protecting client interest. In case a customer seeks compensation on the failure of the other party, the latter uses the defense of the unenforceability of the SLA.
What Happens in Case of Violation?
In case of non-compliance with the Service Level Objectives (SLOs), there are often compensation or penalty clauses in the SLAs.
This compensation is not an actual refund of the money; it is rather service credits, i.e., discounts on current or future bills. Refunding the money would put the company in deep financial jeopardy and risk bankruptcy. Service Credits put the customer in a strange position, on the one hand, the service credit acts as a stimulus for further using the service, since it’s a discount; on the other hand, the customer needs to consider if s/he wants to keep using a service provider that wasn’t able to deliver on the promises made.
In the case of penalty clauses(1), the burden of proof and the interest in demonstrating that the agreed SLOs have been violated lie with the main beneficiary of the service, that is, in the service client. A penalty clause may lead to a decrease in agreed payment or reduction in future usage of the service.
There is another possibility: there might be some SLAs where no ‘violation clause’ is included(2). When the clients are either too gullible or complacent towards quality service, the firm might escape the responsibility of introducing a compensation provision. This ultimately acts to the detriment of the customer.
Putting together an SLA is a difficult task. It involves a good business strategy and clear documenting processes. In case both parties keep their business objectives in mind, and follow the tips mentioned in this article, dealings will be smooth, and enhanced service quality will be guaranteed. Good management is a critical requirement in today’s world of commerce, and SLAs make effective communication, a reality. They ensure that periodic quality checks are taking place and keep both the service provider and the consumer reassured that the contract is entered into on definite and fair terms.