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Making Your Service Level Agreements Work For You: Part 2

16 April 2021

In part 1, we looked at the importance of setting service delivery expectations, initial risk assessments, and common service level structuring approaches in digital transformation projects. In this instalment, we examine service level measurement and reporting, change management, and service credit remedies. 

Measuring service performance

Once the services are up and running in a technology project, the actual performance of the service against the service levels is usually measured on a weekly or monthly basis. In long term arrangements or where the services are new, the customer may agree to a transition-in period during which it gives greater latitude to the supplier in achieving service levels and will not enforce its remedies for service level failures.

The service level agreement (SLA) will usually include a provision that requires the supplier to:

  • Implement and maintain measuring and monitoring tools capable of measuring its performance against the service levels

  • Keep accurate service level records

  • Report on its service level performance by providing the customer with access to the data those tools gather

  • Record the basis on which the service level credits are calculated and ensure that the service level credits reflect the calculations in the SLA

The measurement metrics will differ depending on the service. However, the supplier should be able to demonstrate to the customer’s satisfaction the operation and accuracy of any tool used to measure service levels.

Service level reporting

The supplier usually sends service level reports by email or by providing the customer with access through an online portal.

A savvy customer will require the supplier to go further than just reporting results, and investigate root causes of any failures and to implement remediation plans to remedy them.

A customer may also choose to review service level performance through the governance processes in the contract or utilise its audit rights to verify if the supplier has been keeping accurate records in relation to the measurement of service levels and calculation of service level credits.

Change management of service levels

As the services evolve, the parties may want to adjust the service performance standards or the customer’s remedies. This is particularly important in longer term contracts or outsourcing arrangements. A traditional change management provision is a useful reactive measure. However, as a pro-active measure, a customer can also choose to link service levels with a general continuous improvement obligation setting out how the supplier must improve the services performance and provide on-going price efficiencies.

Of course, any improvement obligation must take into consideration the correct incentives - the supplier should not be allowed to hold back on superior performance in a year because it does not want to set the bar too high for improved targets during the following year.

Consequences of service level breach

The SLA should state what happens if the supplier’s actual performance does not achieve the contractual performance standards. These consequences can include the supplier:

•           Taking specific remedial actions

•           Increasing the resources it uses for the project for a specified period

•           Requiring its staff to undertake additional training

•           Providing financial remedies, such as service credits, to the customer

Service credits

The supplier may provide service credits in a number of ways, such as by providing a rebate that deducts from the customer’s next invoice either a fixed amount or a percentage of the charges. Service credits are typically calculated based on the importance of the service level and the period or severity of the service level failure. A service credit scheme provides an incentive for the supplier and focuses its mind on achieving the service levels to avoid invoking the payment of service credits.

A more sophisticated approach is for the parties to assign scaled ‘points’ for different types of service level failure, with services that are more important to the customer being apportioned more points. The parties use a formula in the SLA to translate the points accrued into equivalent service credits at the end of each month.

Interaction with other clauses

For certainty, the contract should state if:

  • The service credits claimable in a specified period are capped at a certain percentage of the charges

  • Service credits are the customer’s sole and exclusive remedy for service level failure, or alternatively, if the customer has an additional right to claim other damages

  • The value of the service credits counts towards the supplier’s overall financial cap on liability

Is the service credit a penalty clause?

A court will not enforce a contractual provision that it holds to be a penalty. Customers will often include a statement that service credits represent a reduction in the charges to reflect the provision of a lower level of service and do not constitute a penalty. Whether a court considers a service credit to be a penalty will, of course, depend upon the individual facts of each contract.

A final thought - it’s all about getting the balance right

There is no ‘one size fits all’ approach to drafting a service level and service credit scheme in an IT contract.

As with all contractual drafting, the parties must draft the SLA clearly so that it aligns with the contractual and business objectives. In many cases, a customer will have to balance the promise of better service levels with an increase in the charges.

Service levels agreements are a useful tool to encourage good performance, gauge the quality of service delivery and address service failures in digital transformation projects. But truly effective SLAs require careful planning, suitable drafting and significant commitment from all stakeholders if they are to deliver optimum value.

For more information please contact a member of our Technology team


The content of this article is provided for information purposes only and does not constitute legal or other advice.

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